Akulaku-backed digibank’s dicey road to profitability

Bank Neo Commerce, the Indonesian digital bank backed by fintech unicorn Akulaku, has become the most downloaded banking app in Indonesia by offering high interest rates on deposits. However, this has also resulted in the bank having weaker profitability than some of its peers. One way to fix this is by increasing loans to consumers (instead of SMEs), although this may bring greater risks in an economic downturn.

The bank posted a 990 billion rupiah (around US$66.7 million) operating loss last year. This year, the company is aiming for a US$59.4 million loss, raising questions about the bank’s ability to turn a profit.

That said, Tjandra Gunawan, president director of Bank Neo Commerce, said that the company is set to hit profitability by 2023. One of the early indications of this is the increase in its net interest margin, a key profitability metric in the banking sector.

However, the trend from the past four months shows that the bank may miss its targets for loan disbursement and the interest revenue from those loans, which may contribute to a bigger operating loss this year.

Tech in Asia has reached out to Bank Neo Commerce, but the company has not responded to our requests for comment.

Ramping up loans

Since launching its own app in April 2021, Bank Neo Commerce has acquired more than 17 million active users, many of whom are attracted to the bank’s high deposit interest rate. In fact, the average interest rate for a 12-month time deposit with the bank was at 9.49% last year.

This catapulted Bank Neo Commerce’s app, making it the most downloaded banking app in the past 12 months.

However, this strategy has also resulted in the bank having higher interest expenses as a percentage of revenue compared to other digital banks.

While the high interest rates have doubled deposits to 8.1 trillion rupiah from 2020 to 2021, this wasn’t followed by a similar increase in loan disbursements, which only grew 17% for the same period.

Bank Neo Commerce plans to change gears in 2022 by making more loans, while holding back growth in deposits. This year, it made projections to double loans to 9.6 trillion rupiah and only increase deposits by 26.6%.

The effort to offer more loans has been apparent in its performance in the first four months of this year. The bank has gotten some help disbursing loans through its parent company Akulaku, along with other peer-to-peer lenders such as 360Kredi.

Rewards and risks of consumer loans

Opportunities beyond Java