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How digital transformation is shaping Indonesian BFSI sector

Insurance (BFSI) sector in Indonesia, the largest economy in Southeast Asia and one of the biggest emerging markets for the financial services industry. It focuses on the following broad points:

- The current state of the BFSI sector in Indonesia

- Digital transformation in the BFSI sector

- Indonesia’s Digital banking sector sees rapid growth

- Opportunities and challenges

- Conclusion

The rise of internet banking, mobile banking, and digital payments in the last decade has led to a rapid change in the way customers interact with financial institutions. And this trend has accelerated in the last 2 years during the Covid-19 pandemic, with a spike in the adoption of digital finance. Users of banking and finance apps have seen 37% YoY growth in Jan-21, with a user base of 79M compared to 58 M in Jan-20. Similarly, the peer-to-peer lending market grew from 22 billion IDR worth of loans per month before Covid to 9.5 trillion IDR worth of loans per month by end of 2020, even after suffering a temporary setback during the initial lockdown months.

The current state of the BFSI sector in Indonesia

Indonesia (population 270 million) has one of the world's largest unbanked and under-banked populations, with only 50% of adults having a bank account. One key reason for this is the geographical spread of this archipelago nation (with 17K+ islands) has hindered the development of the physical infrastructure required for banking services, especially in remote islands.

The financial services industry in Indonesia is dominated by the four largest banks - Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI), and Bank Central Asia (BCA). They together control 55% of the lending market and 63% of the combined market share for current accounts and savings accounts (CASA). Other commercial banks, rural banks, microfinance institutions, and multi-finance companies make up the remainder. In addition, credit lending in Indonesia is heavily skewed towards corporate and consumer loans, with MSMEs accounting for 18% of the total portfolio of loans. Also, only about 3% of the population has an active insurance policy, excluding mandatory health insurance, due to complicated registration, ineffective claim processing, and high premiums.  

Digital transformation in the BFSI sector

Indonesia has 345 million mobile connections and 202 million internet users, with an internet penetration of around 70%. The chart below shows that the number of internet users has been increasing steadily and is expected to reach 85% of the -population by 2025.

Figure: Number of internet users in Indonesia 2016-2026 (projected)

source: https://www.statista.com/topics/2431/internet-usage-in-indonesia/#dossierKeyfigures

This familiarity with smartphone technology and increased usage of e-commerce, digital media, and other digital services like ride-hailing are the demand-side pull factors fuelling the rise of digitalization in Indonesian financial firms. Here, we will explore how digital technologies are transforming Indonesia's banking, financial services, and insurance sectors.

Digital transformation is about transforming business models, existing processes, and customer interactions to create more value by integrating digital technologies like

It involves not only the adoption of new and upcoming technologies but also cultural and organizational change to adapt to changing customer expectations, market sentiments, and the rapidly evolving technological ecosystem.

For smaller banks, high investment costs and the shortage of skilled staff are the main obstacles to their digital transformation strategies. Therefore, they are partnering with consumer tech firms to upgrade their digital offerings, react faster to changing customer preferences and experiment with newer technologies.

Both the traditional incumbent banks and fintechs are approaching digitization with two sets of goals:

- Firstly, they want to reach a broader range of customers who have had less exposure to formal finance. The rapid advancements in data and business analytics have made it possible for firms to assess credit and insurance risk more accurately and serve a larger base of customers.

- Secondly, they aim to simplify banking and finance for existing customers using digital technologies. They are looking to become customer-centric and offer more personalised banking and insurance products, leading to more product innovation and a higher value proposition.

Let us look at some examples of how Indonesian banks and financial firms are leveraging digital technologies to transform their business and open new growth opportunities.

Indonesia’s digital banking sector sees rapid development

Indonesia has seen many developments in its digital banking sector in the past 12 months. Gojek allowed users to open a bank account through its super app thanks to the integration with Bank Jago, while a slew of other companies also launched digital banking offerings. Among the new players are Seabank by Sea Group, Akulaku-backed Neo+ by Bank Neo Commerce, Line Bank by Hana Bank, and Blu by BCA Digital. Some of these banks also integrate or partner with e-commerce apps, for example, Seabank with Shopee, and Blu with Blibli, to function as payment methods for these platforms.

E-commerce company Bukalapak is also reportedly preparing to launch digital banking services in partnership with Standard Chartered, while Grab is forming a joint venture with Emtek Group to also introduce a digital bank in Indonesia after Emtek acquired local lender Bank Fama

Opportunities and Challenges

The Indonesian BFSI sector is likely to be shaped by three major technology trends in the next few years – Banking-as-a Service (BaaS), advancements in AI, and migration to cloud computing. Let us look at them in more detail, starting with Banking-as-a Service (BaaS). The traditional banks are looking to disaggregate their existing systems into modular applications. This will allow third parties like e-commerce, healthcare providers, transportation providers, and fintechs to connect to these services using APIs and build product offerings in personal finance, real-time payments, and fraud monitoring on top of this infrastructure. Advancements in AI and data analytics are allowing financial firms to deploy and scale AI-based products in application areas ranging from conversational chatbots to provide customers with 24/7 service experience, credit risk assessments based on multiple digital data sources, and personalised finance to help customers make better financial decisions. Indonesian financial firms are looking to digitise their core infrastructure and move their legacy systems to cloud computing. The financial firms are increasingly collaborating with local and global tech firms to develop cloud-native platforms, enabling them to launch new digital financial products and services within a short timeframe.

