Are Indonesian Retail Banking Ready for Digital Transformation?

20 Aug 2018



This article was written by our Associate Partner, Gervasius Samosir, and featured in Forbes Indonesia's August edition. 

With the third largest youth population in the world and 130 million active social media users, Indonesia has the potential to become the biggest digital economy in Southeast Asia. The rapid growth of internet users, improvements in telecom infrastructure, and an increasingly supportive regulatory framework are factors driving digital transformation in the country. Yet many industries are still lagging behind in their digital initiatives, including the financial services sector. Across Indonesia, several retail banks have started to digitize their business processes but many choose to focus on enabling basic customer transactions to this day.


Indonesia is moving towards a cashless society to support financial inclusion as only 36% of the population is currently connected to formal financial institutions, leaving an estimated 150 million citizens unbanked. Furthermore, 85% of transactions in the country rely on cash, signifying the need for alternative payment schemes.

The increasing demand of customer expectations from the youngest population bracket in Indonesia, the millennial generation, has also urged executives in the industry to rethink the customer journey. Indonesia's millennial productive age population is expected to reach 58% of total population by 2027, making this generation to be the highest age demographic in Indonesia in the next decade.

Apart from the large pool of resources Indonesia can leverage on, disruptive technology will continuously grow in every area of the industry's value chain. Commercial banks in Indonesia such as BTPN, Mandiri, and DBS Indonesia have successfully utilized artificial intelligence and big data analytics in their digital product offerings to further streamline and automate processes. By 2020, digital retail banking penetration is estimated to reach 60% driven by Indonesia’s burgeoning digital economy and the rapid growth of its young affluent customer segment.


How should banks take up on digital opportunity?

The up-take from digitization will therefore help open greater opportunities for challenger banks to seize market share with the latest product and service innovation while also helping incumbent banks pave the way in new ideation and corporate model transformation. For incumbent and challenger banks, the first step towards digital transformation is by aligning 5 core competencies in line with corporate vision and mission: business model, capacity building, leadership & organizational DNA, products & services, and marketing promotion strategies.

The five core competencies between incumbent and challenger banks differ substantially. In terms of business model, incumbent banks are to prioritize digitization for their current customer base while challenger banks actively produce new innovation and receive first mover advantage.

In capability building, incumbent banks are still in the early stages while challenger banks are more prepared to tackle challenges through incubation teams. Strong leadership should also be a key success factor to digitally transform. For example, by creating a culture where teams are tasked to provide fresh business ideas with new networking culture and agile organization structure.

Incumbent banks have the obligation to prioritize digitization for their current customer base and simultaneously adjust digitization. Challenger banks will have a different approach; they will directly bring new level of customer service and new technology platforms to serve the digitally savvy population. Lastly, it is important that banks have a vigorous marketing and advertising strategy. Incumbents are inclined to have straightforward marketing strategies while online channels become the major source of promotion for challenger banks, in addition to actively conducting close user group events to acquire potential customers. To conclude, it is crucial for players in retail banking to identify current competitive landscape in the industry and assess potential initiatives in each area of their digital transformation processes to satisfy the unmet financial needs of their customers.

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