Indonesia’s Digital Banking Revolution: Promises, Perils, and Policies

In this piece, Ibrahim Kholilul Rohman and Afif Narawangsa Luviyanto, researchers at the Indonesia Financial Group (IFG) Progress, delve into the imperative of striking a balance between accelerated transformation, facilitated by the ASEAN Digital Economy Framework Agreement (DEFA), and fostering inclusivity for smaller digital players within the evolving digital ecosystem.

By Ibrahim Kholilul Rohman, Senior Research Associate at the Indonesia Financial Group (IFG) Progress and Lecturer at School of Strategic and Global Studies, Universitas Indonesia and Afif Narawangsa Luviyanto is research associate at Research Associate at the Indonesia Financial Group (IFG) Progress.


Digitalisation, often hailed as a transformative force, plays a pivotal role in reshaping economies across various sectors. Within the Indonesian banking realm, the digitalisation wave manifests through two interlinked facets: the strategic regional implementation, driven by the ASEAN Digital Economy Framework Agreement (DEFA), and the intrinsic growth within Indonesia’s expanding population. While this revolution holds promise for innovation and economic growth, it concurrently poses challenges that demand strategic policymaking to ensure a harmonised digital future.

The first facet involves alignment with ongoing regional policy initiatives. The ASEAN DEFA serves as a testament to the region’s commitment to a digitally integrated future. Employing a rule-based approach to digital cooperation, the ASEAN DEFA aims to redefine regional dynamics through digital trade, cross-border market activities, talent mobility, and competition policies. For Indonesia, the ASEAN DEFA is not solely a regional initiative; it seamlessly aligns with the national agenda for accelerated digital transformation. However, the impacts of this swift transformation on smaller players within the financial industry warrant examination. This article explores the repercussions of accelerated digital transformation on smaller incumbent players and emphasises the need for balance in Indonesia’s rapid digitisation race as the negotiations for the ASEAN DEFA loom on the horizon.

Projections suggest that by 2030, the digital economy in ASEAN could soar to an estimated USD 2 trillion, equivalent to IDR 30,000 trillion. This surge transcends technological advancements; it serves as a catalyst for attracting investment, driving innovation, boosting productivity, creating quality jobs, and strengthening the micro, small, and medium-sized enterprises (MSMEs) sector. To maximise impact, the banking sector must assume a more integrated role, fostering ease and collaboration across sectors.

On the organic and domestic front, Indonesia, with its sizable population and rapid digital adoption, strategically leverages the wave of e-commerce and the platform economy. According to a report by Google, Temasek, and Bain & Company (2023), the digital economy in Indonesia is poised to escalate to an impressive USD 110 billion in 2025, with an annual growth rate of 15% during this period. The anticipated expansion of the platform economy underscores the need for a more technology-integrated banking industry to support and sustain this rapid growth.


Indonesian Banks: Farewell to Traditional Functions

In the dynamic landscape of Indonesian banking, the traditional model, serving as a conduit for channeling funds from the community and third-party sources into loan portfolios, is undergoing a metamorphosis. Traditional banks, reliant on revenue sources such as transaction fees and savings-loan activities, encounter challenges from non-traditional banks engaged in a broader spectrum of activities.

A study, employing a traditional index approach, categorises banks into three groups: traditional, strategically ambiguous, and non-traditional. IFG Progress studies in 2022 identified that in Indonesia’s banking industry, 41.4% of banks follow traditional processes, 39.6% are non-traditional, and 18.9% fall into the strategically ambiguous category. This condition mimics the structure in the US banking industry that showcased 35.3% traditional banks, 34.4% non-traditional banks, and 30.2% strategically ambiguous ones during the 1997-2012 period.

The emergence of third-party financial services has given rise to digital banks, categorised into conventional, digital, and neobanks, further emphasising the transformative impact of digitalisation. However, the lingering question arises: has this progress led to a widening divide among banks?

With digital penetration notably higher in larger banks, the question of who truly benefits from digital innovation looms large. Major banks, such as Bank Mandiri and Bank Central Asia (BCA), exhibit considerable advantages, leveraging their “first-mover advantage” and existing user networks to solidify their positions. Economically, this advantage is enhanced when economies of scale are large; first-mover advantages are typically enhanced, with the enlarged capacity of the incumbent serving as a commitment to maintaining greater output following entry, and the threat of price cuts against late entrants.


Digital banks: Bridging or Dividing?

In Indonesia, this trend accentuates a significant challenge for smaller incumbent digital banks, struggling to create the critical mass needed for sustained success. An IFG Progress study in 2022, adopting a comprehensive panel data analysis covering 58 banks from 2015 to 2021, reveals a disproportionate impact favoring larger banks. As demonstrated by transitions in third-party deposits and credit disbursement indicators, major banks embracing digitalisation exhibit considerable advantages.

However, the drawback to digitalisation emerges when large banks dominate the market, potentially exacerbating economic inequality and excluding smaller financial institutions. As digitalisation becomes more prevalent, large banks with substantial resources are better positioned to invest in and adopt advanced technologies, creating a significant competitive advantage. This concentration poses several challenges, leading to potential drawbacks.

  • Limited Access for Smaller Institutions: Small and medium-sized banks may face difficulties in adopting and integrating digital technologies due to financial constraints and technological barriers, leading to a digital divide.
  • Reduced Competition: The dominance of large banks in the digital space may lead to reduced competition, stifling innovation and hindering the development of diverse, customer-centric digital financial products and services.
  • Exclusion of Underserved Markets: Large banks may prioritise serving established markets and customers, potentially neglecting underserved or economically disadvantaged populations, worsening existing financial disparities.
  • Increased Systemic Risk: A market dominated by a few large institutions may contribute to increased systemic risk, with the failure of a major player in the digitised landscape having widespread repercussions on the financial system.


