Fight for 203 Million Netizens: Can Digital Banking Defend the Banks from Fintech and E-Commerce?

By Karnoto Mohamad

DIGITAL era is unstoppable. Nearly three-quarters of Indonesians are residents of cyberspace. According to a report of Digital 2021, in early 2021, the number of internet users reached 202.6 million, or an increase of 15.5% when it is compared to early 2020. 

In line with the increasing number of internet accesses, the digital economy will become a source of economic growth in the future. The tremendous benefits of internet has been felt since the COVID-19 pandemic that was started last year. When many business people were hit by the COVID-19 pandemic, those who have built a digital operating and distribution system survived, even enjoyed a surge in demand, for example, the e-commerce market which has a great number of new customers during the pandemic.

E-commerce has also seized opportunities by developing its business model. The market place, which initially only sold goods, has entered the financial transaction business. Not only providing electronic money (e-money) or collaborating with other e-money issuers, e-commerce also offers product purchase installments, and even provides cash loans. 

E-commerce business activities such as financial technology (fintech) P2P Lending which have entered the banking business area. Similar to e-commerce, P2P fintech has also been able to record growth during a pandemic. According to data from the Financial Services Authority (OJK), 149 registered P2P fintech companies enjoy loans accumulation growth of up to 91.30% to Rp 155.90 trillion as of 2020. Of the total borrowers, the increase reaches 134.59% to 43.56 million.

According to Adrian Gunadi, Chairperson of the Indonesian Funding Fintech Association (AFPI), the rate of disbursement of fintech funding continues to increase, including during the pandemic. “In 2020, regardless of the condition of COVID-19, the fintech industry will grow 27%,” said the CEO and Co-Founder of Investree to Ayu Utami from Infobank last month.

When e-commerce and fintech enjoy growth, the banking industry has experienced a decline in performance. Since June 2020, bank lending has declined. By the end of 2020, the credit decline was 2.41% to Rp 5,547.62 trillion. Meanwhile, e-commerce and fintech are optimistic that they will continue their growth in 2021, banking banking credit was still declining in February 2021. According to data from Infobank Research Bureau (the data are taken from data from Bank Indonesia (BI) and OJK), during the year from February 2020 to February 2021, banking credit is still contracted of 2.15%. If the year to date is taken from December 2020, the contraction is 1.14%.

In fact, the government and the regulator have intervened. However, various stimuli and encouragement for banks to disburse credit have yet to produce results. Banks are generally so afraid of the horror of non performing loans (NPL) that they find it difficult to loosen credit terms even though they are pushed to extend credit. In fact, even if the current loan at risk (LAR) is 25% to 28% and which will fall into NPL of around 10%, then with a capital adequacy ratio (CAR) of 23% to 24%, the banking industry is sufficiently able to withstand the shock of restructuring credit which will become the NPL.

Not only did the decline in credit continue, the third party funds (DPK) of banks actually decreased 0.29% in February year to date. Then, where did the around Rp 20 trillion in fund that were previously in the banking vault go to? There are four predictions. One, companies or individuals move the fund to the government bonds or treasury bills abroad whose yields are more attractive because national bank deposit rates continue to decline. Two, companies or individuals are worried about the condition of the bank which still looks good, but only because of the “booster” of relaxation of OJK’s policies. Three, entrepreneurs start using their savings to start their businesses in line with optimism about the vaccination program. Four, the community withdrew their funds for living necessities after a year through difficult times due to the pandemic.

The lack of disbursement of bank credit may be a result of an insufficient dose of fiscal stimulus. Or, stimulus and various policies simply cannot beat market forces. This is because the market is very much determined by demand and supply. 

E-commerce and fintech that rely on technological speed and meet buyers’ tastes are able to influence demand and achieve growth during the COVID-19 pandemic. In fact, the pandemic has become a trigger for people who previously did not make online purchases to get used to it. 

Digital Banking and Neobank

No one knows when the COVID-19 pandemic will end. However, the most important thing is that, even if the pandemic has been ended, human life will certainly not be the same as the conditions before the pandemic. 

Changes in the market and the increasing number of internet users have opened up greater opportunities for e-commerce and fintech businesses, as well as a momentum for the emergence of a new type of bank operating digitally or neobank or challenger bank. In Indonesia, there are already three banks that fully serve their customers using digital platforms. Bank Jago, Bank Digital BCA, and Bank Neo Commerce. Two other banks that are being prepared by their parent companies (banks) to become neobanks are Bank Agro and Bank Harda.

Banks that are still operating traditionally must have the ability to adapt to market changes in the digital era in order to have business continuity. Although they still operate many branch office networks, the top banks are in a position to be ready to face competition by continuing to improve their long-established digital services. Realization of capital expenditure (capex), which last year was hampered by lockdown policies in a number of countries of origin for hardware and software, will be executed this year.

Not surprisingly, big banks are quite aggressively budgeting their capex this year. For example, Bank Central Asia (BCA) has budgeted a capex of up to Rp 5.2 trillion. “Most of them will be allocated for information technology, banking digitalization, then branch network development,” said Hera F. Haryn, Executive Vice President of the Secretariat and Corporate Communication of BCA to Infobank last month.

Meanwhile, with the largest asset bank, Bank Rakyat Indonesia (BRI) has prepared more than Rp 8.6 trillion of funds, of which Rp 3.5 is for IT spending. “Most of it is allocated to prepare the next generation of IT infrastructure to support the growth of BRI’s digital initiatives,” said Aestika Oryza Gunarto, BRI Corporate Secretary to Infobank last month. Aestika added, although the digital initiative development initiatives are quite significant, non-IT capex is still needed to support banking activities in the office network so that the combination of digital and physical networks can meet all the needs and characteristics of customers.

With their capabilities, the top banks have the ambition to build super-apps to withstand the invasion of fintech applications, both funding and payments, as well as e-commerce whose business activities have crossed the banking area. For example BCA through BCA Mobile, Bank Mandiri through Livin, BRI has BRImo, Bank CIMB Niaga relies on Octo mobile, Bank Negara Indonesia (BNI) through BNI Mobile, PermataBank has PermataMobileX, and Bank BTPN has Jenius.

To face an increasingly dynamic competition, an important thing for banks and financial institutions to do is how to strengthen digital-based operating systems and services that are fast, practical, inexpensive, and safe. Besides, it should be noted that the enemies of banks or traditional financial intermediary institutions are not neobanks or fintech or e-commerce—in fact, they can collaborate with them; however, the real enemy in the technology era is attacks from hackers that result in the disappointment of customers. Then, the customers do not only move to another heart, but also spread their complaints in social media and become viral. Therefore, banks should not let the customers disappointed. If a complaint is not resolved quickly, then it is shared via Internet and social media, the viral effects are difficult to contain.

The number of internet users will still increase. As a result, digital space will become an important market base that is being fought over by business people to maintain their business continuity in the digital era. Although the competition is getting tighter, the digital world is becoming an important arena to approach the market, show existence, and build a brand. (*)