Why digital banks are the future

from Asian Banking & Finance (January - March 2020)

Indonesia’s non-bank financial firms could face closures in 2020

Why digital banks are the future of financial inclusion in emerging markets INDRA UTOYO

INDRA UTOYO Managing Director of Digital Banking and IT Bank BRI

As digital banking proliferates through the developed world, its adoption in emerging markets in Southeast Asia continues to lag. A McKinsey study in 2018 noted that whilst digital banking penetration has grown by as much as 300% in certain emerging Asian countries, the median level is only around 52%.

Nowhere is this difference more evident than in Indonesia, where about 66% of its more than 260 million population remains fully unbanked, or nearly 180 million Indonesians not owning a bank account.

That is not to say Indonesians aren’t virtually-savvy. A 2018 study by Polling Indonesia and the Indonesian Internet Providers Association found that 171 million locals, or 64.8%of the population were already connected to the internet. Indonesians have been drawn online in recent years due to the tech startup boom in the country, which has in turn birthed so-called “super apps” like GoJek and Grab. Whilst millions of Indonesians use these apps for ride-hailing, food delivery, and grocery shopping, many of their transactions remain cash-based via online-to-offline (O2O) intermediaries, particularly in rural areas. A 2017 Google survey also discovered that only 11% of e-money app users are daily users.

So why the disconnect? Whilst other SEA countries such as Thailand and Malaysia are concentrated in one or two landmasses, Indonesia is an archipelago made up of more than 17,000 islands across 1.9 million sqkm. Its geographic distribution has been a major stumbling block to the expansion of traditional banking activities nationwide.

Today’s “super-apps” have helped soften the initial hesitation to go digital whilst O2O intermediaries have bridged the human gap where needed. It’s fair to say that current conditions have helped pave the way for banks to retake the mantle and offer digital banking services to drive higher financial inclusion in the country.

Rise of the super-apps In the battle of the super-apps, Ovo within GrabPay and GoPay within GoJek have taken slightly different routes to expand. GoPay bolstered its payments dominance in 2018 by acquiring three major financial services companies. Meanwhile, GrabPay partnered with Mastercard to issue prepaid cards, as well as Japan’s Credit Saison to offer loans to the unbanked based on consumer behavior data. Grab acquired O2O player Kudo in 2017 with a network of more than 400,000 agents across more than 500 towns to help people without internet access shop online. This head-to

head competition amongst the super-apps have made more Indonesians comfortable with going digital. However, there remains gaps to fill outside of Java Island (where around 140 million Indonesians reside), with connectivity between rural towns and islands hindering digital adoption.

The role of O2O This is where O2O comes in. Whilst Kudo’s human agents place orders on behalf of their offline customers and take commissions, a company called Kioson boasts 50,000 “cash point kiosks” in 384 cities and the app’s fintech arm offers collateral-free loans to aid its 3,000 kiosk partners in expanding their own businesses.

In Indonesia and other SEA countries, O2O is now seen as a necessary feature for many tech startups, and learnings from O2O players have quickly bled through the processes of traditional banking players as well as financial regulators.

Bridging the trust gap The widespread use of O2O players indicates there remains trust issues, particularly in rural places and smaller cities outside Jakarta. A 2018 PwC survey of digital banking in Indonesia found that physical branches still provide the best experience. The Google survey also found that both banked and unbanked users have concerns about personal data loss and phone theft. Full financial inclusion remains out of reach so long as brick-and-mortar banks with legacy names—and the inherent brand trust—do not participate in the country’s digital revolution.

Recognizing this, the financial authority of Indonesia (OJK) launched the Laku Pandai or ‘Smart Practice’ initiative amongst local financial firms that sought to promote branchless banking throughout Indonesia. Between June 2015 and March 2019, the number of participating banks and financial firms went from six to 30. The number of agents grew from 3,734 to beyond 1 million and the number of accounts jumped from 36,000 to 23.3 million. The success of the Laku Pandai initiative in just four years paints a blueprint for digital banking in emerging markets. With the backing of heavyweight brand-name banks and human interaction at the local level, digital branchless banking has spread to almost every town in Indonesia.

Financial inclusion requires the marriage of trust in local solutions and the ease of going digital — all regulators and bankers need to do is find the correct mix for their markets.