The banking landscape in Indonesia has undergone vast changes in recent years with digital technology creating a shift towards internet and mobile banking. As digital channels have become a pillar for customer loyalty towards and overall growth for financial institutions, the number of digital banks in Indonesia has soared. Their popularity has even drawn considerable support from the Financial Services Authority or OJK (Otoritas Jasa Keuangan) who have outlined new regulations regarding the ownership of digital banks, by issuing OJK Regulation No. 12/POJK.03/2021 on Commercial Banks (“POJK No. 12”) and OJK Regulation No. 13/POJK.03/2021 on the Organization of Commercial Bank Products (“POJK No. 13”). Said regulation now allows for Commercial Banks to conduct their banking electronically, without the need for any physical branches, except for the digital bank head office.

The shift to digital channels continues as Indonesia’s citizens lacking access to baking facilities is represented by a significant slice of a potentially untapped market, and therefore an opportunity to launch digital banks, both local and foreign-owned digital banks and digital banking arms. Potential investors should be wary of a lack of a clear legal framework to regulate the use of customer data, however, as what seems like a remarkable opportunity is accompanied by an equal responsibility to protect data in an era where digital privacy concerns are pertinent now more than ever.

Riding the Wave of Digital Banking

Six years ago in 2016, Bank BTPN released Indonesia’s first digital bank, Jenius, and over the past six years traditional banks have reacted to the digital banking trend by launching their own digital banks. Jenius now has a host of competitors, which include local banks such as Blu by BCA, Bank Jago, Wokee by Bank Bukopin – to name a few – and foreign-owned banks such as Digibank by DBS, TMRW by UOB, SeaBank by SEA Group, Line Bank by KEB Hana Bank.

An increasing variety of banking products and services have thus become available remotely, negating the need for visiting a branch or an ATM machine and increasing use of mobile banking. In fact, 50%of consumers interacted with their bank through a mobile app or website at least once a week, which is up from 32%just three years prior, according to a survey carried out by content management platform Hootsuite. This appears to be part of the larger  trend towards digital products in general, as the adoption of digital services has also soared to 202.6 million internet users and smartphone penetration of 98.2% as of 2021.

A Golden but Pricey Opportunity for Foreign Investors

Recognizing the shift towards digitized products, especially throughout the COVID-19 pandemic, and the potential impact that digital banks have in developing the digital economy, OJK is encouraging the development of digital banks by foreign shareholders. In August 2021, it outlined new regulations in their POJK No. 12 and POJK No. 13 in support of this trend, which dictates that foreign investors can merge with or acquire an existing Indonesian bank and convert it into a digital bank, and those foreign banks are welcome to launch digital banks in Indonesia or, similarly, acquire an existing Indonesian bank and convert it into a digital bank.

These new regulations allow for almost complete foreign ownership of a digital bank: up to 99% of a bank’s shareholders may be based out of Indonesia. A notable feature is the high capital requirements: to acquire a full banking license the OJK foreign would need to shell out a whopping IDR 10 trillion ($70 million), triple the previous minimum requirement. Such high capital requirements may well be worth meeting, however, as the market potential is still unrivalled in the region.

Underpinning Financial Services and the Digital Economy in Indonesia

As many as 43% of Indonesians live in rural areas that lack infrastructure and thus lack access to financial services, an untapped market for digital banking products and services. In fact, the majority of Indonesians accessed the internet for the first time on a mobile device such as a smartphone, directing digital banks towards a mobile-first approach, whereby account registration and an onboarding process can take place completely on a digital banking app. This could hold a lot of promise for investors as, in contrast, internet users continue to increase year on year, with a 15.5%increase from 2020 to 2021 up to 229.6 million, indicating a growing demand.

Various forms of financial technology have penetrated the Indonesian market and significant developments in the realm of digital banking have occurred in parallel to the growth of superapps in the country such as the homegrown Gojek and Singapore-based Grab. Digital payment systems such as OVO, GoPay, and ShopeePay have contributed to an increased number of digital transactions taking place in the country, which reached IDR 205 trillion ($143.5 million) in 2021[1].  The growth in digital banks only serves to complement this and other developments in financial technology such as P2P lending, trading, and investing, which have sparked greater interest in financial literacy, especially amongst millennials, Indonesia’s largest age demographic.

