PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

PwC Survey: Digital Banking in Indonesia 2018 July 2018

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

2 “ “ Welcome to the first PricewaterhouseCoopers Indonesia (PwCI) Digital Banking Survey of Indonesian banks. The survey attempts to gather and synthesize diverse views from senior banking executives from across the banking institutions within Indonesia whilst at the same time protecting the confidentiality of the participants. Key objectives of conducting this survey are: 1. To understand the current state of digital banking in Indonesian banks; 2. To understand the digital banking ambitions and aspirations of Indonesian banks; and 3.

To provide an overview of the risks and challenges facing the industry with respect to digital talent, culture and competition from fintechs. The survey was conducted among banking institutions across Indonesia including state owned, local, foreign, regional and sharia banks. The results of the survey are based on completed questionnaires from senior banking executives from over one third of banks in Indonesia.

We focused our survey on mainly six areas: 1. Digital strategy and operating model 2. Digital talent and skills 3. Emerging technology and innovation 4. Customer experience 5. Digital analytics and decision making 6. Risks and challenges We would like to express our sincere gratitude to the senior banking executives who have participated in this survey. Without them, this publication would not have been possible. We trust that bankers, digital enthusiasts, fintech startups and other readers of this publication will find the results and analysis insightful.

We welcome any feedback you may have on the report so that we can incorporate it into future publications.

Based on your feedback, we intend to publish periodically specific reports on digital banking trends in Indonesia. Chairil Tarunajaya Technology & Risk Consulting Leader chairil.tarunajaya@id.pwc.com

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

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PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

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PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

5 Table of Contents 1 3 2 4 Survey Insights | Page 7 Further Reading | Page 39 Survey Respondent Details | Page 35 PwC Contacts | Page 45 1.1. Banks have embraced digital strategy as part of corporate strategy 3.1. 2018 Risk in Review Study 1.3. Consumer banking and customer service are the key focus areas for digital strategy 3.3. 2018 Digital Banking Consumer Survey 1.5. Digital office led by CIO/CTO/CEO is the prevalent option for executing digital strategy 3.5. 2018 Digital Consumer in Indonesia 1.9. Digital banking platforms will see investments in next 2-3 years 1.13.

Physical branches still provide the best experience followed closely by the mobile channel 1.19. Data quality is a major challenge which inhibits the ability to generate business insights 1.7. Cyber security threats pose a major risk to digital business in the next 2-3 years 1.11. Domestic and regional technology companies are emerging as serious banking competitors 1.17. Responsibility for managing customer data is spread across the organisation 1.15. Consistent customer experience across all channels is still not a priority 1.21. Risk management teams are still trying to adapt to digital innovation 1.6.

Agile development processes will be widely adopted across all banks 3.6. 2018 Technological Readiness Ranking 1.10. There is a need for emphasis on tracking and learning of emerging technologies/innovations 1.14. Customer experience concepts are still under development 1.20. Data privacy risks are poised to be much higher in future 1.8. Enhancing digital skills across all business functions is critical to the success of digital strategy 1.12. Customer satisfaction and loyalty is driving customer experience strategy 1.18. Insights generated by Big Data analysis will be a key differentiator for banks in future 1.16.

Data is the new superpower 1.2. Customer experience and revenue growth are the key drivers for digital strategy 3.2. Tech breakthroughs megatrend 1.4. Mobile banking based on smartphone-based application is the leading component of digital strategy 3.4. Banking Survey Report 2018 8 14 18 24 28 40 10 16 21 26 30 41 32 42 9 15 20 25 29 40 12 17 23 27 31 41 42

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

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PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

7 Survey Insights 1. 7

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

8 Banks have embraced digital strategy as part of corporate strategy 1.1 Digital disruption has been driving Indonesian banks to consider digital as part of their strategy. Most of the banks from Bank Pembangunan Daerah (BPD), joint venture banks, local banks, state-owned banks and Syariah banks have incorporated digital initiatives as part of their corporate strategy. Digital banking has turned mainstream, with around 66% of survey respondents indicating that they have developed their digital strategy as part of their corporate strategy.

Only 12% of the respondents indicated that they created the digital strategy as part of their information technology (IT) strategy followed by 16% of respondents who have included digital strategy as part of their product or customer strategy. It is also very encouraging to see that only 4% of the respondents have indicated a separate standalone digital strategy document in place. This response shows the acceptability of digital strategy as a business strategy and not solely an IT initiative. (refer to Figure 1) However, we see a considerable difference between how large banks and state-owned banks view digital strategy compared to others.

According to our survey, only 38% of the state- owned bank respondents and 44% of Buku 4 bank respondents have incorporated digital strategy as part of their corporate strategy (refer to Figures 2 & 3). This may be an indication that large banks have started on the journey of digital transformation; however, there are still challenges in developing a common view of digital strategy across these banks. Product teams, customer service team, IT team and dedicated digital teams are creating their own siloed digital strategies. Figure 1: Digital strategy has turned mainstream Figure 2: Percentage split between different types of banks who view digital strategy as part of corporate strategy Figure 3: Percentage split between different types of Buku banks who view digital strategy as part of corporate strategy Your digital strategy is part of which one of the following?

