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Indonesian banks are expected to triple the use of big data and AI/ML by 2025 to improve customer experiences

The race to be digital-first in APAC heats up as COVID-19 intensifies customers’ need for availability, access and control of digital banking interactions

Digital banking in the Asia Pacific (APAC) is set to be widely adopted with over three in five customers (63%) willing to make the switch to neobanks and challenger banks in the next five years, according to the Fintech and Digital Banking 2025 report by Backbase and IDC. The report also found that the region is expected to see 100 new financial institutions by 2025, ushered in by liberalization of several markets and issuance of new banking licenses.

By 2023, 40% of Indonesian bankable customers will go through direct onboarding, electronic know your customer (KYC), or third-party onboarding. The report also highlighted that Tier 1 and Tier 2 Indonesian banks will operate within at least 5 lifestyle ecosystems by 2025.

The unprecedented pandemic has also brought into question the industry readiness towards digital banking as a significant majority (70%) of APAC banking customers continue to view banking processes as tedious. A result of incumbent banks’ extreme focus on legacy systems and disregarding digital-first integration, only 30% of the banking customer base in APAC are active on digital banking channels. Today, incumbent banks across APAC are faced with the pressing need to up the ante on digital-first banking due to intensified customers’ need for availability, access, and control of digital channel interactions.

Lack of Agility in the Race to be Digital-First

The report found that incumbent banks have not been able to take advantage of potential ecosystem partners as they still hold traditional views of the value chain. 80% of the top 250 banks in APAC still prefer to own the entire value chain of banking, with third party-contributed business at a mere 2%. Meanwhile, the average age of legacy core banking systems in he top 100 banks in APAC remains at 17.5 years, far behind the rapidly developing digital economy of today.

On the other hand, more than 35 neobanks or new digital challengers across APAC are built on agile innovative best practices — way ahead of incumbents in terms of flexibility, self-service capabilities, customer needs, and personalization. In fact, with the emergence of new players and further digital disruption in the industry, 38% of traditional banks’ revenues are at risk by 2025.

In Indonesia, highly-connected consumers expect instant gratification such as on-demand banking services. To keep pace with this demand, banks should prioritise their resources to focus on the customer and digital platforms to simplify online banking processes. Therefore, strong consumer retention is needed and can be achieved more quickly through fintech or third-party collaborations to process services more quickly and deliver superior user experiences.

Strategic Investments & Growth Priorities for 2025

As the banking industry goes through a period of accelerated pursuit to be digital-first, the report found that APAC banks must unleash the potential of personalization at scale and be more customer-driven and platform-oriented.

The key focus will be on digitization and implementation of artificial intelligence (AI). By 2025, 44% of the top 250 banks across APAC will complete their “connected core” transformation — working on platform-based and componentized modernization, and API-enablement. 48% of banks in APAC are also expected to leverage AI or machine learning (ML) technologies for data-driven decisions.

In Indonesia, banks are expected to triple the use of big data and AI/ML to improve customer experiences. The country is also expected to see 25% growth of investments into real-time capabilities such as marketing, fraud management, and payments.

Digitization provides a multitude of benefits to core banking systems. For instance, in retail and consumer banking, instantaneous delivery of products, services and information is certain to meet the growing demands of consumers. Further, automated processes and lower cost of operations can enable banks to better serve their corporate clients. AI and ML also bring intelligence to wealth management decisions, boosting productivity.

Indonesian customers will maintain multiple banking accounts, both traditional and digital. These customers’ loyalties can be obtained by creating customers’ perceptions that “my bank understands me”, where it is apparent that banking will start integrating with lifestyle ecosystems to achieve such output.

Riddhi Dutta,
Regional Head for ASEAN & India of Backbase

Michael Araneta, Associate Vice-President of IDC Financial Insights, Asia Pacific added:

“Being digital-first calls for the integration of digital technologies with the comprehensive transformation of business processes, engagement strategies, channels, and business models of banking. With the insights from the report, banks and neobanks can be well-positioned for the future.”

About the report

This study is based on IDC Financial Insights review of digital banking strategies of 55 banks from 6 key Asia/Pacific markets (Australia, India, Indonesia, Philippines, Thailand, Vietnam), 20 challenger banks, and 40 fintech disruptors. The study was conducted in 4Q2019-1Q2020. IDC also made reference to its reports on Digital Banking from the past five years to understand the evolution of digital banking strategies.