THE INNOFUSION OF ELECTRONIC BANKING IN INDONESIA: AN EXAMINATION OF THE DIFFUSION AND INNOVATION

MANAGEMENT OF ATM, INTERNET BANKING, AND MOBILE BANKING

A dissertation submitted to The University of Manchester for the degree of Master of Science in the Faculty of Humanities

2009

NOFIE IMAN VIDYA KEMAL

MANCHESTER BUSINESS SCHOOL

Table of Contents Table of Contents .......................................................................................................2 List of Tables ...............................................................................................................4 List of Figures..............................................................................................................4 List of Boxes................................................................................................................4 Abstract ......................................................................................................................5 Declaration .................................................................................................................6 Copyright Statement ..................................................................................................6 Acknowledgement......................................................................................................7 Chapter 1 Introduction............................................................................................8

1.1 Financial Innovation and e-Banking ...........................................................8 1.2 Research Aims ............................................................................................9 1.3 Research Contributions ............................................................................10 1.4 Summary of the Dissertation....................................................................11

Chapter 2 Literature Review .................................................................................13 2.1 Innovation, Diffusion, Innofusion...........................................................13 2.2 Innofusion in Financial Services................................................................15 2.3 Defining Electronic Banking......................................................................19 2.4 Collaboration and Knowledge Transfer....................................................22 2.5 Network Externalities and Legal Protection.............................................24

Chapter 3 Research Methodology ........................................................................27 3.1 Research Design .......................................................................................27 3.2 Research Approach...................................................................................28 3.3 Research Strategy.....................................................................................30 3.4 Data Collection .........................................................................................31 3.5 Limitations of Method..............................................................................32

Chapter 4 Data and Findings .................................................................................34 4.1 ICT in Indonesia ........................................................................................34 4.2 Indonesian Banking Landscape ................................................................39 4.3 ATMs in Indonesia ....................................................................................42 4.4 Internet and Mobile Banking in Indonesia ...............................................46

Chapter 5 Discussion and Analysis ........................................................................51 5.1 Innnofusion Framework ...........................................................................51 5.2 E-banking Practices in Indonesia ..............................................................53 5.3 Firm Size and Innovativeness ...................................................................55 5.4 Management of E-Banking Innovation.....................................................58 5.5 Legal Protection and Cooperation............................................................61 5.6 The Importance of User Education and Communication.........................64

Chapter 6 Conclusion ............................................................................................69 6.1 Recalling the Research..............................................................................69 6.2 Lesson Learned .........................................................................................71 6.3 Limitation and Further Work....................................................................73

References ................................................................................................................75 Appendices ...............................................................................................................83

Interview Questionnaire (Respondent Version)...................................................83

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Interview Questionnaire (Researcher Version) ....................................................84 Interview Transcript 1 ..........................................................................................87 Interview Transcript 2 ..........................................................................................95 Interview Transcript 3 ........................................................................................102 Interview Transcript 4 ........................................................................................105 Interview Transcript 5 ........................................................................................109

Word count: 14,601

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List of Tables Table 2.1. Traditional Comparison of Services-Manufacturing Characteristics .. 15 Table 2.2. Key Innovation in Financial Services . 18 Table 2.3. Common Feature and Classification of Electronic Banking .. 21 Table 2.4. Intermediary Roles of Consultants ... 24 Table 4.1. Internet Usage and Population Statistics per 2008 .. 34 Table 4.2. PC and Internet Users in Indonesia .. 35 Table 4.3. Mobile Telephone Users in Indonesia ... 36 Table 4.4. Mobile Market Liberalisation ... 36 Table 4.5. Market Structure 37 Table 4.6. Commercial Banks in Indonesia Based on Total Assets .. 39 Table 4.7. Indonesian Bank Rating Based on Assets .. 40 Table 4.8. Indonesian Top-10 Sectors Ranked by Value Added . 41 Table 4.9. ATM Cards Performance in Indonesia . 42 Table 4.10. Debit Cards Performance in Indonesia 43 Table 4.11. Debit Cards Issuer in Indonesia . 43 Table 4.12. Smart Cards Sector Performance . 45 Table 4.13. Pre-paid Cards Sector Performance .. 45 Table 4.14. Some Precedents and Notable Events .... 48 Table 5.1. Summary of Interviews . 54 Table 5.2. Correlations Analysis 56 Table 5.3. Campaign Impact on Customer Savings Growth . 60 Table 5.4. Credit Card Losses in 2006 .. 68

List of Figures Figure 2.1. Current state of the financial services sector .. 17 Figure 4.1. Indonesia Map 38 Figure 4.2. BNI-ITB Smart Cards ..... 44 Figure 5.1. Project Communication during Service Innovation Process .. 65 Figure 5.2. BCA Token Key .. 66 Figure 5.3. ATM Skimming Fraud 67

List of Boxes Box 4.1 Indonesia: Brief Facts ... 38 Box 4.2. Smart Cards, Pre-Paid Cards, and Store Cards .. 44 Box 5.3. Innovation in Banking Security Systems ... 66

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Abstract In the financial industries, as in other business sector, innovation is the launching of a new or better product/process aiming at lowering the cost of financial services production. Even though financial innovation plays an important role in the modern economy, surprisingly there have been few empirical literatures. In developing countries, electronic banking (e-banking), for example, received relatively little attention although has been deployed for years. Indonesia, although not the most competitive in the world, presents unique case of Asian tiger economies, especially after experiencing crisis, financial recession, and economic reform. This research address how e-banking being developed in Indonesia, how it diffused from time to time, what factors that drives and influences the e-banking implementation, how banks manage their e-banking, and what lessons can we learn from it. This dissertation concludes by summarising the case of innofusion of electronic banking in Indonesia. This research also found that Indonesian banks are directed by customers and competitors in adopting e-banking services. Fee-based income and third-party funds have become the main jargon in Indonesian banks. There is also an indication that bigger and older banks are not as innovative and dynamic as their smaller and newer peers. Interestingly, the unavailability of legal protection does not discourage them to partner and cooperate with each other and probably true that it is only those people who drive innovation among Indonesian banks. Keywords: innofusion, diffusion of innovation, electronic banking, financial services

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Declaration I declare that no portion of the work referred to in the dissertation has been submitted in support of an application for another degree or qualification of this or any other university or other institute of learning.

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