This article first appeared in The Edge Malaysia Weekly on October 25, 2021 - October 31, 2021

THE digital banking scene in Indonesia is heating up, and both financial technology (fintech) and technology firms in Southeast Asia, particularly Singapore, are making a beeline for the region’s most populous nation, keen to participate in its growth.

The country released long-awaited digital banking guidelines in August, which are set to take effect at the end of this month.

The Edge understands that some fintech players and even banks from Malaysia are eyeing developments there with great interest. It may take a while before they decide to pursue any action, however, since it is likely to be an expensive affair.

“The prospects for digital banking there are strong but the problem is that the capital requirements are very high,” an industry source tells The Edge.

Based on the Indonesian Financial Services Authority’s (OJK) recent regulation, a digital bank is subject to the same capital and licensing requirements as a conventional bank. A digital bank must have a minimum paid-up capital of IDR10 trillion (RM2.94 billion) — much higher than in Malaysia, where a digital bank must maintain minimum capital funds of only RM100 million, unimpaired by losses, during the first three to five years, after which the amount increases to RM300 million.

What is positive is that foreign shareholders can own up to 99% of the bank, subject to OJK’s approval. Digital banks can be set up either from scratch or through the transformation of an existing bank into a digital one.

As it stands, Indonesia already has seven digital banks, with seven more awaiting licences. In comparison, Malaysia is set to issue up to five digital banking licences only early next year after recently receiving 29 applications; Singapore issued four licences last year; and Hong Kong, eight, in 2019.

So far, much of the foreign interest in Indonesia’s digital banks has been from Singapore, says Patrick Stokvis, Hong Kong-based vice-president of Third Bridge, which produces investment research for institutional investment firms.

He says there are two types of digital banks in Indonesia: the digital banking arm of commercial banks, such as Jenius and Digibank; and digital financial institutions — also known as neobanks — set up by companies that have acquired local lenders or commercial banks

“In Indonesia, there’s an existence of what’s called shell companies that have been granted digital banking licences. And what’s happening now is that fintech players or large tech platforms like Singapore’s Shopee are acquiring stakes in those shells as a way to get access to the Indonesian market,” Stokvis tells The Edge.

Shopee, the e-commerce arm of Singapore’s Sea Group, acquired Bank Kesejahteraan Ekonomi in February with the intention of transforming it into a digital bank known as SeaBank. Other recent acquisitions include Indonesian tech giant Gojek’s purchase of a 22% stake in Bank Jago last year. Indonesian fintech Akulaku, backed by China’s Ant Group, just this month became Bank Neo Commerce’s controlling shareholder.

Unlike in Malaysia, Indonesia’s banking regulator does not require digital banks to focus only on the underserved and unserved markets, says Stokvis.

There are strong reasons to pursue digital banking in Indonesia, given that more than 66% of its population of 270 million are unbanked. Indonesians are digitally savvy, however, as the country has a high internet penetration rate of more than 70%. In addition, half of the population are aged 30 and below.

According to a Boston Consulting Group report last year, the middle and affluent class is expected to grow 1.3 times from 2019 to 2024.

“The country demonstrates a growing appetite for digital financial services solutions, with digital transactions expanding 30% to 50% a year between 2015 and 2018. As at end-2019, Indonesia boasted the second-highest e-payment penetration in Southeast Asia, next to Singapore,” it notes.

Analysts say Bank Islam Malaysia Bhd and AMMB Holdings Bhd may be keen to eventually expand into the region via a digital bank, with Indonesia likely to be the first stop. Both banking groups are currently Malaysia-focused and have no regional operations.

In an interview earlier this month, Bank Islam CEO Mohd Muazzam Mohamed said that, if its upcoming digital bank in Malaysia proves successful, the group will consider expanding into the region via a digital bank.

As for AMMB, CEO Datuk Sulaiman Mohd Tahir told The Edge in an interview two years ago that the group might consider venturing into regional markets via digital banking. “It’s something we certainly want to consider because it’s a ‘lighter’ [way of doing it] than through bricks and mortar,” he said.

Currently, the seven licensed digital banks in Indonesia are Jenius, Wokee,  Digibank, TMRW, Bank Jago, MotionBanking and Bank Aladin Syariah. The seven awaiting licences are Bank BCA Digital, Bank BRI Agroniaga, Bank Neo Commerce, Bank Capital, Bank Harda Internasional, Bank QNB Indonesia and Bank KEB Hana.

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