10 reasons on why digital banking in Indonesia will fail: The reason I am making this presentation is because you might heard too many opinion that saying the future of banking is digital. Here I am trying to explain the opposite of major opinion. This is highly subjective, but I hope it can help you to see things clearer. #1 Bank is highly regulated industry; in Indonesia regulation is complicated (REGULATORY) #2 Banking is infrastructure business; oligopoly is inevitable (TECHNOLOGY) #3 Banking in Indonesia known for its inefficiency, digital will make it efficient but (INEFFICIENT) #4 Not all banking interested in going digital (COST) #5 The customer is demanding but does not mean the business is good (DEMANDING) #6 The cost to build digital bank is very cheap, but why not many banks interested (COST) #7 Who watch the watchmen? (REGULATORY) #8 Big player significant moves affecting the market; zero sum game? (COMPETITION) #9 More regulation, more complicated futures (REGULATORY) #10 Don’t forget about data security (SECURITY)

1. 10 reasons on why
Digital Banking in Indonesia will Fail:
Skepticism and Regulatorism
Sharing Session
Technology Consulting
Jun 2020

2. #1 Bank is highly regulated industry; in Indonesia regulation is complicated
• Bank is institution that perform saving and lending (interest based) and perform
financial intermediaries (non interest based).
• In Indonesia, generally saving and lending is under supervision of OJK, while
financial intermediaries aka payment is under supervision of BI.
• Historically speaking, Indonesia follow UK FSA model that separate BI and
OJK, but in reality its more complicated than that e.g BPK (state audit board)
• Bank is highly regulated industry and highly technology dependent
What is a Bank?

3. #2 Banking is infrastructure business; oligopoly is inevitable
• The power of banking infrastructure is concentrated in oligopoly market
• EDC, more than 90% of EDC is belong to five banks only (BCA 38%, Mandiri
18%, Niaga 18%, BNI 14%, BRI 11%). For comparison BCA has more than
500,000 EDC while BTN only 130 EDC
• In comparison, Gojek trying to reach 400,000 and OVO at 100,000
• ATM, more than 75% of ATM belong to five banks only (BRI 19%, BNI 17%,
Mandiri 17%, BCA 16%, Niaga 5%). For comparison BRI has more than
20,000 while Panin, Bank DKI only less than 100 ATM
The entry barrier for digital banking is high

4. #3 Banking in Indonesia known for its inefficiency, digital will make it efficient but
• From financial perspectives: Net interest margin (NIM) is one of the highest in
region. Indonesia: 4.81% ASEAN: 2-3.5%. This represent inefficient financial
intermediation process. BOPO (OER), CAR, LDR.
• From operational perspectives: Payment cost is also the highest in region
• But wait, with inefficiency banks enjoy profit
This case also happen in digital

5. #4 Not all banking interested in going digital
• In Indonesia 75% bank revenue is from interest, while 25% from non interest
income (ATM, EDC, Internet Banking, SKN, RTGS, Swift).
• For big banks, the contribution of non-interest business might reach more
than 25% such as BCA, but for smaller bank, this might not as interesting.
• Interest income vs non-interest income
How bank get its revenue?

6. #5 The customer is demanding but does not mean the business is good
• 94% non-cash transaction is based on ATM/Debit Card (BI Sep 2019)
• European prefer cash instead of digital non-cash for the reason of privacy
• Asian more advanced in electronic money technology acceptance (Line,
Kakao, WA)
• Indonesian customer behaviour never change. E.g discount, brand worshiper,
gossip
Why transaction is behavioral?

7. #6 The cost to build digital bank is very cheap, but why not many banks interested
• Buying a bank is cheap, buying bank infrastructure is expensive, but
• Bank Artos bought by Jerry Ng for Rp 300b ($30m)
• Rabobank bought by BCA for Rp 900b ($90b)
• BTPN Jenius cost for CBS & Digital Infrastructure est.at Rp 200b ($20m), but
SMBC thinks differently
• A core banking system might cost $10-50m
• Conclusion: Big banks is not interested in developing digital bank
How much cost needed to build a digital banks?

8. #7 Who watch the watchmen?
• In Indonesia regulator can be operator. For example BI will have a BI-Fast that
will compete against VISA/Mastercard
• Classic issues in energy industry or utilities industry
Quis custodiet ipsos custodes?

9. #8 Big player significant moves affecting the market; zero sum game?
There are four type of digital banks
• Reliance with Device: Apple Pay, Samsung Pay
• Reliance with OS: Google Pay
• Reliance with Marketplace: Amazon Pay, Gopay, Starbucks Pay, Ovo, Dana
• Reliance with Banking: VISA EMV SRC, Link Aja
Payment landscape is unsurprisingly heterogenic

10. #9 More regulation, more complicated futures
• BI release BSPI 2025 last November 2019 mention the Open Banking as the
future of Banking business model.
• The importance of this regulation is not on the technological changes (ISO
20022) but more on business model (Banking Liberalization)
• Data is banking significant assets; will the bank share it?
Blueprint Sistem Pembayaran 2025

11. #10 Don’t forget about data security
• The issues of Data Integration in Indonesia is commonly happened (SIM, KTP,
NPWP).
• There are more issues on Cloud Computing, not only Data sovereignty
(PP71/2019)
Well there are more than 30 regulation on data security but

12. Quiz 1: What is the oldest digital bank?
Western Union (1914), Diners Club (1950), VISA (1960)?

13. Quiz 2: How many digital product that BCA has?
How many digital product that Bank BCA has?

14. Thank you