Financial literacy has also increased to 38.03% in 2019, up from 26.8% three years prior, indicating greater interest in and use of available financial services. Indonesia is predicted to see the most digital economic growth in the region, with 47 million Indonesians still underbanked and 42 million unbanked altogether. The growing presence of digital banks is rapidly changing this, with Indonesia the most likely country in the region to use digital banking in the next 6 months. 

In response, traditional banks that have jumped on the bandwagon in the past couple of years are leveraging new digital banking arms to compete with the new wave of mobile-first digital banks that appear to be catering especially to the Gen Z. It is common for such banks to piggyback off of an existing customer base through strategic partnerships with already popular and trusted startups to gain one of the most crucial factors of a digital bank’s success – trust. Standard Chartered Bank, for one, has partnered up with ecommerce giant Bukalapak to launch a new application for digital banking services. Digital banks that faced more success aim to create entire digital ecosystems with financial services as an added value rather than merely providing traditional banking services on a mobile app.

Potential Obstacles and Data Concerns

Given that the minimum capital requirements are met and an apt market strategy is considered, there is still a looming concern about data privacy for digital banks in Indonesia that has yet to be effectively addressed by OJK. Guidance and monitoring of data privacy in Indonesia may be particularly tricky, as the country does not yet have regulations or legal precedence in place that clearly outline the repercussions of a failure to protect their customer’s data. Considering how increasingly valuable data is becoming and reports of customer data being sold to larger corporations, there risk of cyber-attacks is relatively high. A reported 1,6 billion cyber-attacks occurred in 2021[2] according to The National Cyber and Encryption Agency (BSSN) indicating an urgent need for greater security with regards to customer data.

These new regulations allow for almost complete foreign ownership of a digital bank: up to 99% of a bank’s shareholders may be based out of Indonesia. A notable feature is the high capital requirements: to acquire a full banking license the OJK foreign would need to shell out a whopping IDR 10 trillion ($70 million), triple the previous minimum requirement. Such high capital requirements may well be worth meeting, however, as the market potential is unrivalled in the region.

The responsibility therefore falls on digital banks to secure their customer’s data by maintaining the appropriate legal measures to prevent further legal consequences. The OJK merely mandates a “a set of guiding principles for banks to operate digitally,” whereby “banks have to mitigate their own risk, any risk, that may arise” as opposed to “[regulating] details” and being “rules-based”. While the Indonesian government is keen on foreign ownership of digital banks as a source of investment to boost its economy, it is not as forthcoming with responsibilities regarding customer data.

Continued adoption and overall growth of digital banking in Indonesia therefore hinges upon a robust set of regulations that provide financial consumer protection. Digital banks may have accrued customers from an existing base, attract a new base through partnerships, or by promoting low interest rates. A lack of legal accountability on digital banks is proving to be a significant obstacle in developing an open banking system that enables secure third-party payment and other financial services that require accessing transactions and other data from financial institutions. The OJK has already urged the House of Representatives to push through a data protection bill in November 2021, but until such a bill is ratified there remain to be no official security standards for data protection.

Nonetheless, despite the lack of regulatory arrangements on data protection, OJK on its own liberty has set out a specific guide for financial consumer protection, including their data protection, through OJK Regulation No. 6/POJK.07/2022 on Consumer and General Public Protection in the Financial Services Sector (“POJK No. 6”). The adoption of POJK No. 6 is hopefully bridging to the full-blown data protection regulation by the House of Representatives to be regulated soon.

The Future of Digital Banking

Digital banking will continue playing a pivotal role in the growth of Indonesia’s digital economy, and the prospect of launching one in Indonesia would entice many of the foreign investors that are now legally permitted to do just that. The market for digital financial products and services is large, and the demand for accessible financial services will only increase with the rise in financial literacy. In spite of the crowd of digital banks engaging with both Indonesia’s banked and unbanked, launching a successful digital bank is no easy feat owing to the vague regulations concerning data privacy. Without a more precise legal framework foreign investors may have the freedom to earn their share of the market, but must also be conscientious of the key factor upon which their success depends, their ability to protect their customer data. The future of digital banking will be determined by how digital banks act on this unpassable opportunity without or, eventually, with the necessary legal frameworks.

Should there be any queries related to this regulation or to find out if this affects your business or personal interest, please do not hesitate to contact us.