Indonesia’s economic growth in the third quarter of 2015 stood at 4.7% and that’s also the figure the World Bank quoted recently as projection for Indonesia’s GDP growth rate for the current year. Economic growth has slowed down in recent years owing to global economic turmoil, though most analysts are optimistic about improvement in the coming years, partly due to increased capital allocation by government on infrastructure projects, which is likely to boost investment.

Indonesia’s financial services sector, especially banking, has enjoyed years of strong fundamentals in terms of return on assets (ROA) and low non-performing loan (NPL) ratios – being one of the most profitable in the world. However, over the past 2 years, Indonesia’s big 4 banks – BRI, Mandiri, BCA and BNI which account for 40% of total banking assets – have suffered reduced profits (except BCA) and slower lending in view of macroeconomic pressures, currency volatility and increase in NPLs.

For 2015, Bank Indonesia expects Indonesian banks’ credit growth realization to reach 9-10% year on year, down from its original target of 11-13%. Also, the non-performing loan ratio in the wholesale and retail trade sector is especially a cause of concern, as it doubled from 2.47% in 2013 to 4.12% in September 2015, leading to banks exercising greater caution in extending credit.

That said, the government has urged banks to boost lending by reducing their operational costs and lowering borrowing rates. As of September 2015, lending growth totalled 11.10%, compared with 11.58% in 2014 and BI expects lending growth to rise to 12%-14% in 2016. On its part, the central bank reduced down payment for automobiles and property purchases, in a bid to boost credit growth (June 2015). The move is parallel to government’s attempt to improve purchasing power, by cutting personal and corporate income tax, to be enforced starting 2016. A worrying statistic however is the rising inflation, which is expected to stand at 6.4% in 2015, much higher than Southeast Asia’s average rate of 2.8%.

The macroeconomic picture clearly points to challenging times ahead for the financial services sector in Indonesia, though players have reasons to remain upbeat too, on the back of rising income levels and higher domestic consumption. McKinsey, in a recent report, stated Indonesia was going to make it to the top 10 world economies by 2030, despite the challenges in near term. The financial services sector has sizeable opportunity in the domestic market, even as ASEAN Economic Community (AEC) awaits, which is why local banking players, instead of looking outward, should solidify presence in the home market. One of the keys to doing that would be understanding the financial behaviour, needs, and desires of the Indonesian population, which is undergoing deep socio-economic change.

The un-banked and under-banked


Source: World Bank

Indonesia has one of the largest unbanked population, compared to peers in ASEAN region. According to 2014 data from World Bank, only 36% of the Indonesians above 15 years of age (approx. 177.7 million) had an account at a financial institution (see figure 1). Only 25% of them possess a debit card, out of which only 8.5% use debit cards to make payments. Credit card usage to make payments is even lower, at a meager 1.1% (see figure 2)


Source: World Bank

That clearly points to a huge untapped opportunity in the domestic market, which industry observers constantly refer to in wake of the AEC. There have been questions raised about Indonesian banks’, especially smaller ones, competitiveness in AEC, which is why the government is also pushing consolidation in the sector.

Nevertheless, decades of experience, local knowhow, and existing brand awareness should prove advantageous for local banks to expand customer base, especially by targeting micro small and medium enterprises (MSMEs). MSMEs in Indonesia are characterised by rising business incomes and greater financing needs, yet only, from Bank Indonesia data, as of June 2015, outstanding loans of MSMEs accounted for only 18.39% of total outstanding bank financing. Medium-scale enterprise loans dominate MSME credit with a share up to 49.51% of total MSME loans.

Indonesia’s middle class segment, especially at the lower and middle end, which is fast witnessing rising income growth and improving living standards, also makes a strong target customer segment. The key to targeting this segment would be an all-encompassing focus on familiarisation, which entails proactively educating them about the benefits associated with formal financial inclusion. Lower middle class segment customers who usually save at informal institutions should be encouraged to adopt banking services by aiding them with familiarisation and documentation.

The government’s branchless banking program is a pivotal step in that direction. Banks such as BRI, under dedicated BRILink program, has a network of 35,000 branchless agents nationwide. BNI too plans to have 3,000 Laku Pandai points by 2016 to reach out to customers in remote areas. This mediator approach is critical to establishing confidence among potential customers who might still look at formal institutions with distrust and also rely heavily on recommendations from family and friends to adopt a new product/service.

Digital to Drive Engagement

It is largely well known how IT is reshaping the financial services sector worldwide. Commercial banks and other retail financial institutions are scrambling to adopt IT innovation to get ahead of the curve, even as Fintech (financial-tech) companies are emerging as competitors in view of evolving customer preferences and rising connectivity. So, we have China and Korea approving online-only banks in a bid to stir up competition in the sector.

The digital innovation, offering greater convenience and personalisation, is being mainly targeted at the upper middle and emerging affluent customer segments, comprising more tech-savvy young professionals and the millennial generation. In Indonesia, despite a large millennial population, digital banking use and adoption is still low. According to World Bank data, only about 5.1% of the adults above 15 years of age in Indonesia used internet to pay bills or make purchases, as per 2014 statistics, compared to 18.8% in Malaysia or 27.6% in Singapore. Some of the main concerns include safety and fraud risk.

Nevertheless, there increasing expectation among millennial customers for faster, safer banking transactions which can be carried online from their smartphones and devices. Most major Indonesian banks do offer online and mobile banking services but usage continues to be low. The banks, which are heavily investing in IT infrastructure to make their online systems more feature-oriented as well as safe, have a strong incentive to optimise usage of its digital services among customers. That could be made possible

Digital in banking sector is no longer limited to online and mobile banking services. Banks and other financial institutions should also strive to engage with their customers online, for example, through social media. Bank BNI, for example, recently introduced #AskBNI hashtag on Twitter, a hugely popular microblogging website in Indonesia. The hashtag allows Twitter users to make inquiries on BNI’s banking products, new information, or promotional events. The move is aimed at increasing e-transactions by targeting 7.5 million of its young millennial customers. Further, digital marketing and analytics should also be effectively leveraged to reach out to and understand customers’ needs more effectively, further driving engagement.


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