Digital banks transforming Indonesia’s financial services sector

9 September 2021

Southeast Asia’s entire financial services sector appears on the verge of a revolution, with a new breed of digital banks looking to tap into and monetise the vast number of unbanked and underbanked people in the region. And the biggest prize in the region is Indonesia, say Macquarie’s Head of ASEAN equity research, Jayden Vantarakis.

A new breed of digital banks are looking to tap into and monetise the vast number of unbanked and underbanked people in Indonesia

Indonesia’s population, like much of Southeast Asia’s is young and increasingly urbanised. Economic growth should recover, smartphone penetration is high and most people don’t have access to banking services yet.
These conditions make it ripe for digital banks to enter the market, acquiring the massive market share that most traditional banks haven’t sought to.”

The undeniable appeal of Indonesia

As we discussed in our recent article, Delivering digital financial inclusion in Southeast Asia, the region has become the world’s fastest-growing regional market for digital wallets, with usage forecast to increase by more than 300 per cent between 2020 and 20251.

The main reason for this is the incredible growth of e-commerce in the region, which doubled in countries such as Thailand and Malaysia between 2019 and 20202. And yet, neither country can compare to Indonesia, which now tops the list when it comes to mobile e-commerce.

Even before the pandemic struck, 76 per cent of all Indonesian internet users were buying something on their mobile each month3. That was above the world average of 55 per cent, and two percentage points higher even than China, which has long been regarded as the mobile payments capital of the world.

What’s more, it’s a massive market. With around 275 million people, Indonesia is the world’s fourth most populous country - roughly the same size as the United Kingdom, France, Germany and Italy combined4.

But despite the growing popularity of buying online, most people have had few ways to pay for their purchases. Fewer than half of Indonesians have access to a bank account, according to OECD figures5. Meanwhile, just six per cent of adults in the country have access to a credit card6.


Tapping into the growth in online

Vantarakis believes these factors make Indonesia not just fertile ground for digital wallets, but for more comprehensive digital banking services. He says that he expects to see Indonesia’s banking sector move increasingly online over the next three years.

“Banks tend to be intelligent operators and there are strong reasons that many Southeast Asian countries, including Indonesia, have been underserved by financial institutions to date,” Vantarakis explains.

Traditionally, monetisation has been a real challenge. Lower incomes and the cash-based nature of commerce in Southeast Asia means making profit out of customers has been difficult. Even today, it’s still difficult to make much profit out of payments alone."

Digital banks, Vantarakis argues, offer a way around this, not only because they can tap into the incredible growth in online payments but also because they have much lower running costs. The cost of running a branch network accounts for about a third of the cost base of the traditional banks in the market.

Vantarakis notes that most of the larger players in Indonesia’s banking sector are alert to this and have prepared for a more data-based, digitally focused way of banking. For instance, Bank Central Asia (BCA) and Bank Rakyat Indonesia (BRI), both of whom are already the dominant players in the payments space, are about to spin off their own digital challenger brands7 .


Acquiring old banking licences

Another source of digital banking is less traditional though. It comes in the form of the app and software providers that have already started to dominate the digital payments space. Many of these have recently been acquiring dormant small bank licences which they are repurposing and turning into potentially profitable businesses. Indonesia had 106 banks at the start of 2020 and the financial regulators have been keen to see consolidation for some time.

In December 2020, one of Indonesia’s most popular digital wallets, GoJek, acquired a stake in Bank Jago. Gojek and Tokopedia, two of the country's largest tech companies, own the GoPay wallet, and having a stake in a bank allows for more extensive financial services. The GoPay app began by letting users pay for rides, food, and other services (i.e. Gojek and Tokpedia’s core businesses) before other, independent vendors also began accepting payments through it.

Now, GoJek users can open a full bank account through the platform with BankJago, allowing users to save, earn interest, manage their finances and potentially even apply for a loan. GoPay has indicated that it intends to use the model to join with other banks and finance providers8.

Vantarakis believes that ultimately, it is through offering ‘banking as a service’ in this way that digital banks could disrupt Indonesia’s financial services sector, offering a viable alternative to the major brands and potentially pushing Indonesia's mid-tier, largely undifferentiated banks from the sector.

“What’s already clear is that payments alone won’t generate profitability,” Vantarakis says.

“For this reason, many of the most successful digital wallets in the region are currently used as ‘loss leaders’ to encourage take-up of other services offered through the same app. Increasingly, this won’t just be ride sharing or e-commerce but in providing the financing and banking. ”

“The biggest opportunity here is not in appealing to the wealthier, older and urban market that is already well serviced by financial services, despite the temptation to do so thanks to their greater level of financial maturity. It is in bringing banking to the masses.

“Digital wallets, backed by a digital bank, could be the vehicle through which this can finally happen.”

Macquarie Capital has or manages investments in some of the companies named in this article.