The Future of Neobank in Indonesia

Indonesia is a country with a population of 270 million people who are adoptive to technology. However, digital financial solutions in Indonesia have not been implemented optimally. With nearly 197 million internet users or 73.7% of the total population, Indonesia is one of the countries in the Asia Pacific region with an underserved digital market as a whole.

Currently, 66% of Indonesia's total population does not have access to finance. Neobanks and digital banks have the potential to provide financial solutions to those who need access to credit and loans. Neobank has different services from ordinary/traditional banks for its customers: low interest rates and no large fees, as well as different transaction methods.

Based on research, 63% of banking customers in APAC countries are expected to adopt neobank services by 2025, making it the solution of choice for digital transactions. With digital penetration numbers and digital-friendly investments (digital investment friendly) is high, will Indonesia become the country with the highest neobank growth?

Of course, neobanks can be established from non-bank companies and the fintech market is currently growing in Indonesia. This is a big challenge and threat to traditional banks to quickly accelerate their process in technology and serve customers digitally.

Is Indonesia's financial ecosystem ready for digitization?

According to INDEF, 40 of the total 110 banks in Indonesia have the potential to become neobanks in the future. Some of these 40 banks have created a digital ecosystem, so they will more easily switch to neobanks. However, this also needs to be supported by technological capabilities in the field of credit loan solutions and optimization of information exchange. Its growth is considered to be still not optimal.

Fintech companies such as CredoLab, the only digital alternative credit score scoring company based on smartphone metadata, are instrumental in bridging this gap. The pandemic has also helped accelerate the adoption of fintech solutions, finance and digital transactions, e-commerce, e-wallet, and e-money in Indonesia.

In terms of population, some Indonesians still rely heavily on traditional banking methods and are accustomed to visiting physical facilities to make transactions.

Several well-known banks have created digital banking solutions such as Bank BTPN with Jenius, Bank Permata with PermataMe, Bank UOB with TMRW and most recently Bank Jago and Bank BCA with Bank Royal. Even so, access to easy and hassle-free loans will encourage Indonesians to choose digital services in the future.

Digital banking services are accelerated in this pandemic era and make people accustomed to using digital services. There are three characteristics of a neobank or digital bank that must be owned by the service in the digital banking ecosystem: first, the bank or company must be fully operational digitally and there are no physical branches, second, take advantage of applications and technology and the third is to have market penetration in highly digital business ecosystem.

Fintech bridges the technology gap

One of the impacts of this pandemic is that traditional banks have difficulty providing credit to customers. But this actually encourages neobanks and digital banking to profit from their digital transactions. Research conducted by Google, Temasek, and Bain & Company, shows that in 2020 Indonesia has achieved the highest digital economy transaction value in Southeast Asia, which is $44 billion.

In a country like Indonesia, where internet and mobile penetration is very high, alternative credit scoring techniques are capable of producing good credit scores and will allow Indonesians to access quality bank loans, which they would normally not be able to obtain due to the absence of traditional credit scores for them.

CredoLab's alternative credit scoring technique involves the use of Artificial Intelligence and Machine Learning algorithms to collect millions of determinants embedded in a prospective borrower's digital footprint. These determinants will then be converted into a credit score that will identify a person as a good or bad borrower.

Regulatory issues and the development of digital banking in Indonesia

With financial inclusion and high use of digital services, neobank has the potential to become the digital banking service of choice for the Indonesian people. Currently, neobanks still need further regulation from OJK.

Supportive regulations in the field of neobank and digital bank will increase the potential of the banking industry in Indonesia to be able to compete with neobanks from abroad.

Digitizing financial services will not only prove successful for the community but will also be profitable stakeholder internals and investors. Cost overhead and operations will be significantly reduced compared to traditional banks with physical branches.

Unlocking the digital future in Indonesia

Seamless digital journeys is the core and unique proposition that defines neobanks and digital banks. In addition, the ability to diversify banking relationships, ease of access to information in the hands of customers, accommodate digitally active customers, and improve customer acceptance to choose digital services will accelerate the Indonesian banking and financial industry.

Cooperation between banks and other financial actors with fintech is the main key in determining Indonesia's success in identifying potential borrowers while still paying attention to controlled risk factors. The role of the government, both in terms of efforts and policies, is needed to support and hone the financial industry.

Indonesia is a country with high technology growth potential. The adoption and implementation of digital and neobank banking services will benefit the country's economy. The ability to extend financial services to low-income families and those who have never had financial services will open up pintu new finance in this digital transformation era.

- Disclosure: This entry was created by Paramita Wikansari, Country Sales Director, Indonesia, CredoLab, the leader in alternative credit scoring