Cover Story / September 2018

Embracing a New Digital Strategy

Indonesia's leading private lender, PT Bank Central Asia Tbk, is now embracing an all-digital strategy to catch up with digital transformation. During an exclusive interview with GlobeAsia's Muhamad Al Azhari, veteran banker Jahja Setiaatmadja, who has led BCA for more than seven years, unveiled the lender's strategy to establish a new digital bank.

He confirmed news reports that BCA plans to acquire two smaller lenders and explained that one of those will merge with BCA, while the other will be transformed into a digital bank.

BCA, established in 1957, is now the nation's third-largest lender by assets. It services close to 18 million customer accounts through 1,241 branches and 17,565 automated teller machines, while also processing nearly half a million transactions daily, either online or made through electronic data capture machines.

Jahja said BCA's top management expects the acquisition of a smaller bank to give the lender more flexibility to try out its new digital strategy and that it is a better option rather than shaking up and performing a major overhaul of BCA's existing business formula.

"This is about how we can create a new core banking system. BCA's existing core banking system was set up in 1989-1990. The formula has been in place for more than 29 years. If we want to change it right away, I am afraid it will not be easy to implement," said Jahja, who became president director of BCA in June 2011.

He said BCA is on the lookout to acquire two BUKU 1 lenders, or lenders with core capital of less than Rp 1 trillion ($68 million). While he was unable to disclose how much funding BCA has set aside for the buyout plan, he did say the lender has budgeted to spend a total of around Rp 4.5 trillion this year, including on existing subsidiaries and acquisitions.

Jahja said BCA has yet to submit a business plan for the acquisition, but that the Financial Services Authority (OJK) has informed him that they can acquire a special permit to establish a digital bank. However, they want to operate the second lender they plan to acquire as a conventional lender, and it must therefore merge with BCA to meet the country's single-presence policy. This policy requires banking institutions to merge their banking units to make the banking sector more efficient.

While Jahja did not provide any details of the planned digital bank, such as how much capital BCA, Southeast Asia's second-largest lender by market value, plans to inject, he did say that their Asian rivals have already been successful in developing digital banks, pointing to South Korea's KakaoBank and Singapore's Digibank.

South Korean internet company Kakao launched KakaoBank in 2016 by integrating its KakaoTalk messaging platform and its KakaoPay payment service to allow users to conduct financial transactions with other people in their contact lists.

Unlike traditional banks, KakaoBank provides no ATMs, although users can still deposit and withdraw money at the ATMs of other banks with which it has cooperation agreements. Apart from digital debit cards, users can also acquire loans, and the bank plans to introduce a credit card next year.

Digibank, powered by DBS, Southeast Asia's largest lender by market value, meanwhile provides banking services via smartphone. The service does not only allow users to make deposits, withdrawals, transfers and payments, but also provides access to financial plans. Indonesian users can also make use of this service, as DBS has a presence in the archipelago.

As for BCA's planned digital bank, Jahja said the service will allow customers to create new accounts and make payments. "But in the end, it may tap into the micro-banking segment. We are still learning what the format will be," he said.

Jahja added that BCA is currently working on the development of services that will allow customers to make payments using QR codes, or machine-readable two-dimensional matrix codes, used for offline transactions at merchants. However, he declined to say whether this would be done via the planned digital bank, or through BCA directly.

BCA, which promotes its services under the slogan, "Always by Your Side," said it aims to become Indonesians' bank of choice.

The lender, which has one of the most advanced payment systems in Indonesia, says on its website that its nearly 18 million interconnected customer accounts benefit from its growing multichannel transaction banking platform.

The lender, which had Rp 791.73 trillion in assets as of the end of June, plays a strong intermediary role as a traditional bank, providing financial solutions to both businesses and individuals.

Competing With Rivals and Fintech

BCA has long paid serious attention to digital transformation and currently offers several digital services to facilitate consumer transactions. In early 2000, the lender made massive efforts to expand the number of merchants connected to its electronic data capture network system, known as EDC BIZZ, to allow more customers to use its debit cards. This also allows them to make cash withdrawals at appointed merchants with Tunai BCA.

