Digital Banking and

Islamic Banking in Indonesia

GABRIEL VIGO – SENIOR PARTNER

July 4th 2018

CONFIDENTIAL AND PROPRIETARY WORKING DRAFT

Any use of this material without specific permission of McKinsey & Company Last Modified 6/28/2018
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AM SE Asia Standard Time
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The Banking Industry is highly disrupted by Digital leading to a brand new
industry landscape

Last Modified 7/2/2018 11:12 AM SE Asia Standard Time

Digital payments 51%

New available data

per year +40%

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Digital customer
acquisition cost -50%

SOURCE: McKinsey McKinsey & Company 2

Digital will change customer interaction model - what is the future of
branches?

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Online banking Advisor meeting
Self-service area Coffee area Meeter/greeter
area rooms

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Remote advisor
Assisted online Social/
Smart ATMs through video- Tellers
banking community space
conferencing

McKinsey & Company 3

SOURCE: McKinsey Asia PFS Survey 2017
If the Banking Industry takes advantage of the efficiency and productivity
that Digital can bring, significant value will be created

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Global banking return on equity
Percent
18 17.4

16 15.5 15.2

14

12
“”New Reality”
10 9.6 due
9.2 9.0 9.3 to adequate
8.6 8.5
8.2 8.2 response
7.8
8 to Digital
7.9 6.7
6.5 7.4 5.7

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6 5.2 Unmitigated
digital
4 4.9 disruption1

0
2004 06 08 10 12 14 16 18 20 22 24 2026

Forecast

1 Margin decline of 11.6% - Average results across sectors and geographies, generally more severe in consumer finance, payments, and AM/WM sectors (up to 20%+ in UK and Japan
SOURCE:SNL, McKinsey Panorama – Global Banking Pools McKinsey & Company 4
In Indonesia as well, Digital Banking is booming
Million
Total Internet Active social Unique Mobile Active mobile

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population users media users Users social users

265 133 130 178 120

Urbanisation: Penetration: Penetration: Penetration: Penetration:
56% 50% 49% 67% 45%

58% 42% 13% 32%

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Digital banking Frequency of Digital banking Digitally active
5
penetration1 has digital channel sales2 have customer
doubled in the usage in 2017 picked up in segment. It has
last 5 years increased from 2017 (vs 7% in grown 2.5x
29% in 2014 2014) since 2014
1 Defined by usage of internet or mobile banking
2 Digital sales include online application for purchase of product
SOURCE: McKinsey Asia PFS Survey 2017; We Are Social; UN; Internet worldstats; Facebook; GSMA Intelligence; McKinsey & Company 5
Major banks in Indonesia have joined the “digital race” to capture new
growth opportunities

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Launched Go Mobile Launched a customizable
(2012), Rekening Ponsel Jenius app that allows
e-money services and fund transfer, bill splitting
Digital Lounges (2013) among users and a
savings feature (2016)
Launched Sakuku e-
money services and digital
branches served by virtual
HaloBCA agents, with
automated account
opening and Flazz e-
money cards (2015)
Piloting Digibank, a mobile
only service that allows
easy account opening
using national identity
cards (2017)

Before 2015 2015-2016 2017 Onwards

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Launched D-Mobile/ D-
Cash which supports fund Launched “Pay by QR” Launched Line Pay e-cash Launching a Digital Loan
transfers through Facebook feature on their mobile app to target Millenials (2016), Service that provides small
and Augmented reality that and a fully digital branch and also launching Mandiri loans and entrepreneurial
pushes promotions from (2016) Pay (2017) credit (2017)
nearby merchants (2014)

Source: Press Search McKinsey & Company 6

Despite being the largest Muslim country in the world, Indonesia has low
banking penetration and low market share for Islamic Banking
2017 Banking Penetration1 Islamic mkt share as %

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XX%
of total banking assets
Percent

Indonesia 49 5%

Saudi 72 51%

Kuwait 80 39%

Bangladesh 50 19%

Thailand 82 2%

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UAE 89 20%

Malaysia 85 24%

Bahrain 83 18%

1. Total Banking Assets/GDP; Based on World Bank Global Financial Inclusion Database; Account (% age 15+)
Source: Bank Indonesia, World Banking Intelligence, Islamic Financial Services McKinsey & Company 7
 Main result
Customers today value convenience and trust over Sharia
Top factor
compliance when choosing a bank
When selecting their main bank, customers value trust and convenience the most

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% of survey responses
56 42
Sharia compliance
2
84
Convenience 16
0
61
Customer experience 39
0

60
Pricing 37
4

54 42
Products

Printed
4

58
Personal relationships 39
4
77
Trust in the institution 21
2

53 46
Digital services
2

Low importance Medium High importance

SOURCE: 2017 survey in Indonesia McKinsey & Company 8
Globally, Islamic banks have already launched digital only
offerings – Retail Banking example
▪ World’s first Islamic Banking compliant digital bank

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Value
▪ Fully Digital Bank
proposition
▪ Targets youngsters and young professionals
▪ Online and mobile as primary banking channels
Business
model
▪ Offers high rates of return on deposits and low service
charge due to low cost of operation

▪ Mobile and internet banking

Distribution
model ▪ 3 retail and 9 nano-stores, and nano-stores are open 24x7

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and 7 days a week

▪ Achieved its annual target in 3 quarters in the first year despite

tough market conditions
Success
▪ Active presence in social media
to date
▪ Maintained its position as a best savings rate bank in the
kingdom

SOURCE: Press Search; Websites McKinsey & Company 9

Moving forward – key questions to consider

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▪ How to further trigger demand of Islamic Banking
in Indonesia?

▪ How to shape a specific Islamic Banking

digital offering vs. traditional Banks?

▪ How to cooperate with Fintechs to build

distinctive solutions?

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▪ Which role to play in the digital ecosystems?
▪ Wait or innovate now?

McKinsey & Company 10

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McKinsey & Company 11