Indonesia’s digital banking scene has skyrocketed in the past year. At the peak of the COVID-19 crisis, the shift intensified when cashless and contactless transactions became the norm for society, paving the way for virtual banks in a country where millions of people are without bank accounts. With fewer residents making trips to physical banks, fintech startups and digital banks found growth opportunities with rising mobile payments usage and peer-to-peer lending during the pandemic. Bank Central Asia (BCA), the largest private bank in Indonesia, reported a 50.7% growth in its mobile and internet transactions in 2020. 

This trend is likely to continue its ascent and to be adopted indefinitely into Indonesia’s financial infrastructure even after the pandemic—boosting the implementation of digital financial services for the future. Though physical banks still dominate complex transactions and human interactions, they must adapt for digital development and the increase in competition from fintech startups innovating in the sector, especially as people keep acquiring online accounts. Additionally, eBanks must prepare for potential market and digital disturbance from cybersecurity attacks and low financial literacy, both of which pose a threat to their continued growth and consumer perception.

We take a look at the fintech disruptions in Indonesia’s digital banking market.

The emerging trend of SME financing

As digital financial services spread, fintech companies are strengthening the world of Small and Medium Enterprise (SME) financing and providing sufficient support to the sector, especially during the pandemic. In the past, SMEs struggled with funding gaps that traditional financial institutions weren’t helping them fix. These companies turned to fintech companies for investment aid to repair their funding issues. 

Financial technology startups were able to utilise their tech advancements to develop applications to issue easy access and visibility to SMEs to meet their funding requirements. SMEs could also receive smaller and short-term loans at lower costs than traditional banks, with automation creating faster turnaround times. By simplifying the funding process, SMEs receive strong financial support and rapid onboarding processes through online banks. 

A pioneer in fintech lending is the company Investree. The online lending marketplace helps SMEs access finance and capital through peer-to-peer lending, financing through e-invoicing, and direct loans to online sellers. This Jakarta-based company also looks beyond mere lending to create AI solutions for the decision-making, monitoring, and upstream/downstream activities of SMEs. As fintech lending opportunities increase, it is likely that more and more eCommerce companies will be joining the financial digital scene in Indonesia to optimise their financial processes. 

The rise of digital banks

Indonesian eBanking found its footing in the past year, leaving local banks in a difficult position to either adapt or be left behind. Influential factors such as high mobile penetration, low broadband prices, a sizable young population, and the volume of unbanked people have made Indonesia a hotspot for online banking and its investors. Digital banks can exist in two forms: by integration and acquisition (also known as neobanks) or be newly introduced by commercial banks. 

As these banks continue to sprout up across Indonesia, companies are discovering the advantages digital banking brings. Tech companies like Gojek are leaving the eWallet sector for the more comprehensive setup of neobanks that provide more financial services and revenue through lucrative loans. Neobanks also have lower operational costs and a wider reach to potential customers and debtors. Recently, financial tech company ALAMI Technologies acquired the Sharia bank, BPRS Cempaka Al-Amin, capturing a large segment of the market. 

Welding partnerships between startups and banks

Although digital banks may pose competition for fintech firms, opportunities for collaborations foster vertical integration between the two segments and create room for them to coexist successfully. Through their partnerships, they can develop a digital ecosystem with more benefits for both lenders and borrowers, especially SMEs. With fintech’s advanced tech such as AI-based credit scoring and verification, digital banks with investment capabilities can tap into fintech developments to upgrade their current solutions and vice versa. Investree, a peer-to-peer lending fintech firm, partnered with Danamon bank to maximise their client base and their offering in loans to SMEs. 

With Indonesia’s Financial Services Authority, OJK, changing the minimum required capital raised for banks to $182 million USD, banks without these financial capabilities must look to other institutions or investors for aid to sustain their operations by 2022. The drastic change has made way for fintech companies to pour investment into the financial sector and explore new collaborations. 

As digital banking continues its sprint to financial stardom, there are still a few potential deterrents in its way. The sector must focus on calming consumer concern for cyberthreat and data security, consolidate to prevent uneven rural digital infrastructure, and find ways to help with low financial literacy. Even though the sector may have its challenges, Indonesians’ enthusiasm and the pandemic-led shift to fintech and digital banks’ looks to win through. With the increase of SME financing, digital bank acquisitions, and collaborations between fintech and banks fueling its success, the digital banking future is bright in Indonesia.