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The Disruption of Fintech On Rural Bank: An

Empirical Study On Rural Banks in Indonesia

Silvia Ika Anggreini1
Arif Singapurwoko2
Universitas Islam Indonesia, Indonesia
15311040@students.uii.ac.id1, arif_singa@uii.ac.id2

Abstract - This research aims to investigate if the Competition in financial markets is getting tighter
emergence of financial technology startups gives disruption to with the emergence of digital financial technology or
rural banks. The research is to determine the difference before Fintech [9]. Convenience provided by Fintech in providing
and after the emergence of Fintech on Non-Performing Loans online portfolio management services and international
(NPL), Return on Assets (ROA), Loan to Deposit Ratio (LDR), and
money transfers, such as crowdfunding platforms and
Net Loan to Total Asset Ratio (NLTA). Because nowadays the
mobile payment solutions is a new way of providing
conditions of the Rural Bank industry face challenges with the
emergence of Fintech. This research was conducted in "financial" services by utilizing "technology" or called
Indonesia by involving rural banks registered in Financial "Fintech". Therefore, there is competition from the
Service Authority in the period 2013 - 2018. This research data emergence of Fintech with traditional banks and financial
is taken from 50 Rural Banks. The method carried out in this institutions [29]. In different word, Fintech means the
research was 3 years before the emergence of Fintech and 3 innovation from financial services or products that are
years after the emergence of Fintech. This study employed produced by technology. In concert with the progress in
Paired Sample T-test to examine if NPL, ROA, LDR, and NLTA technology as well as mobile and internet along with their
received differences before and after financial technology
global widespread adoption, the expectations from
emerged. The test results show that there is a difference before
consumers are changing. Many businesses or startups are
and after the emergence of Fintech on Non-Performing Loans
(NPL), Return on Assets (ROA), Loan to Deposit Ratio (LDR), and operating on Fintech related products and there are
Net Loan to Total Asset Ratio (NLTA) in Rural Banks. major disruptions in financial services [6].
Fintech is growing very rapidly along with the
Keywords - Financial Technology, Non-Performing Loans development of technology. In economic finance, Fintech
(NPL), Return on Assets (ROA), Loan to Deposit Ratio (LDR), Net provides solutions with every type of technology it offers
Loan to Total Asset Ratio (NLTA), Rural Banks. [7]. There are similarities in services offered by Fintech
and traditional banks, but in different ways because
I. INTRODUCTION Fintech is more efficient by utilizing technology [9].
Because Fintech provides the same service as a bank, it
The economy of a country cannot be separated from
can disrupt the performance and profitability of the bank.
the role of the bank. Bank is a firm that both accepts
According to Fintech Indonesia, there are 161 Fintech
demand deposits and market commercial loans [33].
companies in Indonesia until 2018. In addition, Financial
Banking is a business in financial intermediation where
service authority (FSA) in Indonesia on July 2017 until
one group of people deposit money with the bank and
December 2018, there are 88 Fintech lending companies
other group utilize the same money by availing loan from
have been registered and licensed. Globally, the
the bank for income generating activities or credit. The
Compound annual growth rate (CAGR) for Fintech
word credit comes from the Latin word “credere" means
companies from 2014-2020 is estimated to reach 51%
trust. The main definition of credit is reliance on and
[23]. Based on these data, it can be seen that the growth
confidence in the truth, worth, reliability of a person or
of Fintech is growing very rapidly and has succeeded in
thing [3]
transforming an existing system or market. The
In Indonesia, rural bank regulated in the Banking
emergence of Fintech introduces practicality, ease of
Principal Act Number 7 of 1992 and the Law of the
access, convenience, and economical costs, otherwise
Republic of Indonesia Number 10 of 1998, it is stated that
known as disruptive innovation [18].
village banks, market banks, village barns and employee
banks have become rural banks. Rural banks are much II. LITERATURE REVIEW
narrower if they are compared to commercial banks. In
accordance with the bank regulation, it has been stated A. Fintech
that the credit provided by the bank contains risks. Bank Traditional financial institutions run into
can anticipate credit risk through several ratios. The ratio disrupted, revolutionary, and attacks from digital
used is asset quality ratio, profitability ratio, and liquidity weapons, which is from the emergence of Fintech
ratio. Those ratios can be measured by Non-Performing [26]. According to Indonesian Bank, the modern
Ratio (NPL), Return on Asset (ROA), Loan to Deposit Ratio financial system produces new services, products,
(LDR), and Net Loan to Asset Ratio (NLTA). and business models using technology or Fintech,
which affect monetary stability, financial system
