The Covid-19 pandemic has propelled contactless and cashless transactions in Indonesia at warp speed, paving the way for virtual banks that 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 processes.
The pandemic has led to even more growth, particularly in mobile payments and peer-to-peer lending, analysts said.
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," Gadjah Mada University economics professor Sri Adiningsih, who is also 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 said.
Just like a conventional bank, a digital bank provides services such as deposits, loans, and debit and credit cards, but these transactions are performed online and the bank has no physical branch.
In Indonesia, the setting up of these virtual banks often involves acquiring smaller banks, or collaborating with one another or tech start-ups.
For example, in 2019, Bank Central Asia (BCA), the largest private bank in Indonesia, acquired Bank Royal Indonesia, which will be turned into a fully digital bank targeted at millennials.
BCA reported on Feb 8 that its mobile and Internet transactions grew by 50.7 per cent last year compared with the previous year. Its president director Jahja Setiaatmadja said in a statement: "The circumstances in 2020 proved beyond all doubt the importance of developing digital platforms as part of BCA's strategy."
Conventional banks, however, will remain relevant as consumers still prefer human interaction 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 said.
"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.
The pull factors for investors are plenty, such as high mobile penetration, low broadband prices, a sizeable young population, and the sheer volume of the unbanked who account for one-third of the 270 million population in South-east Asia's biggest economy.
According to a Google, Temasek, Bain & Co report in October 2019, some 92 million Indonesians do not have a bank account, and another 47 million have 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, a McKinsey & Co report in 2019 said.
A McKinsey 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 about shifting 25 per cent to 50 per cent of their balances to a pure digital bank.
Last month, Singapore tech start-up Sea made headlines after it acquired a small Indonesian bank, Bank Kesejahteraan Ekonomi, which will be turned into a digital bank.
More similar acquisitions are expected as Indonesia's Financial Services Authority (OJK) pushes for consolidation and looks poised to pass new rules on digital banking.
Mr Heru Sutadi, executive director of the Indonesia Information and Communication Technology Institute, said he hopes the government will impose the same regulations on both local and foreign players.
"When foreigners dominate, the benefits of Indonesia's digital economy are not optimal and Indonesia becomes only a mere market to tap. 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 said.
Dr Ardito Bhinadi, economics lecturer at the Veteran National Development University, said OJK, Indonesia's equivalent of the United States 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 ST.
"Digital technology is growing, giving us a lot of convenience, but also a lot of fragility."