The race in Indonesia's on-line banking

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.