The Indonesian Digital Bank is one of the current, well-developed business phenomena. The innovation was initiated by old players (banks that convert their services to digital banks) and new players who provide digital banking services. The growing penetration of devices and digital literacy in the community is one of the main reasons for the service’s development.
The presence of digital banks in Indonesia is also expected to increase financial inclusion through more accessible access to various banking services. This ease is expected to encourage Gen Z, Millennials, and those still unbankable, for example, people in rural areas, to be bankable. According to the Indonesian Deposit Insurance Agency Data, as of 2020, there were about 351.7 million registered bank accounts from 110 institutions (96 conventional, 14 sharia).
What is a digital bank?
Digital banks are a new approach to the banking industry, offering a wide range of services from savings to loan credit through applications. Not only as a means of transactions, the mobile application provided by digital banks also assists users in the onboarding process, starting from registration with e-KYC (Know Your Customer). Because everything is conducted online, digital banks also do not rely on branch offices for administrative processes.
Based on the report from McKinsey & Company (2019), the potential for digital bank adoption in Indonesia is quite high. In a survey of 339 people in Indonesia, more than half expressed interest in using digital bank applications in the future.
In addition, there are a number of fundamental reasons that make the Indonesian Digital Bank relevant to the community:
- The regulatory support from the FSA accelerates the growth of the industry.
- There is a high population of unbanked and underbanked people in the midst of increasing MSMEs and the macroeconomy.
- Consumers are more digitally active and expect services that can be "integrated" into their lifestyle needs.
- The strategic value of digital bank services can provide various alternative financial products, from investments to paylater.
Digital Bank Business Model
Digital banks in Indonesia are created with two main approaches. First, as a form of conversion from existing conventional bank services. Second, a new business unit (subsidiary) of a large bank targets previously unserved consumer segments. Interestingly, the Indonesian Digital Bank ecosystem works very well with various fintech platforms. In fact, some of these fintech companies are acquiring conventional banks to be converted into the digital realm.
According to the DSInnovate (2021) report, the current business model of the Indonesian Digital Bank is divided into several segments as follows:
The number of digital bank players is also growing. Some focus differently based on the consumer segment they want to embrace, such as wholesale banking, retail banking, lifestyle banking, and MSME banking. Here is a map of the currently existing players:
Potential Development of Digital Banks
According to Global Industry Analysts Inc., the potential economic value generated by digital banks reached $12.1 billion by 2020 and is projected to grow steadily to $30.1 billion by 2026 with a CAGR of 15.7%. Retail banking is expected to see significant growth, and it will account for 14.3% of total growth.
While in Indonesia, the potential is also quite large, especially for the retail and lifestyle banking segment. This is driven by the rapid adoption of existing digital bank applications. Some of the Indonesian digital bank applications launched today already have millions of users who actively use their applications.
One of the strategies that digital bank players implement to attract users is to integrate the service into consumer applications that already have a large user base. For example, since the blu service connects to the Blibli platform, e-commerce users can open an account through the Blibli application. The cooperation that Bank Jago accomplishes with Bibit/Stockbit is similar.
The Open Banking Concept
One of the main characteristics of digital banks is their integration with other digital services. They try to be financial partners with various applications. The concept of Open Banking or Banking as a Service is widely applied. This mechanism allows bank services to connect with partners via a secure API connection in the application's backend. So, from the end-user perspective, they can obtain the financial service experience provided without switching applications.
To facilitate the integration process, the Open Finance Service developer was present. Finantier is a leading Open Finance platform developer in Southeast Asia, with the mission to provide relevant infrastructure services to digital service developers to deliver relevant financial products to their customers effectively and efficiently.
With the development of Indonesia's digital financial and banking ecosystem, supported by the ease of integration through Open Finance, the inclusion and financial literacy level are expected to be improved in Indonesia.