stability, smoothness, security, reliability, and mobilization [17]. There are several services that are
efficiency of the payment or loan system. provided by rural banks in general, which are
Digitalization in the financial sector is also called savings, deposits, and credit.
Fintech, which is the use of advanced internet-based The history of the emergence of Rural Banks
technology that moves mostly in the financial sector. (BPR) in Indonesia:
Internet-based technology in the fields of cellular 1. Began in the Dutch colonial era.
payments, e-commerce, and early-stage crowd- 2. Rural banks (BPR) in Indonesia began in the
based financing or can be called crowdfunding and 19th century with the establishment of Bank
crowd investing is an example of modern technology Kredit Rakyat (BKR) and the village granary,
services to activate or provide financial services [31]. which was built with the aim of helping
In the other meaning, the increase in financial farmers, employees, workers, in order to
activity is currently influenced by the emergence of escape the bondage of moneylenders who are
Fintech which entered the financial industry by burdened with high interest.
applying technology in its activities [25]. The term of 3. After Indonesia proclaimed independence, the
Fintech is not confined to specific industries, such as government encouraged the establishment of
peer-to-peer (P2P) lending, nevertheless it includes market banks which were particularly well-
financial services that were traditionally supplied by known because they were established in the
the financial industry and all of financial products market environment and aimed to provide
[20]. financial services to market traders. Then, the
The evolution of Fintech is started in [7]: market banks were confirmed as rural banks
1) 1967: the launch of the ATM (Automated (BPR). Thenceforward, rural banks in Indonesia
Teller Machine) have grown rapidly.
2) 1967-1987: the financial services industry 4. On June 2018, rural banks were recorded in the
changes from traditional to digital industry Financial Services Authority (FSA) in Indonesia
3) 1987-2008: the financial services industry as many as 1,603 offices spread across regions
was largely transformed into a digital in Indonesia.
industry, supported by the emergence of the Rural banks provide several benefits by providing
internet around 2000. loans, the first is that rural folks have been helped
Fintech provide several advantages, such as for several years by the existence of rural banks with
Fintech allows them to lend cheaper or provide loans. Second, the Rural Bank teaches rural folks to
better products, Fintech companies can save labor have savings and make loans at banks. Third, helping
and office space costs that are significantly more the economy by giving loans to people who have
comfortable according to consumer reviews, and productive businesses, helping development, and
creditors may be able to choose better prospective improving the socio-economic life of the rural
borrowers, provide information from various population [17].
sources, and technology-based lending that uses the C. Management Credit of Bank
big data approach [10]. Fintech is easy to adapt with Credit is the provision of money or bills based on
the needs of consumers who are fast changing, and an approval or agreement. Before obtaining credit,
the existence of low-cost financial services that the customer must go through several phases of
make Fintech more attractive to the public, so there credit which must be fulfilled as the stage of the
is no need for geographical concentration. Fintech crediting process. Credit in a planned economy
easy adjusting changes in consumer behavior, easier means both the enterprise as borrower and the bank
regulation, and offers a lower risk of services and as lender [2]. In providing credit to borrowers, there
products [12]. The services and products offered by is a process that must be performed which is credit
Fintech are the same as banks, the difference is they administration. Credit administration is carried out
utilize technology that makes Fintech becomes more to protect both parties, namely banks or related
efficient [9]. financial institutions and clients or parties who carry
B. Rural Bank out credit. Banks or related financial institutions
Rural banks are a place to help the poor in conduct credit administration to avoid the risk of
alleviating poverty by providing loans and firsthand default, while the client is making more obligation
information of the needs and enthusiasm of poor commitments that cannot be settled in auspicious
people [27]. In Indonesia, rural banks are commonly way [27]. There are 4 types of banking credit
referred to as Bank Perkreditan Rakyat (BPR), and products, which are Micro-finance loans, SouSou
can be categorized as small banks that usually loans, Salary loans, and Commercial loans.
finance small and medium enterprises (SMEs). Rural D. Loan of Portfolio
banks are one of the main financial intermediary Loans are the main sources of profit among
entities for the SMEs [34]. The basic function of rural banks [34]. Loan risk can be classified into pass,
banks is to meet the financial pressures of middle other loans especially mentioned (OLEM),
and small entrepreneurs, farmers, and savings substandard, doubtful and loss. To determine the

