With the recent announcement that Indonesia’s Bank Jago will go fully digital, the trend of digital banking is on track to open up financial services to populations across the archipelago who have so far struggled to see benefits from traditional banks.
By Natasha Teja
Indonesia’s Bank Jago is set to become the country’s first fully digitized bank. While the bank will provide traditional services for accounts, deposits, loans and investments, the bank will not have any physical branches or ATMs. Bank Jago will provide services exclusively online.
In December 2020, the bank announced that it would expand its existing strategic partnership with ride hailing service Gojek in order to collaborate on financial technology projects.
Gojek, which is backed by Facebook and PayPal, is a minority shareholder in Bank Jago and in late 2020, the company invested an additional US$160million (2.25 trillion rupiah), increasing its stake in the bank from 4.1% to 22.2%.
Bank Jago’s move comes amid news that Indonesia’s financial services authority will now allow customers to open bank accounts and apply for loans through Gojek’s app.
“Banks must be present in digital ecosystems; this is how people do their banking nowadays instead of visiting a bank,” Bank Jago commissioner Anika Faisal told the Straits Times.
Bank account ownership increases with digitization
According to the World Bank, an estimated 95 million Indonesians, one third of the country’s population, do not hold bank accounts. However, of that 95 million, 60 million own a mobile phone, representing a large untapped market and a key avenue to offer financial services to new populations.
Many poorer Indonesians who work in the private sector are paid in cash and the introduction of digital payments will significantly alter how they receive their wages.
Digitizing payments in the private sector alone could increase bank account ownership by 29%. Many Indonesians living in rural areas live far from the nearest physical bank or ATM and have to travel significant distances to withdraw cash for payments for utilities, hospital bills, school tuition and other expenses. Digital banking would enable easier payments and give rural Indonesians access to more financial services.
Bank Jago, like a number of other fintech firms, will help increase financial services equity in the country by eradicating barriers such as geography and providing people with greater access to and ownership over their finances.
Indonesia reforms its digital bank regulations
Indonesia’s financial services authority (OJK) is expected to announce new regulations for digital banking by mid-2021, including whether OJK will grant digital bank licenses to investors. However, OJK has remained vague about which direction they will take.
“We won’t regulate details, nor will it be rules-based,” Anung Herlianto, executive director of banking research and regulation at OJK, told the Straits Times.
“It will instead be a set of guiding principles for banks to operate digitally, and banks have to mitigate their own risk, any risk, that may arise,” he added.
Indonesia is unique among ASEAN countries in that it doesn’t grant digital banking licenses. The only way for tech firms to enter the banking sector is by acquiring commercial banks or lenders with existing bank licenses. For Gojek, the firm had to partner with Bank Jago in order to create a fully digital payment system in Indonesia.
Bank Jago receives investment from Singapore
Singapore’s sovereign wealth fund, GIC, has invested 3.15 trillion rupiah (US$23 million) into Bank Jago to acquire a 9% stake in the bank. GIC’s investment will increase Bank Jago’s capital from its current 1 trillion rupiah (US$70 million) to 8 trillion rupiah (US$565 million).
Alongside GIC and Gojek, the majority stakeholders in Bank Jago are Metamorphosis Ecosystem Indonesia and Wealth Track Technology, together holding a 51% stake. However, both of them have committed to transferring some of their shares to foreign institutional investors.
This isn’t the first time Singapore has made investments in digital banking in Indonesia. In January, Singapore tech start-up Sea Ltd—now Southeast Asia’s most valuable company—acquired Indonesia’s Bank Kesejahteraan Ekonomi. Sea has already obtained a license to operate a digital bank in Singapore.
COVID-19 has accelerated digital trends in the financial sector
The pandemic has accelerated the need and demand for digital payments. Through the initial lockdowns and in the months since, consumers have opted for cashless and contactless payments, adding momentum to a boom in fintech that was already underway.
Digital peer-to-peer lending platforms have also gained prevalence by offering lower interest rates and more flexible terms than traditional banks. Loans from these digital platforms also minimize face-to-face interactions and eliminate the need for physical trips to the bank.
“The growth is extraordinary. People are scared of catching Covid-19 so they turn to mobile banking to perform their financial transactions,” Dr. Sri Adiningsih, professor of economics at Gadjah Mada University and 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.
While vaccination rollouts are slowly helping us towards an end to the pandemic, the trend of digital banking is unlikely to slow down in the foreseeable future.