Indonesian banks play catch-up as fintech firms gain traction

Indonesia has been witnessing a vibrant fintech marketplace with more brands rising in popularity.

Far from the novelty it has been a few years back, fintech is fast becoming a familiar facet of the banking industry. Experts at the 2017 Asian Banking & Finance Retail Banking Forum Jakarta Leg held last April 5 at the Ritz-Carlton Mega Kuningan agreed that fintech is definitely opening new possibilities and opportunities for banks and consumers alike.

For one, the digital transformation age has eliminated several barriers for fintech firms. “Consumers’ perception of traditional banks is waning. They are now increasingly open to digital financial transactions,” said Liew Nam Soon, managing partner, financial services ASEAN at Ernst & Young.

The rise of fintech companies in the region, especially Indonesia, has been described as an industry disruption.

“Fintech activities are increasingly making headlines. Slowly but surely, incumbents are falling behind digitally,” Liew noted.

Indonesia in play

For a time, this trend has been limited and only observed at a regional level, but this has been slowly shifting in favour of local developments. According to Iwan Margono, principal at top management consulting firm Bain & Company, local banks are beginning to play catch-up with their foreign peers.

“Local banks in Southeast Asia have closed the gaps with foreign banks. Local banks have invested in digital heavily,” Margono says. In Singapore, for instance, the NPS gap between leading foreign versus leading local banks has been whittled down to a lean -8.93%.

In the Asia Pacific region, the practice of disintermediation—or the decrease in the use of intermediaries between producers and consumers, for example by direct investments in the securities market rather than through a bank—is most evident in China, where it has reshaped the economic powerhouse’s financial services industry with transaction values worth $18.6 billion by yearend.

Recently, Indonesia has been witnessing a vibrant fintech marketplace, and the rise of several brands is proof of such improvement. Prime examples of prominent fintech firms include Pinjam, an online pawnshop platform established in 2014 “that provides financial services by developing a digital platform to assist customers in addressing their fast funding needs,” and GO-PAY (formerly GO-JEK Wallet), a virtual wallet that can be used to virtually pay for various transactions.

Beyond the national level, the appeal of fintech has already firmly established itself on the grassroots level. According to Liew, digital innovation has gained the most traction amongst retail payments and investments. This makes customer service extremely important as far as rival traditional banking channels are concerned.

Banks respond to fintech’s rise

The rise of fintech firms, however, indicates that the banking landscape is constantly being shaped by the forces of competition. The challenge is for banks to remain competitive and exploit recent innovations to gain and keep new customers. Banks simply have to keep up.

OCBC NISP, for instance, has embarked on a challenging journey in its very own digital transformation.

Andreas Kurniawan, retail business development head at OCBC NISP, shared that the Indonesian banking giant, in the development of its digital self-service offering and in its shift to developing being a retail consumer bank from an SME bank, overcame several challenges. Some of these hurdles included stiff competition from other retail consumer banks, strict regulatory constraints, and limited resources.

Some banks have also taken the initiative in embracing key innovations that may benefit customers overall. Rajiv Madane, director of products and strategy at Fiserv, also shared how they created innovative credit and debit cards as well as payment solutions for banks and financial institution.

These useful innovations include Verifast Palm Authentication, an award-winning, multi-platform bank biometric authentication system described by Madane as possessing “superior security and accuracy,” as part of a next-generation customer experience journey in payments.

“Customers control cards, and eliminate card fraud,” Madane explained, noting that 83% of Verifast customers “value the security and convenience,” while 97% “will use it moving forward.”

Aside from these, how then can banks be more competitive in the face of fintech firms? “Banks need bold strategies to compete in today’s new normal environment,” said Liew.

An emphasis on customer service

Liew has observed that most retail banks have responded to the rise of fintech companies with a “kitchen sink” approach—adopting a process that is generally imprecise and unfocused.

“In response, most retail banks are reacting with a ‘kitchen sink’ strategy, and success has been partly dampened by the entry of fintechs,” Margono said, proving that when it comes to dealing and competing with fintech firms, banks are never guaranteed outright success.

“There are no silver bullets, but it pays to invest in customer service,” he advised banks. According to Margono, key drivers of promotion include a value-adding brand and affiliation, customer service, and branch customer experience.

Margono also noted that it is one thing to gain customers, and another to retain them, especially as customers are becoming more and more selective and discriminating when it comes to banking choices.

As a consequence, an emerging issue that banks and fintech firms are finding more relevant and too important to ignore is customer loyalty. These days, customer loyalty has evolved as customers have chosen to embrace certain basic needs, he said.

“Loyalty has shifted in banking in recent years, from friendly customer service to other attributes, especially simplicity and convenience,” said Margono.

Unknown to them, banks may already be suffering so-called “hidden defection.” “Hidden defection means that your consumer will chase a new competing bank,” Margono noted. This happens to be more prevalent amongst developing countries where “loyalty is not strong.”

If gone unchecked, hidden defection can pose a risk to banks. “Hidden defection represents a significant missed opportunity for banks,” Margono noted, pointing to current industry data that indicates a hidden defection rate of 40%–a figure described as “alarming.”

Fending off defectors

“Banks need to quickly address drivers of detraction since switching costs may exacerbate hidden defection,” Margono added. “The one that go out the door are high-net worth customers,” he said. One approach banks can consider is adopting an optimization or rationalization of branch networks, ensuring that best-performing branches are capable of adopting new innovations, he added.

In addition to hidden defection, banks seeking to go digital also face underlying threats from enterprises whose functions replicate those of fintech firms, Liew added.

“Reality is that the biggest threat [to fintech firms] are x-sellers for financial services: Western tech giants, Eastern tech giants, telecom operators, and on-demand providers,” Liew explained.

Meanwhile, despite the rising popularity of the fintech industry, traditional channels will continue to exert considerable influence on banking transactions. “Omnichannel delivery remains critical,” Margono noted, referring to the typical brick-and-mortar banking structures in the status quo.

“Digital channels and mobile/tablets are taking over other channels, but this does not mean branches are going down or dying. Omnichannels are still critical,” he explained.

Fintech companies are here to stay and will continue to shape the future of the region’s banking industry, but in some ways, one can expect more orthodox banking channels to remain a familiar sight.