Digital banks are banks that make intensive use of digital technology, not relying on a branch network like most traditional banks. Digital banks are expected to be a breakthrough in the banking world.
By
RICO USTHAVIA FRANS
·6 minutes read
SALOMO TOBING
Rico Usthavia Frans
In Indonesia, this phenomenon started with Bank Artos, which was changed to Bank Jago by Jerry Ng. This immediately became a trend. CT Corp acquired Bank Harda to become Allo Bank, Sea Group (owner of Shopee) acquired Bank Kesejahteraan Ekonomi to become SeaBank, and Akulaku changed Bank Yudha Bhakti to Bank Neo Commerce.
Grab and Emtek also jointly acquired Fama bank to turn it into a digital bank. Big banks have not been left behind either. BRI repositioned BRI Agro to become Bank Raya, BCA acquired Bank Royal to become BCA Digital and BNI plans to acquire Bank Mayora to become its digital bank.
In January 2022, Bank Jago once reached a market capitalization of Rp 260 trillion and became the fifth-largest listed company.
The stock performance of digital banks was initially fantastic. In January 2022, Bank Jago once reached a market capitalization of Rp 260 trillion and became the fifth-largest listed company. However, currently Bank Jago's capitalization has fallen 85 percent from its peak to only around Rp 40 trillion.
Similar to Bank Jago, Bank Raya's capitalization fell 84 percent to Rp 10.5 trillion. Allo Bank's capitalization fell 80 percent to Rp 35 trillion and Bank Neo Commerce’s capitalization fell 76 percent to only Rp 8 trillion.
Direction
Quo vadis digital banks? Where are digital banks headed?
One of the success factors for digital banks is access to digital ecosystems. It is like in the past, when almost all conglomerates had their own bank. Salim owned BCA, Lippo owned Lippo Bank, Sinar Mas with its BII and CT with Bank Mega. These banks became a source of cheap funds for their business groups and vice versa they also took advantage of the business group's captive business.
In the digital age, the strategy is similar. Bank Jago hopes to exploit the GoTo ecosystem. Allo Bank manages CT Corp's business. BNC capitalizes on Akulaku's user base, SeaBank focuses on the Shopee ecosystem. The Grab and Emtek ecosystems have been prepared to be managed by Bank Fama. The difference is that their operation is focused more on a business to consumer (B2C) approach and is done digitally with a user experience that is more integrated with business processes in the real sector.
Ownership of and access to an exclusive digital ecosystem allows digital banks to reduce customer acquisition costs to obtain low-cost funds, as well as to extend credit and other services. The degree of exclusivity to the digital ecosystem will affect the success of a digital bank. For example, Bank Jago's access to the GoTo ecosystem, which is not as exclusive as Seabank's access to Shopee or BNC's access to Akulaku, makes it less optimal.
Meanwhile, digital banks owned by business groups that already have traditional banks have their own challenges. Bank Raya must compete with BRI in utilizing the BRI ecosystem. Allo Bank has to share the CT Corp ecosystem with Mega, BCA Digital has to share the segment with BCA, and later Bank Mayora will have to share with BNI. Without clear concessions, it will be difficult for these digital banks to develop.
Digital capability
The digital technology capability factor clearly plays an important role. Digital banks owned by digital player business groups, such as Seabank and BNC, as well as Grab and Emtek, will benefit from the digital technology capabilities of their parents. In contrast, digital banks owned by traditional banks or business groups that are not digital must be willing to invest in building strong digital technology capabilities if they are to be successful.
Management factors are also very decisive. Digital banks whose parents have traditional banks tend to import management personnel from their traditional banks. The risk is that traditional bank culture, which tends to be conservative and bureaucratic, will be carried over to digital banks. The intention is to become a digital bank, but the way of thinking and "behavior" remains conventional.
On the other hand, digital banks owned by digital companies tend to have more aggressive management. There should be a balance between management prudence and progressiveness. An element of caution can be obtained from experienced banking people, while progressivity is obtained from young people in the world of financial technology (fintech) or other digital platforms.
The vision and tastes of the controlling shareholders also matter. If they are only concerned with short-term gains, it will be difficult to invest healthily. Conversely, if too bold, for example burning too much money, it can be fatal. Capital investment should be used to build capabilities, not just buy market share.
Another factor that influences the success of digital banks, but which is less clear, is regulation. With the passing of the Financial Sector Development and Strengthening Law (P2SK), will digital banks continue to be regulated and supervised like traditional banks under the chief executive of banking of the Financial Services Authority (OJK) or move under the supervision of the chief executive of financial technology? Will the OJK issue specific rules for digital banks?
This policy direction will affect the probability of success of digital banks relative to traditional banks. If regulated and supervised specifically and differentiated from traditional banking, digital banking has the potential to develop faster. On the other hand, when compared, development tends not to be optimal because it is burdened by traditional rules that are not in accordance with the digital world.
For the next few years, these traditional banks will be able to take advantage of their branch networks supported by increasingly modern digital channels.
One more factor that should not be overlooked is the fact that traditional banks are also transforming. These traditional banks are upgrading their business processes to become more digital. Their mobile banking has also become more modern. For the next few years, these traditional banks will be able to take advantage of their branch networks supported by increasingly modern digital channels.
If digital banks do not immediately take advantage of cost efficiencies and provide a better customer experience, traditional banks that have undergone digital transformation will be able to make digital bank's value proposition become a commodity and irrelevant.
The success of digital banks is determined by many factors, including access to digital ecosystems, technological capabilities, management choices and the direction of regulatory policies. It seems too early to answer the question quo vadis digital banks?
RICO USTHAVIA FRANS, member of the steering committee of the Indonesia Fintech Society.
