Indonesia’s BRI Agro seeks to raise external capital and enter supply chain financing to advance its digital banking ambitions in the country, its chief executive officer Kaspar Situmorang told DealStreetAsia in an interview.
He did not disclose the firm’s fundraising targets or timelines but said that the Indonesian bank is “in the middle of conversations with strategic partners” for the proposed fundraising exercise.
The move will allow BRI Agro to build a larger ecosystem of merchants, consumers and business partners and facilitate loans for their everyday banking needs.
BRI Agro, the subsidiary of Bank Rakyat Indonesia (BRI), is one of the nation’s largest and oldest banks. Its digitalisation journey began over three years ago, with some of its most crucial transitions being slated for this year.
Going forward, one of its key focus areas will be supply chain financing, an underserved market. The move signals a breakaway from Bank BRI’s focus on corporate loans, and into a new segment that has tended to be the hallmark of Indonesian fintech startups like Investree and LinkAja.
“We’re trying to build the supply chain financing, as a much larger portion of our business than before,” said Situmorang.
“We want to become a tech company with a bank licence, not a bank with technology. Such platforms are important for us to help amplify supplier financing massively across Indonesia,” he added.
According to Situmorang, BRI Agro is still the only bank to have the licence to offer digital banking services in Indonesia. But competition is heating up, especially with internet giants like GoTo, Grab and Sea Group entering the segment recently.
Many of them have acquired rural banks in Indonesia to possess both the license and capabilities required to lend. Some of them are Gojek’s Bank Jago, Akulaku’s Neo Commerce, and Sea Group’s SeaBank Indonesia. Bank Central Asia (BCA) also has plans to launch its digital arm this year.
Edited excerpts of the interview:-
We’ve seen how Gojek, Tokopedia and Sea Group branched into financial services from ride-hailing or e-commerce. What is the bigger vision for BRI when you talk about building an ecosystem?
I think that’s a $1 billion question. We have a three-pronged strategy. The first strategy is we want to acquire and become the super aggregators of supply chain financing in Indonesia to all verticals in the gig economy. Just to give you a sense, it could be hotels & restaurants, agri outlets, salons or automobile repair shops. We’ve already mapped out 20 verticals where we want to become the biggest supplier financing provider in Indonesia.
The second strategy is to enter payrolls for them, and subsequently, it will be loans. This way, we’ll be able to create more loyalty with our customers.
The third strategy is payment. We can get a slingshot on that once we’re hooked onto supplier financing because we will have loyal customers. Once we get into payroll, we can get payments into their stalls or booths and become the payment service provider for merchants and organisations. But the first step is to be able to become the biggest in Indonesia by acquiring suppliers and merchants of the gig economy as quickly as possible – within a timeframe of fewer than six months. This is our ambition right now.
In terms of structure, will BRI Agro be a subsidiary of BRI? Or do you see yourself onboarding new investors?
We are in the middle of a conversation with strategic partners right now. That’s how we will build agility within the organisation. If you look at my track record on the Board of Commissioners in Linkaja, one of the things I did was onboard two strategic partners, Gojek and Grab, into our digital wallet company. We also successfully acquired one of the P2P lending companies. We’re about to embark on a similar trajectory. We want to be open to innovation and strategy, and that’s how we believe we can maintain our capabilities and strength as a digital bank.
Bank BRI has been on its digital transformation journey for over three years now. How did it all start?
We started by leveraging a policy (digital bank POJK 2018) led by the financial authority of Indonesia. We launched the first open API by the name of BRI API. That product has seen a growth of some 390-400% till the end of 2020 – it has given a significant boost to Bank BRI to be able to connect with startups and companies. The onboarding process [earlier] used to take 2-4 months but after 2018, it takes less than a few hours.
In 2019, we set up our first lending product called Pinang. We were the first company back then to be able to amplify and accelerate disbursements of digital lending. This means doing away with manual processes, face-to-face meetings, or web signatures. A customer just had to download the app, do a face scan, ID check, and the money would be disbursed in less than two minutes.
In 2020, we launched a Buy Now Pay Later product and then a digital savings product. The pinnacle of all this was in April when BRI group CEO Sunarso and the Board of Commissioners from the ministry of state-owned enterprise said that we have to build a digital bank in order to place sentinels within state-owned enterprise organisations.
If you can see the landscape of banking, Indonesia consists of three cohorts. The first is what we call the hybrid bank. They have a lot of branches, but they also instill the digital processes within. This would involve the banks under Himbara, the collection of state-owned enterprise banks, which includes BRI, Mandiri, BTN, BNI and private banks such as BCA.
The second cohort is what we call the Sharia bank. Indonesia has merged three of the Sharia banks so far, which are BRI, Mandiri and BNI to make one of the largest Sharia banks in Southeast Asia called BSI. The third cohort is the digital bank which has few or no branches with all their processes being digitised.