Striking a Balance for an Integrated Digital Future

In conclusion, the trajectory of digitalisation in Indonesia aligns with both national and regional strategies, offering immense promise. However, challenges arising from the concentration among a select few major players in the digital landscape require careful consideration. Policymakers and regulators must assume a pivotal role in ensuring an equitable playing field for both large and small banks in this digital era.

Crucially, the goals of the ASEAN DEFA underscore the imperative of inclusive economic growth. This necessitates the inclusion of smaller players in the transformative journey of the banking industry. For instance, an enhanced landscape in Indonesia and the ASEAN region can significantly contribute to the ASEAN DEFA agreement in critical areas such as advancing payments, e-Invoicing, and digital payments as fundamental components of the ASEAN DEFA.

Furthermore, digital trade and cross-border e-commerce, aimed at streamlining cross-border trade and fostering a more efficient and equitable environment, are pivotal in a region where the majority of countries record a significant proportion of private consumption in GDP amid the fast-paced adoption of the internet-based economy.

Crafting policies that encourage fair competition, foster innovation, and prioritise financial inclusion is of paramount importance. Striking a delicate equilibrium in policy-making will empower Indonesia to fully unlock the potential of digitalisation, cultivating an inclusive and robust banking sector that acts as a catalyst for broader economic growth.

Therefore, ongoing negotiations led by the ASEAN Coordinating Committee on Electronic Commerce and Digital Economy (ACCED), in coordination with relevant ASEAN sectoral bodies and supported by the ASEAN Secretariat, should involve pertinent stakeholders, including national entities and the private sector. Scrutinising the banking industry’s market conduct in each country with respect to the ASEAN DEFA is crucial to prevent inadvertently creating higher barriers for smaller banking institutions in member states where the industry is highly concentrated, inhibiting their contribution.

As the digital horizon beckons, Indonesia’s banking sector is poised to navigate a course towards a future where innovation, accessibility, and equity converge. Strategic policy-making stands as the linchpin, allowing Indonesia to lead the digitalisation race and set an example for inclusive growth in the ever-evolving landscape of global finance.


About the writers

Ibrahim Kholilul Rohman, a Senior Research Associate at Indonesia Financial Group Progress (IFG Progress), specialises in researching digitisation in the financial sector, particularly insurance and pension funds. Formerly the Chief Economist at Samudera Indonesia, he has had a long career, including roles at the United Nations University in Guimaraes, Portugal and JRC Directorate Innovation-European Commission in Seville, Span. He lectures Digital Economics at the University of Indonesia. Holding a Ph.D. from Chalmers University of Technology, Sweden, and bachelor’s and master’s degrees from the University of Indonesia, Ibrahim is a prolific writer with over 40 op-eds and several journal articles in Telecommunications Policy and Science and Public Policy.

Afif Narawangsa Luviyanto, who joined IFG Progress in December 2021, brings extensive experience as an investment banking specialist at BRI Danareksa Sekuritas. With expertise in equity and debt markets, Afif handled numerous transactions. He served as an intern in the investment directorate at PT Perusahaan Manajemen Aset (PPA) and as a Research intern at Bank Indonesia branch London. Afif holds a bachelor’s degree in Economics from Gadjah Mada University and International Economics from Erasmus, University Rotterdam. He earned his master’s degree in Finance & Investment from the University of Nottingham. At IFG Progress, Afif is responsible for various areas, including banking sectors, macro-economic and financial, and Digital Economics.


The views and recommendations expressed in this article are solely of the author/s and do not necessarily reflect the views and position of the Tech for Good Institute.

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Mouna Aouri

Programme Fellow

Mouna Aouri is an Institute Fellow at the Tech For Good Institute. As a social entrepreneur, impact investor, and engineer, her experience spans over two decades in the MENA region, South East Asia, and Japan. She is founder of Woomentum, a Singapore-based platform dedicated to supporting women entrepreneurs in APAC through skill development and access to growth capital through strategic collaborations with corporate entities, investors and government partners.

Dr Ming Tan

Founding Executive Director

Dr Ming Tan is founding Executive Director for the Tech for Good Institute, a non-profit founded to catalyse research and collaboration on social, economic and policy trends accelerated by the digital economy in Southeast Asia. She is concurrently a Senior Fellow at the Centre for Governance and Sustainability at the National University of Singapore and Advisor to the Founder of the COMO Group, a Singaporean portfolio of lifestyle companies operating in 15 countries worldwide.  Her research interests lie at the intersection of technology, business and society, including sustainability and innovation.


Ming was previously Managing Director of IPOS International, part of the Intellectual Property Office of Singapore, which supports Singapore’s future growth as a global innovation hub for intellectual property creation, commercialisation and management. Prior to joining the public sector, she was Head of Stewardship of the COMO Group and the founding Executive Director of COMO Foundation, a grantmaker focused on gender equity that has served over 47 million women and girls since 2003.


As a company director, she lends brand and strategic guidance to several companies within the COMO Group. Ming also serves as a Council Member of the Council for Board Diversity, on the boards of COMO Foundation and Singapore Network Information Centre (SGNIC), and on the Digital and Technology Advisory Panel for Esplanade–Theatres on the Bay, Singapore’s national performing arts centre.


In the non-profit, educational and government spheres, Ming is a director of COMO Foundation and Singapore Network Information Centre (SGNIC) and chairs the Asia Advisory board for Swiss hospitality business and management school EHL. She also serves on  the Council for Board Diversity and the Digital and Technology Advisory Panel for Esplanade–Theatres on the Bay, Singapore’s national performing arts centre.


Ming was educated in Singapore, the United States, and England. She obtained her bachelor’s and master’s degrees from Stanford University and her doctorate from Oxford.