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.”