An ecosystem approach to banking the underbanked

Reaching Indonesia’s unbanked and underbanked population has been a long-standing challenge for banks. Hindered by numerous factors, including sociocultural diversity, low levels of financial literacy, and Indonesia’s archipelagic geography, the expansion of traditional banking channels has been cost-prohibitive.

The result is that half of the country’s 181 million adults do not have a bank account, whilst another 26% have an account but are unable to access other basic financial services.

However, with around 74% of Indonesians connected to the internet and the banking industry undergoing huge digital transformation – fueling innovation and the development of the banking ecosystem beyond traditional channels – the door is opening for banks to reach segments that they have previously been unable to penetrate.

At a recent event in Jakarta, financial services software and cloud solutions provider Finastra joined some of the leading digital and incumbent banks in Indonesia to discuss how a collaborative ecosystem that brings together traditional incumbents and new players can accelerate growth and achieve financial inclusion targets.

It starts with the customer

To reach a new group of customers, banks must consider the products customers need and the channels customers use. In Indonesia, bank-driven approaches such as branch and ATM networks don’t sufficiently meet the needs of the unbanked population.

They are typically too far away from banks’ existing physical networks and the cost of expansion is usually too high. As a result, banks have explored alternative approaches, such as agent networks, with some success.

For instance, Bank BRI’s AgenBRILink network has brought a range of banking services to almost 80% of villages across Indonesia through a network of 660,000 agents who act as intermediaries.

Now, technology is fueling an explosion in potential paths to customers by enabling wider partnerships and deeper connections. The model is shifting from a limited network of partners to an ecosystem made up of dozens of players, including telecom providers, retailers, ecommerce vendors and ride sharing apps.

For instance, a partnership between Gojek’s GoTo Financial and Bank Jago has enabled users of the GoPay digital wallet to open a Jago bank account directly from the Gojek app, enabling many users to open a bank account for the first time.

Similarly, the recently announced partnership between Paywatch and Bank KB Bukopin will see many people able to access credit for the first time through the creation of the first bank-backed Earned Wage Access (EWA) service in Indonesia, enabling employees to access a portion of their earned wages in advance without any interest or fees.

Technology has the power to transform

What does a bank need to compete and win in this space? In addition to a clearly defined strategic approach, they need the agility to respond quickly to changing requirements.

They also need to be able to connect their capabilities, their products, and services to the ecosystem in a fast, safe way. To stay competitive, banks should also be able to create their own ecosystems as well as participating in others.

Achieving all this while ensuring financial services are delivered compliantly can be quite a complex task. Here is where having the right core banking system is key.

Banking is sophisticated, so banks need systems with rich, broad, and deep banking functionality. Banking is evolving, so banks need advanced technologies that use open APIs and microservices to enable growth and agility. Above all, banks need to be able to improve their levels of enterprise.

To tap into new markets, banks must be able to rapidly develop products and then orchestrate them into comprehensive applications, allowing for the faster, easier introduction of new channels.

The financial journey for a consumer must be made smooth and seamless using the digital platforms they choose. Key requirements such as onboarding, KYC, account management, and disbursements must be made easy for customers to use while also protecting the bank.

All of this is possible with a core system that has strong customer management backend capabilities, a rich data model and sophisticated interactions management that can provide a consistent experience through digital channels.

The road ahead

To capitalize on the opportunities created by the rise of ecosystems, established banks must overcome some key challenges. For instance, cost-to-income ratios for most banks in Indonesia are too high in comparison to the most efficient banks.

As regulations increase and technology requirements evolve, this cost challenge will continue to inhibit innovation unless dramatic adjustments are made.

Speaking of costs, many established banks have IT landscapes that have evolved over decades, creating expensive, inflexible, hard to adapt spiderwebs of barely connected systems.

Innovation, especially driven by the rise of ecosystem business models, will be limited by this legacy infrastructure.

To move forward in a way that enables them to leverage an ecosystems model and take financial services to the unbanked and underbanked, banks need platforms that can launch innovative products and services quickly, at low cost, across a growing range of partners and networks.

In addition to supporting a broad range of products the platforms need to be flexible enough to deliver niche products suited to the Indonesian customer. A wide range of well-documented, easily accessible, and rapidly integrable APIs will be vital for success.

Finastra Essence delivers on this requirement by being a truly modern, flexible, microservices-based core banking platform that offers a broad range of functionalities along with powerful integration capabilities to connect to, and make the best of, emerging ecosystems.

The solution’s rich, broad, and deep banking functionalities are combined with a product composer for rapid product creation.

Established banks and emerging players in APAC and across the globe are using Essence to accelerate growth and launch of new products/services ranging from BaaS models to BNPL.