It further offers internet banking through KlikBCA, mobile banking through the m-BCA application, while promoting cashless transactions with its prepaid e-money card, Flazz.

Last year, BCA also established venture capital firm Central Capital Ventura, which has Rp 200 billion to invest in fintech companies it believes would support the lender and its subsidiaries' financial service ecosystems.

BCA has been competing with domestic rivals to embrace fintech companies, especially to reach "unbankable" customers. Nearly half of Indonesian adults do not have bank accounts, because financial institutions often find it difficult to penetrate rural areas, while also shying away from the high costs associated with operating branches in remote areas.

This is a blue-ocean business for the growing number of fintech startups, many of which offer innovative technologies to simplify the know-your-customer process, analyze credit quality and process payments. Fintech startups have been racing to fill in the gap, with their sophisticated technological abilities, to tap the pool of previously "unbankable" customers and leverage the power of smartphones.

In 2016, state-controlled Bank Mandiri – the country's largest lender by assets – earmarked Rp 500 billion to invest in its venture capital unit Mandiri Capital Indonesia, to foster fintech startups, particularly those catering to small and medium enterprises.

Indonesian banks are also competing with telecommunication companies to reach "unbankable" customers. State-controlled Telekomunikasi Indonesia, the country's largest telecommunication company, has its own mobile payment service, as well as a venture capital arm, Metra Digital Innovation, that offers incubator services to payment solutions startups.

Fintech Companies: Friends or Foes?

Digital disruption has inevitably driven Indonesian banks to seriously consider digital expansion as part of their greater corporate strategies. This was one of the highlights of the first edition of "Digital Banking Survey of Indonesian Banks," released in July by PwC Indonesia, the local arm of global consultancy PricewaterhouseCoopers.

The survey includes diverse views of senior bankers on the current state of digital banking and the risks and challenges facing the industry. The outcome of the survey, based on responses from 52 senior banking executives at 43 lenders in Indonesia, interestingly shows that 72 percent of respondents believe unicorn startup Go-Jek is emerging as a serious competitor to Indonesian banks.

"Go-Jek's large customer base in Indonesia, combined with its ability to harness data, puts it in a unique position to tailor its payment offering to the end customer," PwC Indonesia said in its detailed report.

"Around 62 percent of Indonesian bankers believe Alibaba, with its Alipay and other services, is a force to reckon with and that it can emerge as a serious banking competitor in the near future. Grab, Tokopedia and Telkomsel are also on the horizon to be perceived as emerging banking competitors. However, they might still have some work to do before Indonesian bankers take notice," the report said.

"It is very surprising to see that the big global technology giants, such as Amazon, Google and Facebook, are at the bottom, with only 28 percent, 18 percent and 12 percent, respectively, of bankers looking at them as emerging banking competitors," it said.

"In my view, fintech companies can be a friends or foes," Jahja said.

A lender with a massive network such as BCA is very attractive to fintech companies. Jahja said they can establish mutually beneficial cooperation. The lender has been one of Go-Jek's partners since 2016, when it started to facilitate banking transactions for the ride-hailing firm's payment platform Go-Pay. This cooperation not only benefits users, but also Go-Jek driver partners.

Jahja said such cooperation can boost banks' current and savings accounts. "We are not embarking any special promotions, there are no lucky draws or other promotions to attract more depositors, but our CASA has increased," he said, referring to the ratio that indicates how much of a bank's total deposits are in current and savings accounts.

"I am guessing that transactions from services such as Go-Pay have made some contribution to this increase," he added.

When asked specifically whether he saw ride-hailing startups such as Go-Jek and other fintech companies that have tapped into the digital payment system, pose a threat to commercial lenders, he said: "I think what they do is good, because they create a new cashless ecosystem. In the past, you paid cash for small deliveries; now you can do it cashless and as easy as using your fingertips."

However, Jahja noted that lenders, especially small and medium lenders who do not have the capacity to collaborate with fintech companies, may see erosion of their market share.

Overall, he said BCA's stance on fintech and digitalization is to embrace it, as the lender seeks a relationship based on mutualism and symbiosis.

