A shopper scans a quick response code Indonesian standard (QRIS) to pay for a cup of coffee in a cafe in Jakarta last July. (ID Photo/David Gita Roza)

Neobanks and the Future of Digital Banking in Indonesia

BY :PETER BARCAK

DECEMBER 10, 2020

With a high mobile penetration rate and a young, tech-savvy population, Indonesia is ideally suited for widespread adoption of digital-only financial services provided by neobanks.

Using innovative digital platforms with user-friendly interfaces, neobanks offer consumers and businesses seamless and truly barrier-free access to banking services. The appeal of this new approach to finance is already patently clear, with alternative cashless payment methods such as Go-Pay and OVO accounting for more than 55 percent of all digital payments within Indonesia. 

However, while the increased demand for socially-distanced online services has allowed neobanks to reap the benefits of their digital business model, just like their traditional counterparts, they too have been put under strain by Covid-19.

Changes in consumer behavior that saw a drop in spending with an increased propensity to save, combined with an urgent need for many to borrow, all reveal areas that still need work from alternative financial institutions. 

But these areas should best be seen as opportunities for neobanks to capitalize on the advantages afforded to them by their lean, dynamic, and forward-looking business models. 

Neobanks Close to Home

Lending is perhaps the best example of such a (so far) inadequately explored area of opportunity for neobanks. While capable of successfully emulating virtually all other aspects of traditional consumer banks, most neobanks have not yet been able to provide their customers with access to loans or credit cards. 
 
In Indonesia, neobanks are paving the way for a new method of granting access to credit for Gen Z, the millennials, and the country’s large population and could potentially be the answer to small- and medium-sized enterprises that require working capital. Half of the 181 million Indonesians are eligible for bank and credit services yet do not have access to financial products due to the lack of historical bank records and full-time employment.
  
Of course, this was partly caused by a lack of viable credit assessment tools and the painstaking process of creating a sufficiently secure, trustworthy, and legally compliant lending apparatus.

However, supplemented by cutting-edge credit scoring solutions from firms, neobanks now have the tools necessary to create a new revenue stream for themselves by providing consumers and businesses alike with highly accessible and inclusive credit. And with Covid-19 having substantially accelerated the world’s inevitable transition to digital services, the time for taking this enormous opportunity is right now. 

The Future of Digitizing Indonesia’s Banking Sector

This is not merely a business opportunity, as expanding access to credit will have a profoundly positive set of economic and social impacts. The scale of this is hard to encapsulate in words. 

Other than increased use of mobile phones and the cloud as tech advancements for the future of banking, neobanks have offered a tempting alternative of customers not having to visit a branch and employees working from home while still having access to all banking facilities products.

To fully maximize their potential, neobanks must evolve and consider reaching beyond their typical offerings to increase the revenue stream and stay profitable. By collaborating with fintech companies, they can create a path for creditworthy individuals to access mainstream financial services.

It isn't easy to overstate the transformative impact of making credit available to individuals that, while creditworthy, were beyond traditional banking models' ability to reach. This, make no mistake, is nothing less momentous than the historical economic empowerment of potentially billions of people worldwide.

Peter Barcak is the founder and chief executive officer of CredoLab, a company specialized in alternative credit scoring.

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