Customers, especially millennials and the younger generation, prefer noncash transactions. The shift from cash to noncash transactions has become the key for financial institutions to keep businesses competitive and resilient at the same time.

Without innovation and technological enhancements in financial services, traditional banks will lose their competitive advantages as they will not be able to serve future customers. From this point, I think the disruption triggered by fintech companies has made traditional banks realize that there is ample room for innovation in the heavily regulated market.

That is why the term digital or full-digital bank is growing in popularity as banks are racing to have digital services or establish a separate entity to embrace digitalization and to retain their millennial customers.

To provide some perspective on how digitalization accelerated in 2020, we can compare the transaction value of debit and credit cards with electronic money. In 2019, the average electronic money monthly transaction value was below Rp 15 trillion (US$1.04 billion). The figure jumped to Rp 17 trillion in 2020, especially after the economy reopened in the second half of 2020.

The value was relatively small compared to card transactions, which reached more than Rp 570 trillion in monthly transactions, an increase of 1 percentage point when compared to the previous year. However, looking at size, the increment of Rp 2 trillion in monthly transactions in 2020 was a huge nominal value. Digital financial institutions and e-commerce platforms have gained most of the benefits from the increase in electronic transactions.  

The fact that digitalization has great unrealized potential and benefits to businesses has made traditional banks willing to transform their business into digital banks. China is considered as the first country to have introduced digital banks as it has Ant Financial Services, JD Finance and Tencent Financial as the biggest digital banks.

In 2019, the Hong Kong Monetary Authority granted eight virtual banking licenses, most of which went to technology or start-up companies. Meanwhile, Singapore awarded four digital bank licenses in 2020 to Ant Financial, Sea Limited and two big consortiums backed by start-up and investment funds. In total, as reported by McKinsey, there are more than 30 digital banks operating in the Asia Pacific. Indonesia, Malaysia and the Philippines are in the stage of finalizing a framework and guidelines for digital bank licenses.

What is interesting is how the Monetary Authority of Singapore (MAS) set its guidelines and rules for digital banks. Singapore has the intention to create digital banks with the purpose of providing more access to small and medium enterprises (SME) and millennials. Tapping the younger generations who are internet and smartphone savvy provides a lot of room for fast growth. With no physical presence, digital banks could reduce a lender’s operational costs and enable it to be more efficient. With clear segmentation, digital banks have a clear target for their market acquisition and revenue growth. And therefore, the framework set by MAS could also be followed by the Financial Services Authority (OJK) in Indonesia.

It is very clear that Indonesia will follow the trend in issuing digital bank licenses. Both old and new players will be interested in applying for a license. From the industry perspective, the competition between traditional banks and fintech firms will remain.

However, both entities may find a certain point where they could work together to create a healthy and resilient financial industry. Fintech firms could learn how banks manage financial and operational risks. On the other hand, banks could learn how fintech firms innovate and create benefits from digital transactions.

What is more important is how the industry understands the Indonesian market.

It is true that we are the biggest market in ASEAN. But our digital and internet literacy is dominated by middle- to high-income groups. There are also significant differences in indicators between urban and rural areas.

Therefore, entities or big corporations that are interested in opening digital banks in Indonesia should go the extra mile by educating low-access people and SMEs. By doing so, we can expect the presence of digital banks to improve financial literacy and financial inclusion.

Thus, we hope digital banks can provide extra economic benefits to underserved people and businesses.

 ***

Senior analyst at Bank Mandiri

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