Current Issues and Challenges

Jahja Setiaatmadja is known as an informative person from whom someone can learn a lot. During the interview at BCA's headquarters in Jakarta. Jahja showed that he is very up-to-date regarding the latest financial developments both at home and abroad, especially those with the potential to have a major impact on the industry he has been serving for the past few decades.

Jahja said Indonesian lenders must be cautious of the potential fallout from the trade war between the United States and China and the prospect of a higher interest rate environment at home, amid the recent depreciation of the rupiah.

He said the ongoing trade war between Washington and Beijing could seriously impact China's growth, with many observers warning that global companies may become less eager to have production facilities China, following the US government's recent decision to impose trade tariffs on at least $50 billion worth of goods and another $200 billion more from the Asian country later this year.

"China has played an important role as the world's growth engine. For example, coal prices boomed when demand from China increased. Now the price is gradually recovering after a sharp decline, but if the trade war impacts China's economy, coal prices may go down again," Jahja said.

He said the rising coal prices are not immediately benefitting producers in Indonesia, because they must still ramp up production before they can enjoy the windfall profit.

"Last time, when coal prices declined, many sold their assets, their trucks, their heavy equipment and barges. Now, amid increasing demand from China and India, they want to produce more. Many are investing in this sector again. However, taking out bank loans is not as simple as that. I do not think all producers can easily catch up with this price increase. That is a problem," he said.

Another immediate challenge for the country's banking sector is the prospect of a higher interest rate environment. He said the current trend of capital outflows from emerging markets, including Indonesia, is affecting the rupiah and that this puts the central bank in a difficult position.

"It is a hard choice for Bank Indonesia; businesses and consumers of course want low interest rates, but if they cannot maintain the rupiah's attractiveness and if the currency continues to depreciate, the impact will be inflationary. In the end, they will have to raise the rate anyway, so it's better to do it now, rather than later," he was quoted as saying in GlobeAsia's August edition.

As expected, Bank Indonesia raised its benchmark interest rate on Aug. 15 for the fourth time since mid-May, as it sought to unleash new firepower to defend a rupiah. This will ultimately impact commercial banks' lending rates.

However, Jahja said he expects consumer spending, the backbone of the Indonesian economy, to remain strong. "I think the authorities have done well to keep inflation low," he said.

A career banker, who has experience in many divisions within BCA, including the treasury, branch banking, overseas representative offices and international banking, is currently responsible for general coordination of the lender's more than 60,000 employees, including outsourced staff those at subsidiaries.

BCA currently has eight subsidiaries involved in vehicle financing, insurance, securities, shariah banking, remittances and venture capital.

"I published my biography titled, 'The Conductor.' I like to think of myself as a conductor, whose main job is to maintain harmony in a symphony orchestra. Apart from that, he must know his audience, he must be able to handle the pitch and beat of the music. Likewise, in my position, a banking chief needs to master the macroeconomic issues to understand when to accelerate the business and when to take a break," he said.

When asked about his leadership style, he said he likes to implement a habit of teamwork. "A conductor doesn't need to master all musical instruments, but he needs to know when a note is false. How to improve it? Only through teamwork," he said.

Jahja, who comes from a modest background and whose father worked as a low-level cashier at Bank Indonesia, also shared his definition of success.

"Success for me needs to cover five things: spiritual, especially your relationship with God, then relationship with other people and family. Last but not least, it also covers your financial situation and health. If you are successful in the first three, but fail in the last two, for example, you have large financial debt, or if you have poor health, then what is the point?" he said.

"Success is not only limited to one aspect; it is about how to continuously uphold all five aspects," he said.

Jahja, who was born in Jakarta on Sept. 14, 1955, graduated with a bachelor's degree in accounting from the University of Indonesia. He started his career as an accountant at Price Waterhouse in 1979 before moving to pharmaceutical company Kalbe Farma, until the Salim Group hijacked him in 1989.

He worked for the local conglomerate's automotive distribution arm Indomobil and became director of finance before BCA offered him a position as deputy to a divisional head at the bank. He gradually rose through the ranks and served as deputy to the president director between 2005 and 2011.