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View all search resultsHow Indonesia’s banks can break free from legacy constraints
Despite the country’s rapid digital adoption in recent years, a significant percentage of the banking system continues to operate on legacy infrastructure developed decades ago.
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A customer scans a Quick Response Indonesia Standard (QRIS) code to settle a transaction on April 24, 2024, at a coffee shop in Sukabumi, West Java. (Antara/Henry Purba)
I
ndonesia’s financial institutions stand at a crossroads in their technological evolution. Despite the country’s rapid digital adoption in recent years, a significant percentage of the banking system continues to operate on legacy infrastructure developed decades ago.
This places Indonesia in a challenging position, though similar patterns exist across the broader APAC region, where financial markets like Malaysia, Thailand, Singapore and Japan also contend with deeply entrenched legacy systems.
Legacy systems, typically monolithic, mainframe-based architectures built in the 1970s and 1980s, were revolutionary when first implemented but have become quite problematic when modern technologies emerged, such as digital and mobile banking, instant payments and alternative payment methods.
The impact of maintaining legacy systems weighs heavily on Indonesia’s banking sector, with research indicating that banks globally allocate up to 60 percent of their IT budgets to maintain legacy infrastructure. The tech spending is predicted to rise, exceeding US$600 billion by 2028, driven by so-called “vendor locks”, reducing the flexibility of Indonesia’s banks to select lower cost and higher-quality upgrades, leading to excessive customization of those outdated platforms and disjointed integrations of additional newly-acquired tech in attempts to fix the situation.
Banks in Indonesia are actively engaged in card systems modernization efforts, recognizing the unsustainable nature of their current technological foundations. It’s also driven by rising rates of fraud, with 1 in 4 Indonesian consumers losing money to scams via real-time payments, leading 56 percent of consumers to value fraud prevention when selecting their financial services provider. Banks must balance the expense of system maintenance against investments needed to compete with the growing presence of digital banks and new challengers that have started to gain traction in the country.
Despite widespread acknowledgement of the need for change, modernization efforts by Indonesian financial institutions are frequently sidetracked by obstacles. Research by McKinsey & Company indicates that 70 percent of digital transformations exceed their original budgets, and 7 percent end up costing more than double their initial projection.
Several common traps await unprepared Indonesian banks. Many institutions fail to accurately assess interdependencies within their existing systems, leading to cascading implementation challenges that are particularly problematic given Indonesia’s geographic complexity and diverse banking news across thousands of islands. Modernization requires specialized skills that bridge legacy understanding with cloud expertise, a talent combination that is especially scarce in Indonesia’s competitive technology labour market.