Your digital strategy is part of which one of the following? Q Q Operations Strategy 2% Corporate Strategy 66% Separate Digital Strategy Document 4% Customer Strategy 8% Products Strategy 8% IT / Technology Strategy 12% 100% BPD Buku 2 Buku 3 Buku 4 Joint Venture Local- owned State- owned Syariah 80% 74% 75% 63% 44% 38% 71% 66% of respondents have indicated that they have developed their digital strategy as part of their corporate strategy

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

9 Customer experience and revenue growth are the key drivers for digital strategy 1.2 Whenever there is a conversation about digital, one of the buzzwords used is customer experience.

In line with this, 44% of respondents have indicated that the primary objective of their digital strategy is to enhance their customer/ employee experience. It is very encouraging to note that revenue growth comes second with 32%, followed by 14% for cost reduction (refer to Figure 4). However, our survey indicated that state owned banks are primarily focused on using digital initiatives to enhance revenue growth, with over 63% of the state-owned bank respondents indicating this when compared to only 21% and 14% for local-owned and Syariah bank respondents respectively. (refer to Figure 5.) On the other hand, the current revenue contribution of digital initiatives across all banks is still very nascent.

About 40% of respondents have indicated that they do not currently measure the revenue contribution of digital. Another 40% have indicated less than 5% revenue contribution from digital (refer to Figure 6). Despite all of the above, there is an increasing realization among bank executives of the need to monetize the enhanced customer experience and ensure there is a reasonable contribution of digital initiatives to revenue in the future. Around 56% of the respondents have indicated that they have set a target of over 5% revenue contribution from digital initiatives in the future (refer to Figure 7).

This is an indicator which will denote the successful adoption of digital strategy to banking operations and new product development in banks. Even though the current and target revenue contribution figures from digital are still low, we believe the Indonesian banking industry is moving in the right direction.

Figure 4: Customer/Employee experience enhancement is the key Figure 5: Revenue growth as the primary objective across various types of banks Figure 6: Current contribution of digital to revenue (as a % of current revenue) Figure 7: Target contribution of digital to revenue (as a % of current revenue) What is the primary objective of your digital strategy? What is the primary objective of your digital strategy? What is the current contribution of digital to your revenue? What is your target for the contribution of digital to your revenue Q Q Q Q Revenue Growth 32% Business Process Enhancement 2% Cost Reductions 14% Customer / Employee Experience Enhancement 44% 30% of revenue 2% 15%-30% of revenue 4% 5%-15% of revenue 14% State-owned BPD Local-owned Syariah Brand Reputation Enhancement 8% 14% 21% 56% 63%

PWC SURVEY: DIGITAL BANKING IN INDONESIA 2018

10 Consumer banking and customer service are the key focus areas for digital strategy 1.3 Figure 9: Mass customer segment is the key focus area for digital strategy Figure 10: Customer services and acquisition are the top focus areas for digital strategy Figure 8: Consumer banking is the key focus area for digital strategy Your digital strategy focuses on which customer segments? Your digital strategy focuses on which areas of the customer lifecycle? Your digital strategy focuses on which products/services? Q Q Q Consumer banking, once viewed as the bastion of stability in financial services, is now being identified as the most likely financial sector to be disrupted by fintechs over the next five years.

The very simplicity that underlies banking products and processes for savings, lending, and business services renders the sector ripe for disruption.

New entrants see opportunity in disaggregating the components of traditional banking and offering targeted solutions with better servicing to both retail consumers and businesses. In parallel, the threats posed by fintechs have the ability to disrupt four categories of incumbents’ business – market share, margins, information security/privacy and customer churn – at higher rates when compared to non-banking organisations within the financial sector. Some customers still prefer human interactions in certain parts of the processes, but the other hand, a viable digital approach is now mandatory for banks wishing to compete across all consumer segments.

Traditional banks are still in the early stages of customer-oriented solutions, at least when compared to what fintechs propose. According to the PwC global survey, only half of the respondents from the banking sector (53%) believe they are consumer-centric, compared with over 80% for fintech survey participants. By prioritising 24/7 access, fintechs offer services available via nontraditional channels such as social media, empowering customers to a great extent. Fintechs also stand out with their focus on ubiquity and omni-channel offerings. New entrants understand the need to design product offerings by considering and fulfilling the various needs of the customer at different points of their experience journey.

