The Impact of FinTech Innovation on the Financial Stability of Conventional Banking in Indonesia: Risk Analysis and Transformation Opportunities

The Risks of FinTech Innovation for Conventional Banking

FinTech poses a number of risks that have the potential to impact the stability of conventional banks in Indonesia:

• Disintermediation and Revenue Decline:

  • Decline in Traditional Revenue: FinTech services, such as peer-to-peer (P2P) lending and digital payments, may take over market share from traditional banking services (e.g., retail credit and remittances), potentially reducing the bank's Net Interest Margin (NIM) or net profit [1.1, 1.2].

  • Price Competition: FinTechs that have lower operating cost structures can offer more competitive interest rates or service fees, forcing banks to lower their profit margins [1.1].

• Increased Credit and Operational Risk:

  • High-Risk Loans (NPL): Collaboration or competitive pressure from FinTech may encourage banks to extend credit to previously unbanked customer segments , which may have higher credit risks (increased Non-Performing Loans/NPL ), especially if the screening process is not strict [1.1, 2.3].

  • Technology and Cybercrime Risks : Increasing reliance on digital technology and integration with third parties (FinTech) increases operational and cyber risks (such as hacking, data fraud, and cybercrime ). This threatens the security of customer data and the stability of bank operations [1.2, 2.1, 2.3, 2.4].

• Regulatory Challenges and System Stability:

  • Regulatory Risk: Regulations that are not fully adaptive to the dynamics of FinTech can create uncertainty in supervision, which is a challenge for the supervision and stability of the financial system [1.2, 1.6].

  • Data Integrity: The lack of centralized data integration with the central bank as well as issues of legality and public trust in some illegal FinTechs can affect the integrity of the financial system [2.3, 2.1].

Transformation Opportunities for Conventional Banking

On the other hand, FinTech offers great opportunities for conventional banks to transform, improve performance, and strengthen their stability:

• Increased Efficiency and Profitability:

  • Operational Efficiency: Adoption of FinTech technology enables banks to reduce operational costs (such as transaction processing and infrastructure costs) and improve credit distribution efficiency , which has the potential to increase net profit and improve ratios such as Operating Costs to Operating Income (BOPO) [1.1, 1.5, 2.2].

  • Product Innovation: FinTech encourages banks to innovate and offer more varied business models and products that are relevant to the needs of the digital market, such as online lending services or digital financial management [1.1, 1.3].

• Market Reach Expansion (Financial Inclusion):

  • Access to New Segments: Banks can collaborate with FinTech to expand access to financial services to remote areas and unbanked and underbanked segments of society , thereby increasing financial inclusion in Indonesia [1.2, 1.4, 2.2].

  • Increasing Third Party Funds (DPK): Technology integration can facilitate fundraising (funding) through digital services, which has the potential to increase the bank's liquidity ratio [1.1, 1.7].

• Increasing Competitiveness through Collaboration (Synergy):

  • Digital Transformation: Banks can choose to transform aggressively, become digital leaders, or collaborate/synergize with FinTech to adopt new technologies quickly (e.g., AI for more accurate credit analysis and service personalization) [1.1, 2.5, 3.3]. This synergy is considered key to maintaining the position of conventional banks [1.1].

  • Customer Experience: The use of FinTech helps banks create more user-friendly interfaces and improve customer experience through fast and easy services (e.g. mobile banking ) [1.2, 2.2].

Conclusion Transformation and Stability

Overall, the financial stability of conventional banking in Indonesia is not automatically threatened by FinTech , but rather depends on the response and transformation strategy taken by banks.

1. Financial Performance Stability: Research shows that FinTech can have a positive impact on banks' financial stability (for example, on ratios such as the Capital Adequacy Ratio/CAR and the Loan to Deposit Ratio/LDR ) [1.3]. Banks that successfully adapt and collaborate are able to maintain and even improve their financial performance.

2. The Need for Transformation: Conventional banks must transform by investing in digital innovation , enhancing cybersecurity , and optimizing data analytics [3.3]. Banks that choose to maintain traditional approaches risk losing competitiveness and facing significant market disruption.

3. Regulator Role: The Financial Services Authority (OJK) and Bank Indonesia (BI) play a crucial role in creating a healthy and sustainable digital financial ecosystem by balancing between encouraging innovation and ensuring stability and consumer protection