Digital Bank and the Way Forward
Mirza Adityaswara, Economist and Chair of the Indonesia Fintech Society (IFSOC)
KOMPAS – (12/10/2021) The Covid-19 pandemic has changed the way people conduct their activities. “WFH” or working from home is now a colloquial term. Apart from working and studying from home, people also carry out various activities from home, such as watching movies, playing online games, shopping, learning to cook, as well as health consultations.
In the financial markets, the increase in digital economic activity is reflected in the rising stock prices of various companies offering digital services. The stock price of e-commerce company Amazon during the pandemic rose 74 percent from January 2020 to early October 2021. The share price of the film service company Netflix rose 89 percent. Shares of video conferencing service provider Zoom, in fact, rose 800 percent in 2020.
During the pandemic, payment and financial investment activities are also carried out from home. Shopping from home requires online payment facilities. The share price of the financial technology (fintech) payment company Paypal increased 175 percent, with a market capitalization of US$ 305 billion, or about a quarter of Indonesia’s gross domestic product (GDP). Stripe, a payment processing app company founded 11 years ago, is now capitalized at $95 billion, a threefold increase during the pandemic.
The soaring share price of the digital economy company has also spread to Indonesia. However, most of Indonesia’s digital economy companies are still at the stage of funding by private investors, not yet listed on the stock exchange. Investors are also looking for corporate or bank issuers that can enter the digital economy category. Retail investors are tempted to buy shares of companies and some banks that claim to be digital companies and banks.
The increase in the share price of small banks in Indonesia who claim to be digital banks is indeed extraordinary. This is because there is an expectation that digital banks will prosper in the future. Bank Jago’s market capitalization has reached Rp209 trillion, surpassing the market capitalization of Bank BNI combined with Bank BTN, Bank CIMB Niaga, Bank Danamon and Bank Panin although Bank Jago’s total assets are far below those banks. Another example, the market capitalization of digital bank BRI Agro has reached Rp50 trillion. Meanwhile, Bank Aladin’s market capitalization is IDR 39 trillion, already surpassing the market capitalization of Bank BTN, or CIMB Niaga, Danamon, and Bank Panin.
Profit expectations
According to financial theory, stock prices are a reflection of expectations on the company’s earnings performance. Will digital bank profits in the next 10 years be able to overtake conventional banks?
Digital Bank targets a generation that is accustomed to technological developments, namely the millennial generation. Because they are still young, usually they do not have much money as a source of bank deposits. However, in the next twenty years, this millennial generation will become highly paid professionals or established entrepreneurs.
Will conventional banks remain silent seeing millennial generation customers being taken by digital banks? That is why big banks, such as Bank Mandiri, BCA, CIMB Niaga, OCBC NISP, are increasing their digital capabilities. If large bank customers can transact deposits, buy and sell shares, buy insurance, buy mutual funds, take motor vehicle loans, mortgage loans, through their hands on their cell phones, they will not move to another bank.
On the other hand, small banks that claim to be digital banks do not necessarily have an easy time in attracting customers in a short period of time. Bank profits are obtained from garnering deposits and channeling them as credit. Bank profits are also derived from non-interest income, for example providing transfer services, foreign exchange conversion, and investment services. Therefore, digital banks try to work together with other parties in order to form an ecosystem, for example the e-commerce ecosystem, transportation services, farmer ecosystems, and micro entrepreneurs.
With the formation of an ecosystem, it is hoped that customers will open bank accounts and carry out various transactions in that account. Two big banks, BCA and BRI, in order to focus, chose a strategy to build a digital bank subsidiary, with the hope of customer diversification: rather than potential customers moving to other banks, it is better to attract their own through subsidiaries.
In principle, a digital bank is a bank without branch office services, without ATM services. All transactions are carried out online via mobile phones. Because digital banks are trying to form an ecosystem, it is very important to have a technology system that is connected to a number of parties so that interconnection and interoperability can occur.
For example, to disburse personal credit, you need information related to your ability to pay, such as shopping transaction data and debt data from elsewhere. Here comes the term open banking through standardization of API (application programming interface). Bank Indonesia has set an API standardization. What must be guarded against open banking is protection of personal data so that there is no misuse of customer data.
In order to retain customers, conventional banks are also starting to realize the importance of working with digital economy players. For example, if a millennial customer wants to buy mutual funds, it is better to connect with a fintech company that specializes in serving small amounts of mutual funds.
Conventional banks also open doors to electronic money fintech companies because bank customers are now comfortable making payments for various retail transactions with electronic money (e-money). Conventional banks also open doors to credit fintech companies in order to expand their micro and consumer credit portfolios.
Advances in technology today make transactions and data storage to be done on the internet network so that cyber risk is a very important risk to be monitored and prevented from happening. Even if a risk occurs, recovery efforts must be disclosed.
Two regulators, the Financial Services Authority and Bank Indonesia, have regulated that information system security standards, governance and risk management are very important factors in digital banking services. Banks and digital economy players must be prepared for cyber risk, but regulators must also be ready with a new skill: being able to carry out monitoring and inspection by utilizing technology.
Welcome to a new era, the era of the digital economy.
Source: Kompas Daily. Edition: Tuesday, October 12, 2021. General Rubric. Page 1 continued on Page 15.
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