The spectacular growth that the industry has seen in the past few years has brought its own set of challenges, which the industry will have to tackle in the next five years. Cybersecurity, data privacy, and the regulatory environment are going to be the main challenges for the industry. The exponential growth of data in the financial sector, increased use of cloud computing resources, and digitization of customer services are forcing companies to invest more in securing their data infrastructure and integrating cybersecurity functions into their digitization journey. Breaches of sensitive customer data are a risk for the BFSI industry and can lead to financial penalties and reputation loss. Similarly, the regulatory environment concerning personal data protection is evolving in Indonesia, and the Personal Data Protection Law will impose additional costs for digital businesses to comply with its requirements. Financial firms will need to continue strengthening their cybersecurity units to tackle these challenges and focus on developing capabilities for real-time monitoring of data security vulnerabilities, upgrading identity and access management for sensitive data, and leveraging analytics and automation to simplify regulatory compliance.

Conclusion

Indonesia is home to more than 60 million ultra-micro and micro businesses. They are the critical driving force of Indonesia’s economy, accounting for more than 60% of Indonesia’s GDP and absorbing a whopping 97% of the workforce. Indonesia has set a target to achieve 90% financial inclusion by 2024 (up from 76% today); ultra-micro and micro-businesses are the main focus of this vision. The various technological innovations in digital financial services have increased access to formal finance in Indonesia.

The hybrid agent-based networks serve small enterprises and unbanked customers in remote and rural areas through digital channels like card-reading machines and mobile applications. These agents also act as digital advisors, helping build trust since many of their customers have low financial and digital literacy. The Quick Response Code Indonesia Standard (QRIS), implemented in 2019, has streamlined the payment process by ensuring interoperability between different payment providers. It has helped micro and small enterprises adopt and embrace digital payments and enabled them to access formal financial services.

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Digital Transformation
How digital transformation is shaping Indonesian BFSI sector
July 15, 2022

Insurance (BFSI) sector in Indonesia, the largest economy in Southeast Asia and one of the biggest emerging markets for the financial services industry. It focuses on the following broad points:

- The current state of the BFSI sector in Indonesia

- Digital transformation in the BFSI sector

- Indonesia’s Digital banking sector sees rapid growth

- Opportunities and challenges

- Conclusion

The rise of internet banking, mobile banking, and digital payments in the last decade has led to a rapid change in the way customers interact with financial institutions. And this trend has accelerated in the last 2 years during the Covid-19 pandemic, with a spike in the adoption of digital finance. Users of banking and finance apps have seen 37% YoY growth in Jan-21, with a user base of 79M compared to 58 M in Jan-20. Similarly, the peer-to-peer lending market grew from 22 billion IDR worth of loans per month before Covid to 9.5 trillion IDR worth of loans per month by end of 2020, even after suffering a temporary setback during the initial lockdown months.

The current state of the BFSI sector in Indonesia

Indonesia (population 270 million) has one of the world's largest unbanked and under-banked populations, with only 50% of adults having a bank account. One key reason for this is the geographical spread of this archipelago nation (with 17K+ islands) has hindered the development of the physical infrastructure required for banking services, especially in remote islands.

The financial services industry in Indonesia is dominated by the four largest banks - Bank Mandiri, Bank Rakyat Indonesia (BRI), Bank Negara Indonesia (BNI), and Bank Central Asia (BCA). They together control 55% of the lending market and 63% of the combined market share for current accounts and savings accounts (CASA). Other commercial banks, rural banks, microfinance institutions, and multi-finance companies make up the remainder. In addition, credit lending in Indonesia is heavily skewed towards corporate and consumer loans, with MSMEs accounting for 18% of the total portfolio of loans. Also, only about 3% of the population has an active insurance policy, excluding mandatory health insurance, due to complicated registration, ineffective claim processing, and high premiums.  

Digital transformation in the BFSI sector

Indonesia has 345 million mobile connections and 202 million internet users, with an internet penetration of around 70%. The chart below shows that the number of internet users has been increasing steadily and is expected to reach 85% of the -population by 2025.

Figure: Number of internet users in Indonesia 2016-2026 (projected)

source: https://www.statista.com/topics/2431/internet-usage-in-indonesia/#dossierKeyfigures

This familiarity with smartphone technology and increased usage of e-commerce, digital media, and other digital services like ride-hailing are the demand-side pull factors fuelling the rise of digitalization in Indonesian financial firms. Here, we will explore how digital technologies are transforming Indonesia's banking, financial services, and insurance sectors.