Consumer Banking Mass SME Corporate Affluent Emerging Affluent Customer services Customer acquisition Customer retention Customer awareness Customer consideration 90% 70% 82% 68% 54% 32% 10% 38% 50% 34% 48% 14% 36% 6% 20% Commercial Banking Corporate Banking Treasury Micro Banking In line with this global trend, Indonesian bankers are also focusing their digital strategy primarily on consumer banking products/services and the mass customer segment (refer to Figures 8 & 9). Some of the banking products currently available in Indonesian market highlight the progress being made by Indonesian banks to focus on enhancing the customer experience across the customer lifecycle.

Around 82% of the respondents believe that customer services is the key focus area for digital strategy, followed closely by 68% for customer acquisition (refer to Figure 10). As competition intensifies in the digital space in future, we hope to see greater emphasis on customer awareness and consideration aspects of the customer lifecycle as well.

11 Mobile Invest Experience Process Decisioning Experience Enable Advice-based Solutions Invest Spend Borrow Protect Save Organisation Decisioning Process Customer Data Save Spend Protect Borrow Branch The future state of banking is a complete reset: customer centricity enabled by a streamlined operating model and next-gen technology From a Traditional Bank To a Digital Bank Product-centric mindset Customer-centric mindset Thinking about individual product is a traditional way of thinking Thinking about customer needs, in a segment of one, is a way to position and steal share from competitors

12 Mobile banking based on smartphone-based application is the leading component of digital strategy 1.4 Figure 11: Indonesia Smartphone Users (% of Urban/ Rural Population).

Source: Statistics Indonesia Figure 12: Smartphone-based mobile banking is the leading component of digital strategy Which of the following are components of your digital strategy? Q 10 20 30 40 50 60 70 80 10 20 30 40 50 60 70 2012 2013 2014 2015 2016 Urban+Rural Urban Rural Mobile Banking - Smartphone-based apps Internet Banking ATMs Chatbots Collaborations with Fintechs Mobile Banking - SMS / USSD-based Robotic Assistants 86% 68% 48% 46% Digital Branches 44% 38% 38% 18% According to a 2018 report by We Are Social, Indonesia has around 132 million internet users, with 178 million unique mobile users and 120 million active mobile social media users.

These figures combined with more than 50 million smartphone users (refer to Figure 11), forces Indonesian banks to create a smartphone based mobile specific strategy to service their end customers.

According to our survey, 86% of the respondents have smartphone based mobile banking application as a key component of their digital strategy. Internet banking follows closely with around 68% of the respondents. ATMs continue to be a critical component of the digital strategy with around 48% of the respondents indicating so (refer to Figure 12). Hopefully as the digital banking market matures, we will see more activity in the areas of chatbots, digital branches and robotic assistants, which will help banks to enhance their customer experience and cut costs in the long run.

13 44% 82% 56% 44% of respondents have indicated that the primary objective of their digital strategy is to enhance their customer/employee experience Around 82% of the respondents believe that customer services is the key focus area for digital strategy, followed closely by 68% for customer acquisition Around 56% of respondents have indicated that they have set a target of over 5% revenue contribution from digital initiatives in the future

14 Digital office led by CIO/CTO/CEO is the prevalent option for executing digital strategy 1.5 Figure 13: IT environment in banks still needs improvement to support digital strategy Figure 15: Digital office under an existing directorate is the leading way to implement digital strategy How effective is your current IT environment for supporting your digital strategy? Who is leading your digital strategy? How do you plan to implement your digital strategy? Q Q Q Around 64% of respondents believe that the IT environment of their current organisation is moderately effective in supporting their digital strategy (refer to Figure 13).

This is a crucial indicator that we hope will improve over the coming years, as digital transformation of Indonesian banks is based on transforming their legacy IT environments.

Inspite of this, the Chief Information Officer (CIO)/Chief Technology Officer (CTO) typically lead the digital strategy according to 36% of the respondents. This is closely followed by another 32% respondents who believe the Chief Executive Officer (CEO) leads the digital strategy in their bank (refer to Figure 14). Indonesian banks are yet to evolve the role of Chief Digital Officer (CDO), who would develop and implement the digital strategy, with only 12% respondents indicating they have a CDO leading the digital strategy in their banks. This figure we hope will increase in the coming years with increased digital maturity in Indonesian banks.

Creating a digital office under an existing directorate – either IT, business team or corporate strategy team is the most common way to implement digital strategy with around 46% of the respondents indicating so (refer to Figure 15). In the future, we believe the percentage of respondents who believe that they need to create another subsidiary for carrying out activities related to digital will increase from the current 20%, as more and more banks look to accelerate their consumer and corporate businesses digitally.

Moderately Effective Create a digital office under an existing directorate Create another subsidiary for carrying out the digital strategy Create another directorate in existing entity Others Create a digital task force Very Effective Slightly Effective Extremely Effective 64% 46% 20% 20% 10% 4% 16% 10% 10% Figure 14: CIO/CTO are leading the digital strategy Chief Information Officer Chief Technology Officer Chief Executive Officer Chief Digital Officer Chief Marketing Officer Chief Operating Officer Chief Financial Officer Others 36% 32% 12% 10% 6% 2% 2%

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