SINGAPORE - The Covid-19 pandemic has propelled contactless and cashless transactions in Indonesia at warp speed, paving the way for virtual banks which will be a game changer for millions of people in the country without bank accounts.
Fintech has boomed in recent years, providing more streamlined and efficient financial services and faster onboarding process. The pandemic has led to even more growth particularly in mobile payments and peer-to-peer lending, analysts say.
Like elsewhere in the world, Indonesians have switched to digital payment methods to minimise face-to-face interactions and trips to physical banks. Those who have been laid off are taking loans from peer-to-peer lending platforms, which offer lower interest rates and more flexible terms than traditional banks.
"The growth is extraordinary. People are scared of catching Covid-19 so they turn to mobile banking to perform their financial transactions," Dr Sri Adiningsih, economics professor at Gadjah Mada University and founder of the Social, Economic and Digital Institute, told The Straits Times.
"It's not just millennials and urban dwellers. Old people, those living in small towns and even villages are going online. It's no longer a choice, but a necessity," she added.
The newfound habit is expected to stay even after the pandemic, and will boost the adoption and penetration of digital financial services, including digital banking, analysts say.
Just like a conventional bank, a digital bank provides services such as deposits, loans, debit and credit cards, but these transactions are performed online and the bank has no physical branch.
In Indonesia, the setup of these virtual banks often involves acquiring smaller banks, or collaborating with one another or tech start-ups.
For example, Bank Central Asia (BCA), the largest private bank in Indonesia, acquired Bank Royal Indonesia in 2019 which will be turned into a fully-digital bank targeted at millennials.
BCA reported on Monday (Feb 8) that its mobile and internet transactions grew by 50.7 per cent in 2020 compared to the previous year. Its president director Jahja Setiaatmadja said in a statement: "The circumstances in 2020 proved beyond all doubts the importance of developing digital platforms as part of the BCA's strategy."
Conventional banks, however, will remain relevant as consumers still prefer human interactions to help them perform more complex transactions such as mortgage loans and investment products. But they must keep pace with digital development, or risk getting left behind, analysts say.
"Digital banking must be encouraged to improve bank efficiency and stay competitive globally. The customers will benefit greatly as banking services will become easier and faster, with no time constraints and face-to-face contact," said Mr Nika Pranata, economic researcher at Indonesian Institute of Sciences (LIPI).
The pull factors for investors are plenty, such as high mobile penetration, low broadband prices, sizeable young population, and the sheer volume of the unbanked and underbanked which accounts for half of the 270-million population in Southeast Asia's biggest economy.
According to a Google, Temasek, Bain & Company report in Oct 2019, some 92 million Indonesians do not own a bank account, and another 47 million own a bank account but have insufficient access to credit, investment and insurance.
Indonesians are also among the most enthusiastic in the region about adopting digital banking, said a MacKinsey & Co report in 2019. A MacKinsey survey, conducted two years earlier in 2017, found that about 50 per cent of around 900 respondents would consider shifting to a bank without any physical presence, with most saying they were confident to shift 25 to 50 percent of their balance to a pure digital bank.
In January, Singapore tech start-up Sea Ltd made headlines after it acquired a small Indonesian bank known as Bank Kesejahteraan Ekonomi which will be turned into a digital bank.
More similar acquisitions are expected as the Financial Services Authority of Indonesia (OJK) pushes for consolidation and looks poised to pass new rules on digital banking.
Mr Heru Sutadi, the executive director of Indonesia Information and Communication Technology Institute, said he hopes the government will impose the same regulations on local and foreign players.
"When foreigners dominate, the benefits of Indonesia's digital economy are not optimal and Indonesia only becomes a market. So foreign investors must also employ Indonesians and pay taxes in Indonesia," he said.
If there is one area of caution, it would be data security, analysts say.
Dr Ardito Bhinadi, economics lecturer at the Veteran National Development University, said the OJK, Indonesia's equivalent of the US Securities and Exchange Commission, should focus on managing bank risk and customer security through proper audits of the banks' digital technology security system.
"There have been several cases of bank account burglary in Indonesia as well as leakage of personal data," he told The Straits Times. "Digital technology is growing, giving us a lot of convenience, but also a lot of fragility."