The Increase of Digital Banks Before The Capital Deadline

A minimum capital of Rp 3 trillion must be met by commercial banks by the end of 2022, except for BPD whose deadline is 2024. Although there are still 52 commercial banks having capital below Rp 3 trillion at this time, most of them are owned by giant investors who have the ability to burn a significant amount of money to enter the business arena of digital finance. What are the incumbent banks’ strategies to block the invasion of digital banks?

By Karnoto Mohamad

The owners of banks with limited capital are in a dilemmatic situation. When the banks’ performance declined due to the COVID-19 pandemic, the Financial Services Authority (OJK) as the regulator required commercial banks to be able to meet a minimum capital of Rp 3 trillion by the end of 2022. Based on data from Infobank Research Bureau (BirI) as of September 2021, there were still 52 banks with less core capital of Rp 3 trillion, even 40 of them have a capital of less than Rp 2 trillion.

One of them is Bank Mayora whose capital is still Rp 1.22 trillion. Jogi Hendra Atmadja, the majority shareholder, must add Rp 1.78 trillion in capital so that Bank Mayora’s capital can meet the minimum capital requirement by 2022. However, this business tycoon who is included in the list of the 50 richest people in Indonesia with a wealth of up to Rp 58 trillion seems to be no longer interested in banking business.

This is because the bank is a very capital-intensive business while its profits are increasingly limited. The net interest margin (NIM) is not as thick as it used to be. In 2017, Bank Mayora was still able to record an NIM of 5.39%, but in 2021 it has thinned to 3.33%. The depletion of NIM is in line with the trend of the banking industry’s NIM, which had declined before the pandemic, from 5.63% in 2016, 5.32% in 2017, 5.14% in 2018, 4.91% in 2019, and 4.51 % in 2021.

According to Infobank Research Bureau, Bank Mayora’s profit for five years—if it is accumulated—is only Rp 121.17 billion. It is very small compared to the need for a capital injection of Rp 1.78 trillion to reach a minimum capital of Rp 3 trillion. The return obtained by Bank Mayora is still far less than Mayora Indah, which is engaged in the food and beverage processing business. The average return on equity (ROE) and return on assets (ROA) of Bank Mayora for five years is only 0.50% and 2.35% with a net interest margin (NIM) of 4.53%. Meanwhile, Mayora Indah was able to record ROE and ROA for five years on average 22.17% and 11.16% with a gross margin of 27.93%.

Therefore, when Bank Negara Indonesia (BNI) came to propose Bank Mayora. BNI was immediately welcomed. Jogi Hendra Atmadja invited BNI to acquire 63.92% of Bank Mayora’s shares through the issuance of 1.02 billion new shares plus the takeover of 169.07 million shares owned by IFC. BNI spent Rp 3.5 trillion to control the shares of Bank Mayora which was officially carried out in May 2022.

BNI has two targets from the acquisition of Bank Mayora. One, utilizing the ecosystem and supply chain of the Mayora Group, starting from 8600 employees to the distribution network. Two, strengthening BNI’s business to enter the digital market in the retail banking segment by making Bank Mayora a neobank which in the next stage will cooperate with Sea Group, a technology-based company from Singapore that has bought Bank Kesejahteraan Ekonomi and then it becomes Seabank Indonesia. The big tech company that is the parent of Shopee is also rumoured to approach small banks such as Prima Bank, Bank Bumi Arta, Bank Capital, and Bank Aladin.

The entry of BNI to Bank Mayora, which it will become a digital bank, will enliven the digital banking battle that has been entered by the technology big companies. There have been Sea Group, WeLab Ltd from Hong Kong (which has bought Bank Jasa Jakarta), Alibaba (it has entered Bank Neo Commerce through Akulaku Silvrr Indonesia, and Tencent (it has entered Bank Jago through Gojek). Bank Jago was previously named Bank Artos, which was bought by Jerry Ng and then turned into a digital bank.

The acquisition agreement by technology companies to small banks that occurred last year were Emtek Group controlled 93% of PT Bank Fama Internasional’s shares, Kredivo annexed Bank Bisnis Indonesia, and Ajaib Group bought Bank Bumi Arta. Previously, local investors who already owned large banks were also competing to acquire small banks which were, then, turned into digital banks. Chairul Tanjung, the boss of Bank Mega, who bought Bank Harda Internasional, which later became Allo Bank. Djarum Group, which owns Bank Central Asia (BCA), bought Bank Royal and it becomes Bank BCA Digital. It also bought Rabobank, which, then, was merged into BCA Syariah.

