Financials

<p style="text-align: justify;">In the digital era, competition and entry barriers are thinning and are almost disappearing or changing shape.&nbsp;</p><p style="text-align: justify;">The banking and financial institutions, which were relatively low in competition, suddenly jumped into digital market and faced perfect competition.&nbsp;</p><p style="text-align: justify;">In this kind of market, "winner takes all." There is no room for the second rank. The entry barrier, which initially needed significant capital, like abundant branches, modern systems, and the best features, suddenly became less relevant to new entrants.&nbsp;</p><p style="text-align: justify;">The entry barrier is gone or mostly turned into a network effect. It defines the competition. &nbsp;</p><p style="text-align: justify;">What if we still rely on the "best value proposition"?&nbsp;</p><h2 style="text-align: justify;"><span style="font-size: 14pt;">Digital Services from Large Incumbent&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">Incumbent companies certainly have a powerful value proposition relative to competitors in their era. For example, Bank A is the best bank in the mortgage market. Bank B has the best service in the corporate market.</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">While bank C has the best service in the Islamic market. Financial Institution X has the best service in car loans. Financial Institution Y has the best service in pawn credit. At the same time, Financial Institution Z has the best service in microcredit. And so on.&nbsp;<br /></span></p><p style="text-align: justify;"><span style="font-size: 12pt;">However, if the best performers are compared with their competitors, the difference in the quality of their products and services is not too far apart. For example, the best benefits of a car loan in financial institution X will not be two-times-better compared to its competitors.&nbsp;</span></p><h2 style="text-align: justify;"><span style="font-size: 14pt;">New Entrant Ambition in Digital Era&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">New digital technologies allow products and services to be barrierless. It significantly offers radical improvements. Not just "slightly better services," but at least "ten times better services." The newcomers take advantage of this characteristic.</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">There is a case that is already well-known, namely EDC machines and ATM cards, an already mature ecosystem.&nbsp;</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">To run this business, banks must provide EDC machines that cost around IDR 1 million per piece. ATM cards are currently around IDR 5 thousand per item (or probably around IDR 20 thousand per piece due to pandemic-related supply chain disruptions).&nbsp;</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">The newcomer offers an innovative payment solution with a new kind of EDC machine in the form of a QR code sticker. The price of the sticker is around Rp 1 thousand per piece. 1000 times cheaper!&nbsp;</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">With the 1000-fold improvement, the market has shifted significantly, forcing incumbents and regulators to "follow the new game."</span></p><h2 style="text-align: justify;"><span style="font-size: 14pt;">New Era: Irresistible Value Proposition&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">"Being the best" is not the new entrants' dream. They will always be looking for new ways that are 1000 times better. A 1000-fold improvement can be the new bargaining value that is impossible for the customer to refuse, even if the customer hates it.&nbsp;</span></p><p style="text-align: justify;"><span style="font-size: 12pt;">So, before it gets too late, established companies with the value proposition "best in the market" should invest (budget, time, attention, meeting agenda, etc.) and collaborate to realize an irresistible value proposition.&nbsp;</span></p><p style="text-align: justify;"><span style="font-size: 10pt;"><em>This article was contributed by our expert <a href="https://www.linkedin.com/in/widodo-darojatun/">Widodo Darojatun</a></em></span></p><p style="text-align: justify;">&nbsp;</p><h3 style="text-align: justify;"><span style="font-size: 18pt;">Frequently Asked Questions Answered by Widodo Darojatun</span></h3><h2><span style="font-size: 12pt;"><span style="font-size: 12pt;">1. How well is Indonesia's financial system working?&nbsp;</span></span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">The Indonesian banking system is currently robust, sound, and healthy with a loan-to-deposit ratio of about 80%, capital adequacy ratio of about 25%, and manageable non-performing loans at around 3%.&nbsp;</span></p><h2 style="text-align: justify;"><span style="font-size: 12pt;">2. What is digital transformation in financial services?&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">The awareness regarding digital transformation is good. Though the implementation is at its early stages, new methods such as QR payment and E-wallet are popular and are gaining momentum.&nbsp;</span></p><h2 style="text-align: justify;"><span style="font-size: 12pt;">3. What are the most important digital technologies for finance organizations?&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">Finance organizations are building themselves to quickly move from one technology to another. More convenient card transaction has started using contactless technology. The role of blockchain technology has increased. Some companies are now using blockchain technology.&nbsp;<br /></span></p><p style="text-align: justify;"><span style="font-size: 12pt;">In terms of credit processing, supporting technologies for Customer Due Diligence (CDC), face recognition, biometrics, credit scoring, etc, will be gaining momentum in the near future.&nbsp;</span></p><h2 style="text-align: justify;"><span style="font-size: 12pt;">4. What are value proposition examples?&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">QR code is one such innovative solution that is a more efficient method and is now being widely used.&nbsp;</span></p><h2 style="text-align: justify;"><span style="font-size: 12pt;">5. What new digital innovations could a financial institution have?&nbsp;</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">Financial institutions are wide open to digital innovations. And hopefully, each industry player can find their new market creation (market-creating innovation) to avoid price competition.&nbsp;</span></p><h2 style="text-align: justify;"><span style="font-size: 12pt;">6. What is an online value proposition example?</span></h2><p style="text-align: justify;"><span style="font-size: 12pt;">Every financial innovation has been catching up with digitalization as now, about 200 million of Indonesia&rsquo;s population have adopted smartphones. The value proposition for them should be &ldquo;mobile-first convenient&rdquo;.</span></p><p style="text-align: justify;">&nbsp;</p>