Growth potential for digital financial services is large, as Indonesia still has a large pool of untapped customers and a growing prime-age population that will demand more mobile services. Changing consumer habits will further support this shift, driven by growing smartphone use. Shift towards digital financial services is likely to be permanent as consumers will continue to choose online purchasing for its convenience. More businesses will respond by selling their products and services online, which in turn will fuel further growth in digital payments and other financial services. Digitalization will enable banks to improve efficiency, grow their revenue, and reduce their reliance on branches and the associated costs which could be greater for Indonesian banks than their regional peers given that they rely on branches to serve a widely dispersed population.
Fintech companies are also rising to the occasion by offering services that are driving the digitalization of financial services, making it imperative for banks to make the shift in order to not lose out to competitors. Indonesian banks are notedly stepping up digitization efforts by migrating services online and partnering technology companies to penetrate new segments. The COVID-19 pandemic further accelerated demand for digital financial services, as governments put in place social distancing measures and companies offer employees work-from-home arrangements. Indonesian banks have sufficiently strong profitability for investing in this field, given their strong net interest margins to absorb falls in revenue. Increases in credit costs caused by the coronavirus outbreak also meant that the country’s banks have strong capital and liquidity buffers.