Riding the wave of Indonesia’s financial services growth

Indonesia is Southeast Asia’s largest economy – a growing powerhouse with a nominal GDP of US$1.05 trillion.  According to government data, Indonesia's GDP is expected to grow 5.3% in 2022 and 5.2% in 2023.  In contrast, the International Monetary Fund predicts economic growth in the Asia-Pacific region to slow to 4.2% in 2022.

The country is also the world’s fourth-most populous nation, where the median age is 29.7 years. 

Indonesians aged 30 and below constitute about 50% of the country, driving spending trends. For the next 23 years, consumers of the productive age will be dominating the population.

A new report claims that Southeast Asia’s digital economy could be worth more than US$200 billion in 2022, outpacing previous projections.  Indonesia is a major driver of this trend, contributing US$77 billion in 2022 – a figure projected to grow to US$130 billion by 2025.  During the pandemic, Indonesia added nine unicorns in digitally adapted industries like fintech, e-commerce, F&B, and logistics, bringing the total to 13.

Not surprisingly, Indonesia is a popular destination for Foreign Direct Investment (FDI). In 2021, FDI in Indonesia increased by 8% to US$20 billion, with investment from Southeast Asia and Asian economies, such as China, Japan and Korea, accounting for more than 90% of total FDI inflows. FDI in finance contributed to around 9.5% of total FDIs at US$1.9 billion. 

Across the region, in the first half of 2022, for the first time, digital financial services overtook e-commerce in terms of securing funding and capital raising, signaling the prime opportunities in this market. 

Consumer Demand for Digital Innovation

The demand for a seamless digital experience is soaring in Indonesia. Digital has penetrated daily life. From ordering food, to buying makeup to exploring new hobbies, all daily needs are ordered online and delivered conveniently to the doorstep. As payments and other financial services facilitate this process, consumer expectations are changing. 

According to the EY 2021 NextWave Global Consumer Banking Survey, traditional banks remain the preferred primary financial relationship  (PFR) as 56% of the respondents have a financial services product with traditional banks. However, the survey also shows neobanks are gaining ground in Indonesia, driven by the fast-evolving financial services landscape. Amid the intense market interest in new digital banks, survey results also revealed 42% of Indonesians already have a product or service with a neobank. The survey also found Indonesians perceived that technology brands offered better products and services, and were more innovative than traditional banks.

Intense competition means the digital payment landscape is becoming increasingly fragmented, with more than 48 licensed e-wallet platforms led by domestic players. In an interesting trend, the cashless payments ecosystem is bypassing traditional credit cards in favor of prepaid cards offered by digital wallet or payments technology providers, with prepaid credit cards introduced by one of the largest global credit card networks in 2022.

More sophisticated financial products and services are also proving to be popular. An online brokerage platform allowing millennials to buy and sell stocks, ETFs and mutual funds rapidly gained more than a million users and became the country’s third-largest brokerage by number of transactions. With backing from big-name investors, the company recently acquired a 40% stake in a publicly listed Indonesian lender.

These trends will only continue as new FinTech and challenger players enter the market. New lending, investments and insurance products are anticipated, and we may also see neobanks growing their share of PFRs, particularly among previously underserved and unserved consumers.

Mature, Ecosystem Approach

When it comes to financial products and services, the big drawcard for Indonesian consumers is the seamless integration of services across providers. EY survey found 76% of Indonesian respondents saying that seamless integration is very or extremely important and 70% were very or extremely interested in “super apps” that combine multiple services via one app or digital experience. In fact, the research found Indonesia had one of the highest levels of super app interest of all the markets included in the survey.

To meet this demand for super apps, banks are being urged to embrace the open banking era by making more application programming interfaces (APIs) available to e-payment companies, FinTechs and other digital platforms. Open APIs are enabling institutions to work with multiple digital ecosystems to reach a wider audience. As a result, a growing number of collaborations between banks and BigTech, FinTech and e-commerce firms are creating more distinctive value propositions in both the commercial and retail arenas.