Digital transformation is about transforming business models, existing processes, and customer interactions to create more value by integrating digital technologies like

It involves not only the adoption of new and upcoming technologies but also cultural and organizational change to adapt to changing customer expectations, market sentiments, and the rapidly evolving technological ecosystem.

For smaller banks, high investment costs and the shortage of skilled staff are the main obstacles to their digital transformation strategies. Therefore, they are partnering with consumer tech firms to upgrade their digital offerings, react faster to changing customer preferences and experiment with newer technologies.

Both the traditional incumbent banks and fintechs are approaching digitization with two sets of goals:

- Firstly, they want to reach a broader range of customers who have had less exposure to formal finance. The rapid advancements in data and business analytics have made it possible for firms to assess credit and insurance risk more accurately and serve a larger base of customers.

- Secondly, they aim to simplify banking and finance for existing customers using digital technologies. They are looking to become customer-centric and offer more personalised banking and insurance products, leading to more product innovation and a higher value proposition.

Let us look at some examples of how Indonesian banks and financial firms are leveraging digital technologies to transform their business and open new growth opportunities.

Indonesia’s digital banking sector sees rapid development

Indonesia has seen many developments in its digital banking sector in the past 12 months. Gojek allowed users to open a bank account through its super app thanks to the integration with Bank Jago, while a slew of other companies also launched digital banking offerings. Among the new players are Seabank by Sea Group, Akulaku-backed Neo+ by Bank Neo Commerce, Line Bank by Hana Bank, and Blu by BCA Digital. Some of these banks also integrate or partner with e-commerce apps, for example, Seabank with Shopee, and Blu with Blibli, to function as payment methods for these platforms.

E-commerce company Bukalapak is also reportedly preparing to launch digital banking services in partnership with Standard Chartered, while Grab is forming a joint venture with Emtek Group to also introduce a digital bank in Indonesia after Emtek acquired local lender Bank Fama

Opportunities and Challenges

The Indonesian BFSI sector is likely to be shaped by three major technology trends in the next few years – Banking-as-a Service (BaaS), advancements in AI, and migration to cloud computing. Let us look at them in more detail, starting with Banking-as-a Service (BaaS). The traditional banks are looking to disaggregate their existing systems into modular applications. This will allow third parties like e-commerce, healthcare providers, transportation providers, and fintechs to connect to these services using APIs and build product offerings in personal finance, real-time payments, and fraud monitoring on top of this infrastructure. Advancements in AI and data analytics are allowing financial firms to deploy and scale AI-based products in application areas ranging from conversational chatbots to provide customers with 24/7 service experience, credit risk assessments based on multiple digital data sources, and personalised finance to help customers make better financial decisions. Indonesian financial firms are looking to digitise their core infrastructure and move their legacy systems to cloud computing. The financial firms are increasingly collaborating with local and global tech firms to develop cloud-native platforms, enabling them to launch new digital financial products and services within a short timeframe.

The spectacular growth that the industry has seen in the past few years has brought its own set of challenges, which the industry will have to tackle in the next five years. Cybersecurity, data privacy, and the regulatory environment are going to be the main challenges for the industry. The exponential growth of data in the financial sector, increased use of cloud computing resources, and digitization of customer services are forcing companies to invest more in securing their data infrastructure and integrating cybersecurity functions into their digitization journey. Breaches of sensitive customer data are a risk for the BFSI industry and can lead to financial penalties and reputation loss. Similarly, the regulatory environment concerning personal data protection is evolving in Indonesia, and the Personal Data Protection Law will impose additional costs for digital businesses to comply with its requirements. Financial firms will need to continue strengthening their cybersecurity units to tackle these challenges and focus on developing capabilities for real-time monitoring of data security vulnerabilities, upgrading identity and access management for sensitive data, and leveraging analytics and automation to simplify regulatory compliance.

Conclusion

Indonesia is home to more than 60 million ultra-micro and micro businesses. They are the critical driving force of Indonesia’s economy, accounting for more than 60% of Indonesia’s GDP and absorbing a whopping 97% of the workforce. Indonesia has set a target to achieve 90% financial inclusion by 2024 (up from 76% today); ultra-micro and micro-businesses are the main focus of this vision. The various technological innovations in digital financial services have increased access to formal finance in Indonesia.

The hybrid agent-based networks serve small enterprises and unbanked customers in remote and rural areas through digital channels like card-reading machines and mobile applications. These agents also act as digital advisors, helping build trust since many of their customers have low financial and digital literacy. The Quick Response Code Indonesia Standard (QRIS), implemented in 2019, has streamlined the payment process by ensuring interoperability between different payment providers. It has helped micro and small enterprises adopt and embrace digital payments and enabled them to access formal financial services.

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