Can Indonesia’s banks go digital to fuel faster growth? Thomas Olsen and Edy Widjaja  ;   Thomas Olsen is a partner and Edy Widjaja is a manager in Bain & Company’s Jakarta office; Both are members of the firm’s financial services practice

JAKARTA POST, 15 September 2014

                                                                                                                       

                                                      

As the government grapples with fuel subsidies, a continuing current-account deficit, and other mounting issues, the economy’s growth is slowing, and the nation’s banks feel the heat.  While still healthy by international standards, the banking industry’s growth weakened in the first half of 2014. Average return on equity remains attractive at 14.5 percent, but it dipped by 2.5 percent in the second quarter. And while non-performing loans are still low by historical and international standards, there’s been a slight uptick. Last year, non-performers accounted for 1.7 percent of all loans. In May of this year that percentage rose to 1.96 percent and by June it increased to 2.08 percent. We expect loan growth will continue to slow slightly in the months ahead, reflecting Bank Indonesia’s (BI) decision last year to hike benchmark interest and the continuing pace at which lending outgrows funding. The rising cost of funds, which contributes to lower return on equity, is more pronounced with the smaller banks, and it’s one of several indicators of a widening gap between the nation’s five largest banks and the next 10 banks. For example, ROE (return on assets) for the biggest banks fell in the second quarter of this year to 20.9 percent from 22.6 percent in the same period of 2013, but the drop was much bigger for all other banks — to 11.3 percent from 16.1 percent. One route taken by many smaller banks to sustain their lending growth is to become more aggressive on funding. These banks offer a rate for funding that is substantially higher than the ceiling rate guaranteed by the Indonesia Deposit Insurance Corporation. The move triggered a bit of a price war, as banks compete for fresh funding and to retain existing customers. The medium-term solution to fund Indonesia’s financing needs will depend on the continued development of local debt capital markets. However, this will take some time and in the meantime banks will likely need to continue to fight for funding and accept higher costs. Indeed, sustaining growth will be the big order for Indonesia’s banks in the remaining months of 2014, and to a big degree that requires creating demand for their services. Much of the answer lives in a single word: Digital. As we are learning from banks in every part of the world, banks in Indonesia that invest to develop new digital interfaces to serve customers and improve the value proposition will boost loyalty and outpace their rivals in growth. If they hope to win as the market evolves, Indonesia’s banks need to take their digital capabilities seriously. The biggest reason: digital usage correlates closely with customers’ loyalty. Mobile banking users, for instance, give a higher Net Promoter ScoreSM (NPS®), a key measure of loyalty, than people who don’t use mobile devices — on average, 27 points higher in Indonesia. And all the evidence suggests loyalty has a powerful influence on a bank’s economics: customers who become promoters stay longer with their primary bank, buy more products, often cost less to serve and recommend the bank to other people. Some leading banks have begun to marry digital and physical assets into a hybrid combination that customers now demand — what we call a DigicalSM transformation. These banks are fundamentally transforming their core business—including offerings, channels, technology infrastructure and organization — funded by aggressively decommissioning legacy costs and systems. The Digical transformation often starts with moving current functionalities online to make banking more convenient. The most forward-looking banks have gone farther to reinvent the customer experience and provide new ways to engage and add value to customers. In many ways, retail banking has already become a digital business, spurred by the rapid spread of broadband access and affordable smart mobile devices. Bain & Company surveyed more than 190,000 customers in 27 countries, in cooperation with Research Now and the market research firm GMI. We found that globally, an average of more than half of consumers’ banking interactions took place through online or mobile channels in 2013. In Indonesia, participation is lower — 45 percent of interactions were conducted digitally. But add the use of ATMs, which increasingly connect to the Internet, and the share of digital interactions in Indonesia is 80 percent, slightly below the 85 percent global average. Fewer than half of consumers in developing countries and just over a third of those in developed countries used smartphones or tablets for their banking. Here, Indonesia is slightly ahead of the pack. Our survey found that 52 percent of consumers use smartphones or tablets for banking transactions. Among the other findings: While digital is growing, with only 21 percent of customers with no digital interaction, 81 percent of customers in Indonesia still used branches for routine transactions at least once in the past quarter. Digital is making inroads in insurance, too, according to a separate Bain study on digitalization in insurance. Now 50 percent of life and property and casualty customers use digital capabilities, and that’s expected to grow to 80 percent in the next three to five years. Customers with hybrid interaction — both off line and digital — give their insurance