For small banks, increasing capital especially in the midst of the COVID-19 pandemic is not an easy matter. Almost all business actors have been affected by the pandemic and they must prioritize cash flow so that their businesses can survive. Only bosses with abundant money can pour money in difficult times like today. Hence, big investors also have the opportunity to take over the shares of low-capitalized banks whose owners are reluctant to increase their capital.

Even if the shareholders are willing to increase their banks’ capital according to the minimum regulatory requirements, the banks are not necessarily able to have the competence to answer all banking challenges that are changing rapidly in the digital era. Moreover, the fulfilment of a minimum capital of Rp 3 trillion is not enough to support investments and banks’ operational costs so that they can continue to be competitive.

Through OJK Regulation No. 12/POJK.03/2020, the regulator requires the banking sector to be more adaptive, innovative and competitive and due to the large amount of technology investment, it is necessary to strengthen capital and increase sustainable business scale. “Rp 3 trillion—based on our experience—is only able to make a bank operate normally and earn sufficient profit; yet there is no contribution to the national economy. The ideal capital is Rp 12 trillion,” said Anung Herlianto, Executive Director of OJK Banking Research and Regulation at the Hybrid Seminar The Rise of Neobank Versus Cybercrime that was held by Infobank Medio Group and Marketing Research Indonesia in mid-February 2022.

Infobank Research Bureau noted that currently there are 52 commercial banks with capital under Rp 3 trillion, and most of them are controlled by big tech companies that have the ability to “burn money” and have connections with the digital ecosystem. The big banks that have become incumbents are already in a position ready to compete in the digital market. However, despite having a capable digital technology capacity, incumbent banks must serve the corporate segment that must be served specifically. Meanwhile, to enter the digital arena, incumbent banks set up digital banks, such as BCA that has BCA Digital, Bank Rakyat Indonesia (BRI) that has converted Bank Agro into Bank Raya, BNI that has Bank Mayora, and Bank Mandiri which chooses to strengthen Livin as a super app.

After decades of being a major player in consumer financial life, can traditional banks withstand the onslaught of digital banks? Who is the winner in the battle of big bank and big tech?

Currently, data shows that the source of bank profits still comes from spread margins by extending large amounts of credit at low cost of funds. Infobank Research Bureau noted that the contribution of interest income still dominates total banking income. Even though the banking industry no longer enjoys credit growth of above 20% since 2014 and banks are trying to boost non-interest income, the contribution of interest income to total bank income is still dominant at 79.67% in 2015, 74.41% in 2016, 74.27% in 2017, 73.28% in 2018, 81.41% in 2019, 79.75% in 2020, and 79.40% in September 2021.

Meanwhile fee-based income is only a small part and has never been a backbone. Therefore, it is not surprising that many digital banks that do not accumulate spread margins and only rely on fundamental transaction activities are still disappointing in performance. These statistics explain that the main key to bank profits still comes from the spread or NIM, of which one of the important keys is how banks are able to obtain cheap funds. Of the nine issuer banks that position themselves as digital banks, the ratio of low-cost funds to third parties (DPK) is on average only 25%, while giant banks generally have ratios above 50%, such as BCA 77%, Bank Mandiri 74 %, BNI 70%, Bank CIMB Niaga 62%, or BRI 60%.

The success rate of digital banks is also low. A study conducted by Boston Consulting Group states that among 249 digital banks in the world, only 13 are profitable. In South Korea, of the three digital banks, only one is profitable, namely Kakao Bank. In China, among 16 digital banks, only four are profitable, one of them is WeBank.

However, because digital banking has prospects as seen by investors and the acceleration of digital economic activities, traditional banks must transform and strengthen their technological capacity. Ernst & Young’s survey in The EY 2021 NextWave Global Consumer Banking also warns that while traditional banks are still leading in maintaining key financial relationships with consumers, non-traditional players are gaining ground at a pace that bankers should be paying attention to. Moreover, challenger banks are supported by big tech companies that are ready to “burn money” and are connected to the digital ecosystem.