The digital bank is a banking business model that provides services and operates mainly through electronic means, with very a minimal need for or a complete absence of brick-and-mortar offices. In a fully digital bank, every banking activity, process and program, including opening a bank account, is conducted online. Several examples of foreign digital banks include South Korea’s mobile-only KakaoBank, as well as Britain’s Monzo.

In Indonesia, the eager players to tap into this new form of banking span from traditional banks, including the country’s biggest private lender Bank Central Asia (BCA), to homegrown decacorn Gojek, which plans to collaborate with an upcoming digital bank.

BCA spokesperson Hera F. Haryn said the lender’s digital bank, called BCA Digital, will be launched in the first quarter of this year as the company finishes the new bank’s trial period.

BCA injected Rp 1 trillion (US$71.2 million) early last year in Bank Royal Indonesia, which it acquired in 2019, in a bid to make the latter eligible to serve as BCA’s digital bank.

“For the initial launch phase, BCA Digital will focus on funding services by facilitating digital transactions through our smartphone application. We also aim to expand our consumer base,” Hera told The Jakarta Post on Monday.

The pandemic has spurred changes in consumer banking behavior, with digital channels becoming more popular as people avoid in-person transactions amid virus concerns, another trend that is likely to support digital banks.

BCA saw its mobile banking transactions surge by 28.4 percent year-on-year (yoy) in the first nine months last year to Rp 1.89 quadrillion.

However, fully digital banks, or so-called neobanks, are not the same as digital banking, as the latter refers to the digitalization of bank services, such as mobile banking or internet banking.

Going forward, BCA digital will disburse loans to individual businesses, small and medium enterprises (SMEs) and retail borrowers, Hera said.

“We are also committed to updating and maintaining security systems to support our business operations,” she said.

Similarly, state-owned Bank Rakyat Indonesia (BRI) also aims to turn its subsidiary, BRI Agroniaga, into a neobank. BRI corporate secretary Aestika Oryza Gunarto said the company had sent its five years transformation blueprint to the Financial Services Authority (OJK) and was awaiting its approval.

“We established our digital bank to compete with start-ups and fintech. We also want to broaden to new segments with a smaller ticket size,” he said in a text message to the Post on Monday.

Private lender PT Bank Net Indonesia Syariah has also announced a plan to conduct an initial public offering (IPO) on Feb. 2. The proceeds will be used as working capital to help realize its strategic plan to become a digital bank, kompas.com reported.

The interest does not stop with conventional banks. Decacorn Gojek also plans to collaborate with publicly listed Bank Jago, which has expressed a plan to become a digital bank, as Gojek aims to expand its financial services. Gojek increased its stake in publicly listed Bank Jago in December, from 4.14 percent to 22.16 percent.

“Gojek is not going to acquire Bank Jago, nor will there be a merger. We are collaborating to provide digital banking on the Gojek platform,” Gojek chief corporate affairs Nila Marita told the Post on Tuesday.

She went on to say that both entities could leverage each other’s capability as Gojek had millions of users and the required technology infrastructure, while Bank Jago had banking infrastructure and services in place.

“We hope that Gojek can implement a similar collaboration model with other financial institutions and banks, so we can reach more consumers and increase financial inclusivity in the country,” she said.  

Meanwhile, regulators across Southeast Asia have also shown more interest in developing digital banks. Malaysia and the Philippines have all introduced digital banking frameworks. Meanwhile, Singapore is expected to have at least four digital banks in operation by 2022, according to The Strait Times.

A draft of an OJK regulation on regular banking accessed by the Post contained articles on digital banks, although they were not extensive. For example, Article 18 of chapter four in the draft regulation stipulates that a bank must have at least an office as a headquarters in order to run its operations digitally.

The OJK has emphasized that the regulation on digital banks was still under discussion.

“We are still in the middle of examining the regulation for digital banks. We will inform [the public] when we're done,” the OJK's deputy commissioner for public relations and logistics affairs, Anto Prabowo, told the Post on Tuesday.

The acceleration of digital transformation in the financial sector is also part of the OJK’s financial sector masterplan (MPSJKI) 2021-2025.

Economist Bhima Yudhistira of the Institute for the Development of Economics and Finance (Indef) said neobanks were cost-efficient as industry players could cut overhead costs such as rent and the construction of branch offices.

“It can also provide 24/7 services to customers, which is good for supporting digital transactions such as e-commerce,” he said in a phone interview on Tuesday.

However, Bhima said challenges such as poor internet access and cybersecurity concerns could hamper the adoption of digital banks in the future, especially as digital literacy was still low in the country.

“Regulations and monitoring on digital banks are still not perfect because we do not have a data protection law yet,” he said. “There are also concerns over fraud targeting digital bank users.”

He went on to say that such banks could not fully operate digitally in Indonesia because some activities — such as appraising big loans, debt collecting and customer services — still needed a high level of human interaction.

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