providers higher NPS scores. We wanted to know how well Indonesia’s banks are doing at the challenge of improving the customer experience in a digital age. Our research shows that 80 percent of the banks have adapted their value proposition for digital, compared to 40 percent of the global banks that were surveyed. All of those banks in Indonesia have adapted promotion and product placement for digital in the last two-to-three years. By comparison, only 60 percent of global banks had made such changes. Until now, many Indonesia banks have focused their digital investments on enabling consumers to access information on bank websites or to do simple transactions through online or mobile channels, thereby moving customers away from branch transactions. When we asked the participating banks about their online and mobile capabilities, they gave themselves low marks that put them in the lowest quartile among banks in the Asia-Pacific region. Most of them only provide service to customers seeking advice via call centers, SMS/text, Facebook and Twitter. Only a few of the country’s banks offer chat/IM, video conferencing or self-service kiosks — digital technologies that are used by more than half of all banks throughout the world. However, Indonesia banks say they will add such services in the next two or three years. They’re behind banks in other countries in their capabilities for selling online. Their capabilities for selling via mobile phones are virtually non-existent. But Indonesia has some good signs that it is well-poised to seize the digital future. For example, 34 percent of surveyed bank customers in Indonesia reported making a mobile payment in the last quarter — that ranks Indonesia fifth among all 27 countries in the survey. Some banks are making advances that will shape the competitive landscape in the months and years ahead. In June, publicly listed Bank CIMB Niaga, the country’s fifth-largest lender by assets, made headlines by announcing that it would launch a service that will allow customers to easily transfer money to Facebook friends. Last year BI’s new guidelines set the stage for five banks (Mandiri, BRI, CIMB Niaga, BTPN, and Sinar Harapan Bali) to pilot e-wallet services, allowing customers to execute banking transactions without having a bank account. They use their mobile device to send and receive specific codes or to withdraw or send money from an ATM or bank teller. If the services move beyond the pilot stage, they will not only improve their ability to serve — and generate loyalty — among existing customers, but they’ll also help the government achieve an important goal, reaching the majority of the population without access to banking. According to the World Bank, only 20 percent of Indonesian adults hold an account at a formal institution. But BI’s revised guidelines specify that only those lenders which come under the BUKU IV category, with minimum capital of Rp 30 trillion (US$2.52 billion), can apply to offer digital financial services. That means Indonesia’s four biggest banks can venture into this new territory. Banks have long deployed technology to support and automate internal processes and to replicate functionalities online, mostly in the service of reducing costs. But now, truly customer-centered banks have also fused digital and physical assets to make customers’ banking lives easier, more convenient and more engaging. Achieving the goal of “anything, anytime, anywhere” banking has major implications for the role of the branch. With teller-assisted transactions declining at an annual rate of 10 percent to 15 percent for many banks around the world, migrating to lower-cost, automated formats is essential. Optimizing the footprint is one aspect of how the branch network will evolve for an omnichannel world. To raise the overall effectiveness of the network, leading banks also are developing new branch formats that consist of lighter but sturdier alternatives to the traditional branch. The most common new model consists of hub-and-spoke configurations of advisory offices, light-retail consumer shops and self-service kiosks arrayed around the full-service flagship store. All of the new formats incorporate digital technologies to enhance the customer experience and provide self-service capabilities that customers increasingly expect. Some spoke formats have removed bank tellers altogether. Fragmented infrastructure remains a pervasive problem for some retail banks. Standard services might be available online and through mobile, but for even slightly more complex transactions like sending funds abroad or prepaying a mortgage, customers still have to go to a branch. Customers have to endure a slow, clunky, multistage experience, instead of a “one-and-done” experience. Funding the investment for this massive change poses a major challenge to management. Some banks free up funds by simplifying their products, processes and organizations. They also reduce costs by migrating basic transactions online. The most commonly applied method uses lean techniques. In addition, banks plan to free up money in legacy infrastructure, systems and projects that don’t directly accelerate the Digical transformation. The broad-scale change implied by the Digical transformation raises major challenges for banking organizations as well. The behavior endemic at many traditional banks — strong departments that narrowly focus on improvements within their domain — works at cross purposes with an omnichannel approach. Walls between departments and functions will have to come down. Technology investments will deliver just a fraction of the potential benefits unless banks understand and act on the implications for staff capabilities and behavior. ●