Digital banks are a big deal in Indonesia because they can potentially bring a large swath of the unbanked population – which stands at about 181 million people – into the formal financial system swiftly and smoothly. That would have positive knock-on effects for the broader economy, which is forecast to grow at a brisk 5% clip this year and next.
Online banks are also arriving at a time when Indonesia’s digital economy is growing fast, catalyzed by the coronavirus pandemic. A McKinsey report published in the fourth quarter of 2021 found that 78% of Indonesians use digital banking at least once per week, up from 57% in 2017. Bank Indonesia estimates that digital banking transactions grew 19.1% to 32.2 quadrillion rupiah (US$2.25 trillion) in 2021, up considerably from a 1.5% rise a year earlier. These findings are significant given that Indonesia was the world’s second-largest cash-based economy in 2019, trailing only India.
While an accelerated cashless movement is common throughout the region, the regulatory environment in Indonesia is perhaps the most hospitable of any emerging Southeast Asian market. In fact, in August 2021 the Indonesia Financial Services Authority (OJK) adjusted ownership rules of local banks, allowing foreign entities to hold up to 99% of a domestic lender, compared to just 40% previously. At the same time, the OJK raised the capital requirement to set up a new bank to at least 10 trillion rupiah (US$695 million) from 3 trillion rupiah, setting the bar high for entry into the country’s digital banking sector.
Big Tech’s big bet
Given favorable market conditions, Big Southeast Asian Tech is moving aggressively into the nascent Indonesian digibanking market. Since late 2020, Gojek (now GoTo), Grab and Sea Group have all been involved in key M&A deals in a bid to cement their respective market positions. Fintech is integral to all three of these platform companies’ growth plans.
For GoTo, its home market is a must win. Unlike Grab or Sea, it has a limited presence outside of Indonesia. If the company can seamlessly integrate its ride-hailing, food-delivery, e-commerce and digital financial services, it might be able to justify its sky-high valuation –estimated at US$28.5 billion in late 2021 – give investors a satisfactory exit and eventually pave a path to profitability.
Gojek’s US$160 million investment in underperforming incumbent lender PT Bank Jago, which upped the company’s stake in the bank from 4% to 22%, appears to be paying off. Gojek has integrated its platform with Jago, so that the Indonesian bank can directly offer access to digital banking services through the Gojek app. Bank Jago swung to profitability in the third quarter of 2021 for the first time in six years, earning net income of 14 billion rupiah (about US$1 million). Interest income and loan disbursement have both grown expeditiously since Gojek took over.
Shortly after Gojek upped its stake in Bank Jago, Sea Group bought Indonesian incumbent lender Bank BKE outright for an undisclosed sum. As Southeast Asia’s most valuable public company, Sea could afford to splurge. Buying the bank not only gave Sea access to its customer base, but also eliminated the need to apply for a banking license in Indonesia.
Sea has rejigged Bank BKE – which launched in 1992 as a bank for civil servants – as a digital lender, aptly named SeaBank. It could be a formidable addition to a digital services ecosystem that already includes the profitable gaming arm Garena as well as Shopee, one of the dominant e-commerce platforms in Indonesia.
Indonesia is also a major market for Grab, and given the activity of its competitors, the company’s investments in local lenders comes as no surprise. Grab first led a US$100 billion Series B round for the state-backed e-wallet LinkAja, which reportedly has 58 Indonesian million users, mostly in tier 2 and 3 cities. The deal made Grab a strategic partner of influential incumbent lenders Bank Rakyat Indonesia, Bank Madiri and Bank Negara Indonesia (BNI).
Grab’s Indonesia digibanking investments have accelerated since the beginning of the year. In January, Grab and Singaporean telecoms giant Singtel invested in the small private lender Bank Fama International. According to Nikkei Asia, Singtel and Grab together own 32.5% of the bank, while Singtel paid 500 billion rupiah (US$34.8 million) for 2.4 billion new shares issued by Bank Fama.
The tycoon angle
Also in January, a Grab subsidiary, Indonesian e-commerce firm Bukalapak and conglomerate Salim Group said they would subscribe to a planned 4.8 trillion rupiah (US$335.6 million) rights issue by Allo Bank. Owned by Indonesian tycoon Chairul Tanjung, it began as a traditional bank in 1992. In 2021 Allo Bank won a digital banking license.
