Indonesia's digital banking scene set for boom as tech giants Sea, Gojek and Line muscle in

Competition in the digital banking sector in Indonesia is heating up as well-resourced technology companies muscle into the scene, capturing a chunk of the market share from large but typically rigid traditional banks.

Among the digital banks that are already up and running is Bank Jago, which is backed by Gojek. The Indonesian tech giant holds 22.16 per cent of the bank's shares after purchasing around US$155 million worth of the bank's shares last year.

Japanese tech platform Line has partnered the Indonesian subsidiary of South Korea's Hana Bank to launch a digital banking platform, while Singapore-based Sea Group, Southeast Asia's most valuable tech company, in January acquired Bank BKE for an undisclosed amount to transform it into a digital bank. Sea has also been granted a digital banking licence in Singapore.

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Southeast Asia's largest economy is now home to seven digital banks, with seven more waiting for licences from the Financial Services Authority (OJK). These digital banks are either operated by small banks after they were acquired by tech companies, or they are offerings from existing banks.

Either way, they are set to ride the wave of digital transactions in Indonesia, boosted by rising levels of internet penetration and digital literacy as well as a growing appetite for online and mobile transactions - particularly among the 145 million millennials and members of Generation Z who account for more than half of the country's total population.

However, low financial literacy in the country and aggressive user acquisition among digital banks may hinder their path to profitability, analysts say.

Bank BRI Agro is one of the lenders waiting for a licence, and is set to team up with local fintech start-up Payfazz to bring its banking vision to life. The five-year-old start-up claims to have the largest branchless banking agent network in Indonesia, and aims to provide financial services to around 180 million unbanked people living in the country's rural areas.

Payfazz has more than 700,000 agents who are tasked with reaching out to these villagers, and had processed nearly US$10 billion in annual transactions from 80 million customers as of May. These agents can be found in warung, or neighbourhood kiosks; telco shops; and other easy-to-find locations in the villages.

The start-up - which counts accelerator Y Combinator, venture capital firms Tiger Global, B Capital Group and Insignia Ventures Partners among its investors - also recently secured an e-money operator licence from the Indonesian central bank, allowing its agents to carry out online payments.

The skyline of Jakarta, the capital of Indonesia. There is a growing appetite for online and mobile transactions in the country. Photo: Xinhua alt=The skyline of Jakarta, the capital of Indonesia. There is a growing appetite for online and mobile transactions in the country. Photo: Xinhua

"We are not a digital bank, [so] we are partnering with a bank to boost financial inclusion in Indonesia," Hendra Kwik, chief executive and co-founder of Payfazz, told This Week in Asia.

The company declined to mention the products it would offer BRI Agro customers once their accounts were integrated into the Payfazz ecosystem. Generally, its users can pay bills, record their cash flow, and apply for a loan from the start-up's banking partners.

While there is heavy competition among digital banks in Indonesia, Hendra said the banking sector still had plenty of room to grow in rural areas.

"We are seeing that the heat of competition will be in the urban area and there is so much potential to grow in rural [areas]. So, we decided to place agents from our banking partners in those areas," he said.

In countries such as Indonesia, where only around 60 per cent of the population has bank accounts, low financial literacy is one of the biggest challenges faced by digital banking operators looking to expand their businesses.

"Fintech customers also disproportionately belong to previously unbanked segments, where financial literacy tends to be lower. This can mean they are less informed on how to independently negotiate risks," Boston Consulting Group said in a recent report about digital banking in Southeast Asia.

A 2019 survey by OJK found that only 34.5 per cent of the rural population was financially literate, lower than the urban population's 41.4 per cent literacy rate. Overall, the study found that only 38 per cent of the country's population was financially literate.

Cybersecurity and data protection are also points of concern in Indonesia, as the country is yet to pass a personal data protection bill - which adopts several elements of the European Union's General Data Protection Regulation - into law. OJK is also yet to publish its much-anticipated digital banking regulations, after having initially scheduled it for the first six months of this year.

"Digital banks must prepare a risk mitigation strategy if their technology fails. Whenever ATMs of a large bank in Indonesia are offline, all of its customers fret easily," said Paul Sutaryono, former assistant vice-president of state-owned Bank Negara Indonesia (BNI).

Indonesia has a less than stellar record when it comes to data protection, with several large tech companies having been breached in recent years. The personal data of more than 100 million users of e-commerce companies Tokopedia and Bukalapak was illegally accessed last year, while in May the details of at least 279 million Indonesians were leaked and sold on a hacker platform after having been allegedly taken from the Healthcare and Social Security Agency system.

According to Boston Consulting Group, there have been around 150 new digital banks established in developed markets since 2000, but only seven have generated profits. It's a similar situation in the Asia-Pacific, where only a handful of lenders - including South Korea's KakaoBank, China's WeBank, and India's Paytm Payments Bank - have done so.

"Profitability is typically achieved only after five to seven years of operations. Business sustainability is not guaranteed, and there are as of yet limited successful examples in the Asia region," Boston Consulting Group said in its report. "Many players are oriented to success metrics based on achieving higher valuations or greater volume of app downloads, which may not necessarily transition into financial sustainability."

Much like in other tech sectors, competition in the digital banking arena will also likely see a race to the bottom, with companies offering low transaction fees to acquire as many customers as possible.

Transferring money from Gojek-backed Bank Jago accounts to other bank accounts via its app, for example, is free for up to 25 transfers per month, after which customers will pay a fee of 3,000 rupiah per transfer (20 US cents), lower than traditional banks' transfer fee of 6,500 rupiah. Bank Jago also imposes zero fees for opening or closing accounts, monthly administration, and dormant accounts. The bank is targeting a profit of 50 billion rupiah (US$3.5 million) this year, after reporting a loss of 190 billion rupiah (US$13 million) last year.

"Many digital banking players are competing on price, potentially triggering a race-to-the-bottom-style approach which leads to large-scale value erosion in banking markets. This value erosion feeds into a larger point around business sustainability," Boston Consulting Group said.

This article originally appeared on the South China Morning Post (SCMP).

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