The race in Indonesia's on-line banking

The following is the second of two articles on on-line banking by C.G. Moghe, an adviser of financial issues at a multi-industry group in Indonesia and an expert on risk management based in Jakarta.

JAKARTA (JP): In the developed world, most banks have embraced on-line banking as an attractive avenue for expanding their customer base, without having to pay up for "bricks and mortar" branches.

The customers are also benefited in terms of the convenience offered by on-line banking and the lower fees as compared to "bricks and mortar" branch banking. Such developments, however, presuppose the existence of an expanding customer base and competing banks to attract their business.

This business may be in various forms such as the handling of funds, offering services such as payments and remittances, and in general consumer banking, where the automation offered by the on- line facilities allows a large amount of customization without excessive costs.

These banks also need to ensure security in handling the transactions and to frequently update their technology so that they can remain competitive.

What does the market in Indonesia tell us? Even if the banks are prepared to invest in offering "on-line banking", they still have to deal with their existing surplus capacity to service retail customers -- including the provision of manpower which may partially be rendered surplus.

They have no lending opportunity or will not be able to put the expanded deposit base to a profitable use, and until the economy revives, they will be chasing a small customer base of some 2 million to 3 million potential users of on-line banking.

That there is enough surplus capacity is evident in many of the large bank's banking hall: mostly empty, with some exceptions. If the existing infrastructure such as the existing automated teller machines (ATMs), on the other hand, can be used more effectively, then such a strategy will immediately help the bottom line.

In any of the major knowledge-based projects like online banking, the Indonesian banks are always at a disadvantage as compared to foreign banks, since most foreign banks will have the resources available somewhere within their own system.

No doubt foreign banks also need to pay for use of these resources, just like Indonesian banks.

It will, however, be a notional payment -- at least partially -- and foreign banks overall will be able to implement such projects with greater cost effectiveness as compared to an Indonesian bank, simply because foreign banks have a reservoir of experience with similar projects to draw on.

In addition, foreign banks, through their on-line facilities, are able to offer their services to Indonesian customers at locations outside Indonesia as well as within Indonesia.

This is a highly effective marketing tool especially in times of uncertainty when private money in Indonesian is searching for a safe harbor.

To the extent that corporate debt restructuring has been delayed, Indonesian banks can still manage to keep postponing writing off a part of the loan and/or accumulated interest.

However as soon as the restructuring exercises are over, or all the means of recovery are exhausted, the postponement is no longer possible, adversely affecting both the capital base and the profitability.

Some of this has already been accounted for in the calculations for CAR, to the extent that write-offs and/or interest concessions are converted from mere estimates into reality, which will progressively occur over the next year or two. The focus on dealing with the immediate issues on hand (namely capital and profitability) will therefore have to be prioritized.

The credit card scenario is a very relevant aspect of the future for on-line banking. Despite the huge disparity between the branch network of BCA (or other similar local bank with a large branch network) and Citibank (a foreign bank with limited network), Citibank is hugely successful in its credit card business in comparison with BCA and similarly placed local banks.

This is as a result of the investment made by Citibank in processing and marketing their credit cards, which has now firmly entrenched Citibank in this market.

The higher risk taking ability of Citibank (as a consequence of its larger size/capital base) also initially helped it to establish a stronger foothold. Similar factors will apply for the on-line banking business and any notion of the Indonesian banks overcoming these handicaps in a jiffy may not be realistic.

In terms of the market expectations and needs, a very relevant and interesting observation was included in a recent news item, which said that a significant part of the general population in Jakarta tended to confuse the computer equipment used for driving tests with either a television set or another piece of similar equipment.

Just imagine such a population being offered on-line banking! In comparison, the use of ATMs is already very common and several of the on-line banking functions can be offered through these ATMs.

As far as on-line banking is concerned, the customer is generally conducting the transaction using front-end equipment at home, while for ATM based transactions the front-end equipment is located on the banks' premises for the use of the general public.

Enhancing ATM functionality will also ensure optimum use of the existing equipment and investments, thus improving the bank's profitability.

While the Indonesian banks are passing through a difficult period, any long or medium term planning must also take into consideration the overall industry developments as well.

These include: (a) Likely consolidation both through mergers and failure of banks to meet the CAR levels. While this may mean some inevitable weeding out, the short-term instability in the marketplace that this will bring about can not be ignored. (b) Possible entry of foreign banks through the sale of banks presently under the control of the Indonesian Bank Restructuring Agency. This will further deepen the disparity between banks in terms of their ability to sustain capital expenditure and risk- taking. (c) Continuing demands for capital needed to keep up with technological upgrades, pushing the entry level barriers and the impact on overheads.

For the Indonesian banks, or at least for most of them, it is important to optimize the performance of their existing assets instead of chasing pie-in-the-sky targets of offering on-line banking to all and sundry. The market for the potential users of on-line banking is too small to accommodate every aspiring bank.

There are more critical issues to focus on, such as expanding the capital base and improving the profitability as well as facing the ever-changing (mostly adversely) scenarios on the currency and socio-political fronts.

The Indonesian banks can always hope to have the cake of on- line baking tomorrow, if and only if they survive today. To do this they need to focus on earning their day to day bread and on meeting their customers' current needs.

These needs are mostly basic, for which ATMs and other existing infrastructure can do an adequate job, perhaps with some upgrading, which will serve a much larger customer base per unit of investment as compared to the infrastructure of on-line banking.

No wonder this would put some (mostly foreign) banks at an advantage, but then the same thing has already happened in many areas of banking, as a result of the prudent banking practices used by the foreign banks.

So to Indonesian bankers: get back to the basics, postpone day dreams of on-line banking and concentrate on the critical issues at hand, like raising capital and improving profitability.