As it turns out, Taijung is no exception: Indonesia’s powerful tycoons have a fast-growing interest in digital banking and are glad to team up with Big Southeast Asian Tech. The giant platform companies have the capability to build comprehensive digital ecosystems, while the tycoons and their conglomerates can offer existing banks ready to be digitized. Once that process is complete, there is potential to attract more customers by tapping other parts of the conglomerates’ business networks.
In addition to Tanjung and Salim Group’s Anthoni Salim, five other Indonesian tycoons have invested in the country’s digital banks thus far, according to Indonesian media. For instance, billionaire Jerry Ng, a veteran of the banking industry, purchased shares in Bank Jago (then known as Bank Artos) in December 2019, about a year before Gojek made its huge investment in the lender. With Bank Jago’s swing to profitability, Ng’s investment has paid off handsomely.
One of the most ambitious Indonesian conglomerates in digibanking is Emtek Group, headed by tycoon Eddy Kusnadi Sariaatmadja. Last year, Emtek acquired a 93% stake in incumbent lender Bank Fama International for US$63 million. Given that Emtek also has majority stakes in Bukalapak and the e-wallet Dana, the company has a solid foundation on which to build a digital banking ecosystem.
Further, Emtek established a strategic partnership with Grab last July following a US$375 million investment in the super app’s Indonesian company. That deal followed Grab’s reported US$270.5 million investment in Emtek last April, which gave the super app a 4% stake in the conglomerate.
The Emtek-Grab partnership appears to have the blessing of Indonesian regulators, who hope that the two companies joining forces can boost financial inclusion for small businesses. The Indonesian government has set a target of having 30 million SMEs go digital by 2024.
“We are grateful that companies like Grab and Emtek Group have taken up the mantle to help our MSMEs in transforming their operations digitally,” Teten Masduki, Minister of Cooperatives and Small and Medium Enterprises, said in a statement. “It is my hope that the strategic partnership between Grab and Emtek Group will also reach more underserved MSMEs such as those run by entrepreneurs with disability or elderly entrepreneurs.”
Plenty of low-hanging fruit
Despite the intense competition in Indonesia’s nascent digibanking market, there is plenty of low-hanging fruit to go around. Two-thirds of Indonesia’s 275 million people (181 million people) do not yet have a bank account, while the country has 205 million internet users and a burgeoning digital economy. On that last point, in a widely publicized 2020 report, Bain, Temasek and Google estimated that Indonesia’s online spending would double to US$146 billion by 2025.
No other Asian market offers digital lenders an equivalent opportunity. As for who will be most successful, that will likely depend largely on the strength of their respective digital banking ecosystems. By partnering with various incumbent banks and conglomerates (sometimes one and the same) Big Southeast Asian Tech looks poised for success. Profitability could come faster than in other markets, where digibanks must be set up from scratch – and burn piles of cash on customer acquisition.
Gojek-backed Bank Jago is a case in point. The bank had been profitable in the past as an incumbent. In the third quarter of 2021, it returned to the black, except now it is a digital bank.
SeaBank, Emtek and Grab-backed Bank Fama International and Allo Bank could follow similar trajectories. All three began as traditional lenders.
Competition could further intensify if American and Chinese tech giants were to increase their investments. Ant Group co-owns the e-wallet Dana with Emtek and backs the fintech Akulaku (which offers lending, payment and wealth management services), while Facebook and PayPal hold small stakes in Gojek’s e-wallet GoPay. For its part, WhatsApp has long sought to monetize its large Indonesian user base with payments.
However, none of those firms looks like a credible challenger to the Southeast Asian tech giants and conglomerates in Indonesia. WhatsApp Pay is focused on India – a formidable challenge in its own right. Ant remains mired in regulatory trouble at home in China. Its once ambitious overseas expansion plans have been curbed. Finally, PayPal has been struggling with plunging share prices and fraudulent accounts.
With that in mind, for the time being, Indonesia’s digibanking market will belong to Southeast Asia.