Financial Crime World

Digitalization’s Disproportionate Impact: How Large Banks are Dominating Indonesia’s Banking Sector

Jakarta, Indonesia - A recent study by the Indonesia Financial Group Progress (IFG Progress) has revealed that Indonesia’s banking sector is experiencing a disproportionate impact from digitalization, with larger banks emerging as clear winners in the transition to digital finance. The findings highlight concerns about market concentration and its potential consequences on financial inclusion and economic inequality.

Key Findings

  • Major banks that have invested heavily in digital technologies are enjoying significant advantages over smaller institutions.
  • These advantages include increased efficiency, improved customer engagement, and a competitive edge in attracting deposits and disbursing credits.
  • The study warns of the drawbacks of market concentration, including:
    • Limited access for smaller financial institutions
    • Reduced competition
    • Exclusion of underserved markets
    • Increased systemic risk

Challenges Facing Smaller Banks

  • Financial constraints
  • Technological barriers that make it difficult to adopt and integrate digital technologies

Consequences of Market Concentration

  • Reduced competition, stifling innovation and hindering the development of diverse, customer-centric digital financial products and services
  • Negative consequences for financial inclusion and economic growth

Recommendations

Policymakers and regulators must assume a pivotal role in ensuring an equitable playing field for both large and small banks. This includes:

  • Implementing policies that encourage fair competition
  • Fostering innovation
  • Prioritizing financial inclusion

ASEAN Digital Economy Framework Agreement (ASEAN DEFA)

The study highlights the importance of ongoing negotiations led by the ASEAN Coordinating Committee on Electronic Commerce and Digital Economy (ACCED) to prevent inadvertently creating higher barriers for smaller banking institutions.

Conclusion

As Indonesia navigates its digital future, policymakers must balance the benefits of innovation with the need for equitable growth. The country has a unique opportunity to set an example for inclusive growth in global finance.

About the Authors

  • Ibrahim Kholilul Rohman is a Senior Research Associate at IFG Progress, specializing in digitization in the financial sector.
  • Afif Narawangsa Luviyanto is a Research Associate at IFG Progress, with expertise in banking sectors, macro-ecomic and financial analysis, and Digital Economics.