The Future of Banking is not for Banks

It took years to understand Bill Gates’ quote, “Banking is necessary, but banks are not.” He said it in 1994, and it is becoming true. This statement was hard to understand in 1994, when fintech was not popular. However, it is difficult to imagine a world without banks.

They have been integrated into our everyday lives. Our everyday lives and businesses could stop without banks. Fintech, technology-based financial services, provides several banking services that can compete with banks. Fintech is also regarded as a disruptor to banking. Some fintech firms have succeeded in acquiring customers. Some banking customers have also migrated from banking to fintech. Yet the capacity of fintech to disrupt banking is limited.

Fintech is an infant industry and needs considerable time to prove that its services are as good and secure as those of banks. Regulations limit the nominal value of transactions through fintech platforms for security and customer protection reasons. Banks can fight back and try to excel in this competition by adopting open banking using Application Programming Interface (API) technology, digital banking and other strategies. Future financial customers will be tech savvy and keen to have simple, fast and cheap services. They are millennials who are eager to have more personalized services. They feel that they have to be understood by financial institutions, not the other way around. The reason for the establishment of fintech is the notion that the intermediary function is expensive and lacks the capacity to serve customers’ needs.

The products and services issued by financial institutions are mass products, except for personal banking, which serves high-networth individuals. Technology can spoil regular customers with relatively low costs. Food can be delivered to your door with less effort than buying it yourself. Ride hailing services provide point to point pickup and delivery services with high efficiency.

Platforms with sophisticated search engines, using artificial intelligence, can predict our needs and save customers searching time. In short, the expected services will be real-time, online and on the spot. Banking is a rigid business with an abundance of procedures to follow. As such, it would be difficult to create flexible or tailor made products. Using the principles of social finance, fintech enables the delivery of more customized services for relatively low prices.

The democratization of finance is possible using proper technology. Technology can make fractions and distribute costs to vast numbers of customers. They will pursue traction through big data on customer transactions and digital tracks. That source of big data could be the new treasure because it could possibly be a new way to read customers’ behavior, profiles and lifestyle. It could help formulate strategies for further and bigger services. In terms of financial management, customers’ needs are still the same.

Customers and small businesses need bank accounts and cash management. They also may need insurance and coverage of their properties, business risks and themselves. Finally, they need investment to make their assets more productive. Previously, those needs were served through different business channels. Services delivered by different entities are based on different sets of rules and regulations. Those are three strong, specific laws for every sector, and it is almost impossible to overlap.

Bundling products is possible. However, a product merger is still a mass product and could not serve the specific needs of customers. All customers and small businesses have to manage their portfolios using several platforms, since every platform is capable only for a limited purpose. To manage an account with a bank, a customer has to use the bank’s app and has to switch to another app for dealing with another bank. If they want to buy insurance, they have to switch to a different app, as with investment. Future apps may be able to handle everything seamlessly. All financial activities could be performed in a practical way.

A “financial supermarket” might be the right way to refer to this kind of service. Individual customers and small businesses, even if they had several bank accounts, could easily navigate their accounts using one platform. They could perform simple liquidity management and portfolio optimization using this super app. Sophisticated IT infrastructure, such as API and telecommunication broadband (5G is coming soon), enables us to have host-to-host network connections and perform those tasks easily. The nation’s first modern banking law, which was issued in 1992 and amended during the economic crisis of 1997 and 1998 has become obsolete in many ways. One example of the outdated articles in banking act is the regulation on branch networks.

This act does not recognize branchless banking networks or fully digital branches since it considers only physical branches. With the absence of virtual branch regulation, digital branches must use digital product activities licenses. For that reason, the operations of digital branches are more limited operations than those of physical branches. Digital-only banking is not mentioned in the act. This would make it difficult to formulate licensing regulations and other prudential related measures.

It is not clear whether digital-only banking can be treated as regular banking or whether it should be treated differently. This creates uncertainty in the industry. The Financial Services Authority (OJK) could issue guidelines for digital banking, but it would only be a temporary measure to fill the regulatory gap.

The Banking Law contains noticeably clear provisions on the services that can be provided by banks. Those areas are very clearly defined, and banks are not permitted to go beyond those activities. Selling insurance products and being involved in investment activities are prohibited. As long as the platform has a banking license, it can only operate as a bank based on the Banking Law. If the bank is to work as a financial supermarket, it would require licensing beyond a banking license. Similar to banking limitations, the activities of financial institutions under insurance and capital market laws are also very exact and restricted.

Thus, in the Indonesian legal context, the “beyond banking” concept should be in the form of a new licensing regime. To cater to innovation in the financial sector, the OJK has issued OJK Regulation No.13/2018. This umbrella regulation is in anticipation of a new business model that will be coming to the Indonesian financial sector.

This new kind of financial entity, the so-called digital financial innovation entity, could operate as the aggregator of different kinds of platforms as its members. It seems that this is also a temporary measure when the business scale of a particular platform is relatively small.

If the platform gets big enough, with a high exposure to financial system stability, the government will have to formulate a new strategy to cope with this future form of financial institution. A stronger regulatory framework is expected. The Digital Innovation Law will cater to the need to set up a strong regulatory foundation.