As ride-hailing firm Gojek and online marketplace Tokopedia join forces to create Indonesia’s largest tech ecosystem under the freshly-minted GoTo Group, Bank Jago is poised to emerge as one of the biggest benefactors of the merger.
Prior to the merger announcement earlier this week, the bank — 21.4% owned by GoTo via its fintech subsidiary GoTo Financial (PT Dompet Karya Anak Bangsa) — already announced a plan to integrate its digital banking services into the Gojek app.
With Tokopedia now becoming part of the equation, the potential captive market gets even larger as the combined ecosystem under GoTo boasts more than 100 million monthly active users, 11 million merchant partners, 2 million driver fleet, and $22 billion in gross transaction value in 2020.
Bank Jago launched its mobile banking app only last month. It has so far had 100,000+ downloads on Google Play Store and a 4.3 rating score from 927 reviewers. Other pure-play digital banks such as Bank Neo Commerce, which is controlled by Alibaba-backed fintech lending firm Akulaku, has 10,000+ downloads, while Sea Ltd-backed Seabank has not launched its mobile app.
No comparable data is available on Apple’s AppStore.
As of now, the Bank Jago app offers online onboarding, current account, money transfers, payments, e-wallets, and Visa debit facility. Loan services are expected to be available in the future.
Achieving profitability, however, will not be a given for the bank.
“Profitability may be achieved sooner if Bank Jago can tap into Tokopedia’s e-commerce ecosystem, which is going to be massive since Tokopedia merchants are much more than Gojek’s and with larger ticket size e-commerce,” said Harry Su, the managing director of Jakarta-based financial advisory company Samuel Sekuritas.
Despite operating at a loss since 2015, high anticipation over the merger and its impact on the bank has helped propel its share price.
The stock has soared by more than 130% so far this year. Bank Jago’s shares are also up nearly four times since a group of investors led by veteran banker Jerry Ng and Patrick Sugito Walujo, whose company Northstar Group is an early investor in Gojek, completed the $16.8 million (in today’s currency rate) acquisition of a controlling stake in Bank Artos, in December 2019, with the intent of refocusing it as a digital bank and rebranding it to Bank Jago.
As of market closing on Thursday, Bank Jago had 139.9 trillion rupiah ($9.8 billion) in market capitalisation, the fourth largest among all publicly-listed banks — even bigger than state-owned Bank BNI, whose first-quarter revenue is more than 300 times that of Bank Jago’s.
Its price-to-book ratio currently stands at 17.4 times, far above the bank industry average of 1.3 times, suggesting that the stock is overvalued. Its net loss expanded to 38.1 billion rupiah ($2.7 million) in the first quarter from 25.4 billion rupiah in the same period last year, but its management targets to close this year with 50 billion rupiah in net profit.
“Although Bank Jago has done well in the markets and attracted big-name investors, the challenge is still getting to profitability. Digital banks worldwide have typically relied on deep-pocketed investors to help finance their growth without too much regard for profitability,” said Zennon Kapron, the founder of Singapore-based fintech consultancy firm KapronAsia.
After eight years in operation, Latin America’s largest digital bank , Nubank, ended 2020 with a net loss of 230.2 million reais ($43.4 million), down from 312.7 million reais from a year earlier. Revolut, which has been operating in Europe since 2015, saw its losses trebled in 2019 to 33 million euros ($40.7 million).
Profitability aside, Kapron argues that the potential expansion of the customer base would allow Bank Jago to better understand the financial situation and needs of the millions of individuals in the GoTo ecosystem. “This insight and data should allow Bank Jago to expand rapidly into newer, higher-margin product areas,” he added.
Taking on the incumbents
Despite having the backing of two major tech platforms, it will not be easy for Bank Jago and other similar players such as Seabank to convince the public to trust their pure-play digital banking services as opposed to more established incumbents.
“Obviously, plugging into the GoTo ecosystem will bring with it huge opportunities but there are also risks involved and it is not without competition,” said Angus Mackintosh, founder of CrossASEAN Research and Insight Provider at Smartkarma.
Mackintosh argues it will take time for Bank Jago to win public confidence and amass new savings to expand its third-party funds, which is critical for any bank to secure a profitable net-interest margin. Meanwhile, on the lending side, although the bank would be able to raise wholesale deposits and effectively borrow money and lend it on, the cost of the fund will be high, he added.
