DIGITAL TRANSFORMATION IN BANKING: REALIZING DIGITAL BANKS

The rapid development of information technology has brought the world into a new era
known as the Fourth Industrial Revolution. The utilization of various technologies in the
financial services sector has brought significant changes to the banking industry. The shift in
consumer behaviour towards digital has driven banks to accelerate their transformation
process towards becoming digital banks. Overall, digital transactions worldwide grew by
118% from USD 3.09 trillion in 2017 to USD 6.75 trillion in 2021 (Statista, 2021). In
Indonesia, digital transaction growth has been even higher, reaching 1,556% from 2017 to
2020. Electronic money transactions reached Rp786.35 trillion in 2021, an increase of
Rp281.39 trillion (55.73%) from the previous year's Rp504.96 trillion (Bank Indonesia,
2021).

The demand for digitalization in banking is reinforced by various factors that drive the
development of digital banks in Indonesia, given that Indonesia has great potential to absorb
the digitalization trend. These driving factors are reflected in three main aspects: digital
opportunities, digital behaviour, and digital transactions. Digital opportunities include
demographic potential, digital economic and financial potential, the potential for internet
usage penetration, and the potential for increasing customers. Digital behaviour includes
smartphone ownership and mobile app usage. Digital transactions include online trading
transactions (e-commerce), digital banking transactions, and electronic money transactions.

In addition to bringing opportunities that the banking industry can utilize, digital
transformation also poses challenges that need to be anticipated. Some of these challenges
include the protection of personal data and the risk of data leakage, the risk of investing in
technology that is not in line with business strategy, the risk of misuse of artificial
intelligence technology, cyber attack risk, outsourcing risk, the need for institutional
readiness for a digital orientation, financial inclusion for people with disabilities, low digital
financial literacy, uneven information technology infrastructure in Indonesia, and regulatory
framework support.
Conceptually, there is a difference between digital banks and conventional banks that provide
digital services such as mobile banking and Internet banking. Digital banks can generally
perform all banking activities from opening accounts, transfers, and deposits, to closing
accounts through smartphones/electronic devices without the need to physically visit the
bank. In addition, another fundamental difference is that digital banks generally do not have
physical branches (except for the headquarters) or can use limited physical branches
(Financial Services Authority Regulation No. 12 of 2021). Meanwhile, conventional banks
that provide digital services are generally unable to provide all of their services digitally.
Moreover, conventional banks are associated with a large number of branch offices.

At least two potential significant positive impacts may arise from the digital transformation
carried out by banks. First, the widening of banking accessibility. Second, the improvement
of Indonesia's banking competitiveness. Digital banks will be able to increase the ease of
access to banking for the public, as well as increase banking efficiency, thus driving
economic activity.