This is the blue ocean for us. The other two cohorts are already packed with players.
And, not many digital banks are profitable yet. So far, I can count only three banks that are already profitable in the entire Asia Pacific region. Two in China, MYbank and WeBank, and South Korea’s Kakaobank. From my understanding, no other digital bank – whether it’s in North America, South America, Europe or Southeast Asia – has hit profitability because they are still looking out for the right ecosystem to play.
We are going to change the name of our digibank in the next few weeks. The name BRI Agro very distinctively suggests agribusiness and we are not running all of this on agribusiness alone. We are moving beyond, going into the gig economy, where we’ve already been investing for the past two years through BRI venture capital.
How will the shift to gig economy workers change your loan book and client base in the future? Can you give us more details in terms of the next steps and strategy?
Yes, we’re trying to revamp some of the old loans, which are close to $1 billion in our books. We are trying to restructure, reshape and revamp those. There’s already a plan in place to do this, which will be executed this year.
The second part is exciting. We want to maximize the digital lending capabilities and the digital lending loan size. By the end of 2023, our aim is that BRI Agro’s lending book should have more than 55% coming from digital lending alone. We are about to launch digital savings within BRI Agro after we get a green light from regulators.
We’re also trying to build the supply chain financing. One of the trickiest aspects of the existing portfolio is the maturity gap. Our previous debtors’ business nature had a tenure of 5-10 years. This is a maturity gap that we need to solve by introducing more and more short-term lending through supply chain financing.
We’ve built a platform within BRI to introduce community brands from our networks to acquire merchants and suppliers from the gig economy. This will help us become the largest platform of supply chain financing in Indonesia, by working together with some of the biggest names in Indonesia. We’re looking at launching this very soon.
Can you throw some more light on supply chain financing – how large are these businesses? What kind of loan sizes are you looking at?
We aim for financing the informal sector, such as in the HORECA business, meaning hotels, restaurants, cafeterias, canteens, or any kinds of small businesses from the F&B sector. We hope our platform will allow them to purchase orders for raw material. Take street vendors in Indonesia for instance – those who sell martabak (pancakes). We plan to connect the small vendors to the right suppliers, offering them the right price with the right people. In that way, we can become a super aggregator of supplier financing in Indonesia.
The F&B sector alone reached 104 trillion rupiah last year and we aim to capture about 10 to 30% of that in the next three years. We want to become a tech company with a bank licence, not just a bank with technology. Such platforms are important for us to help amplify supplier financing massively across Indonesia.
We are currently testing products. Theoretically, by the end of July, we will be ready for execution.
Bank BRI has also invested in a number of fintechs that target supply chain financing. What will happen to these partnerships after you launch your digital bank?
We can split the model into B2B, B2C and B2B2C. The operating model that I’ve just explained is B2B2C. With our partners like Investree and Payfazz, we do have API integration for digital lending. We will collaborate with them since the market pie is still big. We’re not trying to push them around.
The end goal for us is to find ways to amplify our existing network, and in order to win this game, we need to do two things. One, we exploit by tapping on our existing network and partnerships that we’ve built through our venture arm. The size of our digital lending book from our fintech lenders in BRI Ventures represents about 0.5 trillion rupiah so far. Two, we are also pushing exploration of the platforms (B2B, B2C and B2B2C) we spoke about earlier.
You mentioned that only a few digital banking companies are profitable. How hard is it for them to reach profitability?
The short answer lies in the customer lifetime value (CLTV) model. The challenge is if the customer acquisition cost (CAC) is very high, the CLTV will not be that great.
In Indonesia, we need to leverage a particular ecosystem. Bank BRI has access to two large ecosystems. This includes the half a million BRI Link agents across Indonesia, who can sell our digital lending product Pinang. We are going to embed Pinang as a pillar into BRI Link so that our agents can sell mobile top-ups, facilitate electricity bill payments and so on. This is what we call utilisation of our ecosystem in a low-cost manner.
The second part of the ecosystem is the fintechs and gig economy that we have already invested in over the past 2-2.5 years through BRI venture capital. Some of them will become our strategic partners along the way. This is how we are going to make a profit soon. None of the banks are able to tap into these two ecosystems as smoothly as we can.
M&A activity has picked up in the Indonesian banking sector. Do you expect this trend to continue?
There will be some M&A in the next two or three years because building your own team within your digital bank is tough. It’s not feasible as well, because everyone’s racing to hire all the great talent out there. There are two solutions to this. One is acquiring specific technology or startups in Indonesia. The second is sourcing your tech team from Bangalore (India), or eastern European markets like Estonia or Ukraine. They have the capabilities and are very affordable on the development side. These two approaches will be the new normal to boost digital capabilities in the coming years.