The Future of Regional Banks in Indonesia
Nowadays, high mobility and intense working life undeniably force people to look for faster, easier and cheaper financial services and products that can be done in seconds through a smartphone. This is certainly a new challenge for the financial services sector, including regional banks.
Regional banks (Bank Pembangunan Daerah) are banks that operate locally and are owned partially by regional governments. Examples of regional banks in Indonesia are Bank Jawa Barat, Bank DKI and Bank Jatim.
While major commercial banks that operate at the national level have enabled APIs and other current technological tools for service and product improvements, regional banks seem to be trapped in outdated technologies, such as an over-reliance on rigid mainframes and an oversized branch network. They are less engaged in digital interactions. Worst of all, they make little effort to change and adapt existing services and products to the digital world.
As a result, they continue to offer expensive and high-maintenance financial services and products to consumers, most of whom belong to the younger generation.
Meanwhile, the age of digital banks is certainly unstoppable, as the rapid development of information technology drives innovation while providing a multitude of opportunities in the financial services sector itself. This inescapable fact has sparked a debate about the future of regional banks, from how they can survive to the most important question: do we still need regional banks after all?
Regional banks are still going strong
According to OJK Chairman Wimboh Santoso, quoted by CNN, regional banks are resilient enough to face the current situation. Loans disbursed by regional banks increased by 4.99 percent on an annual basis in October 2020, while lending by national banks declined by 0.47 percent during the same period.
Moreover, the non-performing loan (NPL) ratio of 3.09 percent for regional banks was also lower than the banking sector in general, where it was 3.15 percent (gross) and 1.03 percent (net).
So the answer to the previous question is obvious. Regional banks should not completely give up on supporting the national financial system as well as accelerating financial inclusion.
As the Chairman of Regional Banking Association (Asbanda) Supriyatno said in Bisnis, about 50 percent of consumers who do not have access to financial services and products through digital banks live in the suburbs or even in kampongs ten miles away from the city centre. OJK Chairman Wimboh Santoso added that regional banks are the driving force for extraordinary privilege (3T) areas where advanced technology and digitalisation are still a luxury.
Key to Resilience: serving the niche market
Regional banks remain the solution for micro small medium enterprises and informal sectors such as farmers, fishermen or rice farmers living in rural areas to improve their financial well-being.
In other words, the above data clearly shows that regional banks still have a niche market that promises both opportunities and a future even though the consumer number is too small and segmented compared to the digital banks.
If we look at the context, digitization is not the best answer to the question of how regional banks can survive. Moreover, focusing solely on product innovation is still not the right answer to compete successfully with digital banks.
To answer the question, regional banks should focus on local consumers, and strive to understand the needs of today’s consumers based on their current situation and circumstances. Local consumers are the very essence of regional banks. Therefore, these banks must develop and offer financial services and products that provide a positive experience for local consumers. A positive experience not only maintains consumers’ loyalty, but also increases sales, as loyal consumers do not hesitate to buy more or share the experience with their friends.
Again, it is important to put the local consumer at the center of everything regional banks do by developing and delivering products and services that meet the needs of new and existing consumers.
When it comes to lending for example, regional banks should consider an individual’s character and personal qualifications, not just put a credit score on an application. Certainly, the characteristics of the loan applications between rice farmers and sugar farmers differ, even if they live in the same area. Thus, regional banks should be able to entirely tailor their services and products to the needs of individual consumers. This also helps regional banks to speed up their approval process as they have already understood the consumer individually.
To conclude this article: Regional banks are not going away. Do not worry, they will work hard every day for their local consumers because they depend on the health of their local economies to keep them running. Regional banks will hyper-localize their services and products.
