Indonesia's mid-sized banks struggle against digital dominance of state lenders

Top players are accounting for the lion's share of e-banking fees.

Banking in Indonesia is growing increasingly digital but lenders have a disproportionate share of the mobile and online market depending on their scale. 

The country’s top lenders which includes Bank Mandiri, Bank Rakyat Indonesia, Bank Central Asia and Bank Negara Indonesia are accounting for the lion’s share of fees generated from digital banking as medium-sized players players are facing growing difficulty in wrestling away market share and smaller banks have failed to offer significant digital response, according to UOB Kay Hian.

“Technology has caught up with business models and big banks are embracing it. Deposit and loan market shares for the Big 4 banks have been increasing by 100bp and 150bp respectively every year in the last three years. We are not surprised if this trend accelerates,” Alexander Margaronis, UOB analyst said in a report.

In fact, Margaronis estimates that fees from ATM, mobile and internet banking of the fourth-largest bank could be more than five times larger than that of the fifth-largest bank and that the difference gets even bigger for banks below the fifth place.

Indonesia has amongst the biggest number of Internet users amongst ASEAN countries which unlocks a wide array of opportunities like ecommerce, online travel, online rides, and online media that need a supporting digital payment system, according to an earlier report by DBS Equity Research.

Banks have spent a minimum of $66.8m (RP1t) per year in initial IT investments which could mean that such investments may have already reached breakeven after bringing back 2X return in fees. As such, lenders may turn to branch and personnel re-scaling.

In fact, 66% of Indonesian banks have increasingly integrated digital models as part of their corporate strategy, according to a survey by accounting firm PwC as they perceive growing threats to their dominance like on-demand platform Go-Jek.