Ecosystem plays are not new to Indonesia. A decade ago, as international investors built manufacturing plants in Indonesia, international and Asian banks followed their commercial customers into the country and then built out related financial services.

Now we are seeing this strategy play out in increasingly all-encompassing offerings. For example, the payment arm of Indonesia’s leading on-demand service provider now has a sizable stake in an Indonesian digital bank. The partnership will allow super-app users to access digital banking services through the platform, as well as to instantly open a bank account with the bank, while managing their finances via the super-app. Another partnership with an e-commerce platform has formed Indonesia’s most comprehensive digital ecosystem.

As ecosystems form, industry boundaries are blurring. A multinational bank has partnered with Indonesia’s leading beauty and personal care e-commerce platform through its Banking-as-a-Service solution. The collaboration will enable the beauty startup to offer financial products, like savings accounts, loans and credit cards.

Strong Opportunities in Financial Inclusion

According to the World Economic Forum, Indonesia has the world’s third-largest unbanked population and a low financial literacy index of 40%. These two issues are strongly linked. Research in Indonesia shows that the higher a person’s financial literacy, the higher their financial inclusion.  In response, the government has set a target to achieve 90% financial inclusion by 2024 (up from 76% today).  Ultramicro and micro businesses are the main focus of this vision.

Indonesia’s 60 million ultramicro and micro businesses are responsible for 60% of GDP and employ 97% of the workforce.  According to Indonesia’s Ministry of Cooperatives, more than half of these businesses remain financially underserved. Many lack bank accounts and transact predominantly in cash, making it difficult for them to build a legitimate credit history that would give them access to formal funding when they need it.

Digital financial services across an ultramicro ecosystem present an opportunity to solve financial inclusion challenges and set the foundation for inclusive and sustainable economic growth. But banks must also address low financial and digital literacy to prevent exposure to fraud and identity theft.

What Are the Winning Strategies?

Disruption is creating opportunities and challenges for Indonesia’s institutions. While the risk and regulatory protection agenda remains a major focus, institutions must also address financial performance and heightened customer and investor expectations, as they reshape and optimize operational and business models to deliver sustainable returns. Innovation and business-led transformation will be critical for future growth.

As they do so, the following strategic elements will be crucial:

• Trust – When it comes to trust, Indonesian banks operate from a position of strength. EY 2021 NextWave Global Consumer Banking Survey found 91% of Indonesian respondents totally or largely trust their main provider. A respondent’s trust in their PFR is characterized primarily by personal relationship attributes. Personal relationship factors (60%) were the major drivers for PFR provider trust for Indonesian respondents, followed by product (48%), trustworthiness (46%) and control (43%). Strong privacy policies and features are also a top priority influencing Indonesian respondents’ purchase decisions by a significant margin.
• Innovation – Indonesian respondents are highly interested in super apps that can deliver seamless integration of all their financial services. Indonesia has the second highest percentage (70%) of respondents in ASEAN countries that are very or extremely interested in super apps, which is much higher than Singapore (54%) and Hongkong (50%).
• Personalization – Although Indonesian respondents indicate that their PFR provides personalized experiences, there is still much opportunity for improvement. By eliminating personalization gaps, incumbents can enhance relationships and lower the chance of respondents switching to other providers.
• Scale – Digitalization, technology platforms and mobile access will be key for hoping to capture Indonesia’s millions of customers and grow at scale.
• Ecosystem – To deepen customer relationships, banks should look to ecosystem business models that will allow them to seek out customers through multiple pathways and play to their strategic strengths. EY survey found 90% of Indonesian respondents would value trusted financial brands much more if they partnered with other financial services providers or high-tech companies to expand their range of products and services to better meet the respondent’s combined financial and lifestyle needs. This is much higher than the global average of 74%.