“If they do this, they’re going to be like a multi-finance company. For BFI Finance, for example, their cost of funds is now about 8.5%, and that’s the absolute best quality of any of the modern finance companies,” said Mackintosh, while adding that major banks had seen their cost of funding slip below 2%, hitting record lows.
Speculation emerged last month that Bank Jago will acquire a stake in BFI, which is controlled by Northstar through subsidiaries. The bank has categorically denied the rumour.
On top of being profitable, the incumbents, which are often perceived as tech laggards, have shown impressive ability to develop their digital banking capacity.
The performance of the country’s four largest banks is a testament to this, and the best among them is Indonesia’s largest bank by market value, Bank BCA, which has seen its mobile banking business growing exponentially in the past three years.
By the end of the first quarter, BCA’s mobile banking transactions volume reached 2.1 billion, up by 62% year-on-year, already much larger than internet banking (951 million), ATM (463 million), and branch (28 million). Both ATM and branch banking saw an 8% and 22% decrease in volume in the period.
The country’s largest lender by assets, Bank BRI, which is known for its deep penetration in second and third-tier cities, saw a major shift to digital transactions due to lockdowns and other mandatory health protocols during COVID-19. The transaction volume of its internet banking soared by 132.2% to 2.7 billion by the end of 2020, while its ATM transactions stagnated at 0.6%.
The mobile banking transactions under Bank Mandiri, the country’s second-largest bank by assets, was nearly on par with ATM transactions in terms of volume in the first quarter. In terms of value, however, mobile banking has surpassed ATMs since the third quarter of last year.
Finally, the fourth-largest bank, Bank BNI, saw its mobile banking app users growing by 58.4% year-on-year to 8.6 million in the first quarter as transaction volume grew by 50.4% to 63 million transactions, generating 138 trillion rupiah in value.
The Midas touch
While incumbents are clearly fortifying their defences against a potential digital onslaught, the digital banking landscape is still relatively new and remains open to further business and technological innovations as players strive to identify some of the best practices and standards.
Having a capable team is particularly important in this endeavour.
One of Bank Jago’s biggest advantages arguably comes in the form of Ng and his team as investors. During his tenure as Bank BTPN president director, Ng was responsible for the success of Jenius, one of the earliest mobile banking services to adopt online onboarding. Ng resigned from BTPN in early 2019 after 10 years in service, during which time he grew the bank’s assets by 10 times.
Northstar partnered with US private equity firm Texas Pacific Group to acquire a 71.6% stake in Bank BTPN for $195 million in 2007 and appointed Ng to lead the bank. The partnership has secured at least two partial exits from BTPN amassing more than 18.5 trillion rupiah.
“Jerry Ng is known for having Midas’ hands, everything that he touched turned to gold,” said Kartika Sutandi, a chief marketing officer at Jarvis Asset Management.
An equity analyst who chose to remain anonymous said while Ng’s team comes with a proven track record and experience in developing mobile banking services, the management of other banks still has a lot to prove.
“Jerry and his team from Bank BTPN bring proven innovations to Bank Jago. This is something that the other digital banks still need to figure out,” said the analyst.
Although it is too early to tell whether Jerry can emulate his success with Jenius, his investment bet in Bank Jago has certainly paid off handsomely. Thanks to his stake in Bank Jago through PT Metamorfosis Ekosistem Indonesia, he has risen to become the seventh richest person in Indonesia this year, with $2.5 billion in estimated wealth, according to Forbes.
As of last month, Metamorfosis is the largest shareholder in Bank Jago with a 29.8% stake. Based on the latest corporate filing, Ng controls a 76.3% stake in Metamorfosis, while the rest is held by PT Sugi Global Persada, which is affiliated with Northstar’s co-founder Glen Sugita. Fellow co-founder, Walujo, controls an 11.7% stake in Bank Jago through Wealth Tech Technology Limited.
The large ownership of Ng and the Northstar co-founders presents a dilemma for GoTo if indeed fintech is going to be its main revenue generator in the future, analysts said.
“Bank Jago is in the enviable position of being able to benefit from GoTo’s spend, but without contributing financially to it,” said Kapron.
Mackintosh believes it is likely that GoTo would end up with a majority stake in the future as the bank seems to be the main benefactor of the tech giant’s drive to expand into digital finance.
Bank Jago’s heady valuation, however, would make for a costly acquisition.
“Future fundraising will likely be coming from new investors. I would not be surprised if GoTo investors would also invest in Jago in the future. Perhaps GoTo may add investment just to maintain its 21-22% stake,” said Su.