level of loans on rural bank, it can use the NPL ratio. models provided by Fintech are effective forms from
Liquidity and profitability in banks can be seen with the utilization of technology that will be a demand in
an increase or decrease on NPL, the higher the value the future for the community. When community
on NPL in the loan portfolio of bank indicates there demand can be fulfilled, this makes the community
is a greater risk [1]. The presence of moral hazard or begin to switch to using Fintech in conducting
risk in the banking sector can also be identified transactions especially in credit loans [32]. In a
through the NPL level at the bank [8]. research that conducted a survey among financial
In the profitability, the aspect of performance of executives, found that collaboration between
a bank can be captured through Return on assets traditional financial institutions and Fintech startups
(ROA) and this is the ratio of net income to total could provide new ideas into their business. It is a
assets [11]. The company measures the level of positive impact for financial institution such as rural
effectiveness in generating profits by exploiting its banks, because from collaboration with Fintech
assets, this is obtained from income in the startup can generate a new profit that can increase
company's operations which is calculated using ROA company's ROA [19]. By embracing Fintech, rural
[13]. To assess the liquidity can use LDR, means a bank can reduce operating cost [16].
ratio between loan that is distributed and total Fintech provide better services to their
deposit from the bank creditor. The emergence of customers, such as reduce the number of
Fintech brings convenience in loans, the Rural Bank middlemen that a person must pass through to get
needs to see the ability of asset liquidity to avoid service from buyer to seller, help tailor payment
illiquid assets. It can be measured by NLTA ratio, amounts to individual participation levels, and
which means an increased percentage of the total facilitate higher payment frequencies. It became
assets is tied up in loans [35]. threat for traditional banking service because the
E. Hypothesis Development easier people to lend money from Fintech, the more
Fintech adds credit modelling. An increase in often they will do it. Therefore, it led to reduce in
financial inclusion marked by an increase in loan bank deposits. Debtor are more likely to distribute
ratings obtained by several borrowers is the result money to Fintech which causes a reduction in the
from the emergence of Fintech. It can make level of bank liquidity. The decline in the level of
borrowers more often to take loans at Fintech, so bank liquidity has an impact on the percentage of
that the borrowers are not on time to pay loans at LDR. It gives a negative impact on the bank [4].
rural banks. As a result, non-performing loans at Fintech provide convenience to individual low
rural banks has increased. They also stated that income to take loans and rural banks face a decrease
credit in banks has a complexity in providing loans in funds from third parties [24]. However, the
[15]. Therefore, Fintech provides a place for performance of banks is greatly assisted by existing
borrowers or businesses that do not get loans at the innovations in digital finance for the long-term
bank or they are rejected by the bank because they impacts [30].
cannot fulfill the requirements to take loans in Fintech is growing quickly, steadily, and it can be
traditional banking [22]. On the other hand, in supplement for the present financial industry to
exchange for providing funds, the insights possessed serve SME borrowers neglected by most banks, and
by startup companies can be utilized by traditional able to help exist lenders to assess the financial
financial institutions, the purpose is that they are not conditions of millions of consumers, smaller
obsolete and keep up with technological businesses, and make smarter lending decisions
developments. It means the emergence of Fintech [20]. Joint ventures or other types of alliances can be
can help Rural Banks become more efficient. The made between Fintech and traditional banks.
positive relationship between rural banks and Through this joint ventures or partnership, banks
Fintech can make the borrower carries out credit can fulfill obligations in providing funds to third
smoothly and reduces the value of delinquent or parties [36]. Another research found that payment
decrease the value of Non-Performing Loans. services provided by Google, Amazon, and Apple run
A decline in ROA due to the emergence of into rapid growth. In addition, since the launch of
Fintech in banks also occurred in the US [14] and in Amazon lending services in 2011, this service has
commercial banks in China during 2014 to 2016 [38]. grown steadily. In fact, digital financial services are
Incumbent companies such as rural banks can obtain also available on social media and utilize the
a significant threat with the emergence of Fintech technology that knows the characteristics of its
that continues to grow and penetrate deeper in the users. Through these findings, Fintech has the
daily scenario of its customers. The new era when potential to disrupt established financial
technology began to be used to provide services that intermediaries and incumbent companies [37].
were needed and could be accepted by community Based on the theories and previous studies, the
easily and directly or indirectly created new ways for hypotheses are as follows:
society, so this made the emergence of new H1: There is a difference before and after the
cultures. New business schemes and new business emergence of Fintech on NPL in rural bank

H2: There is a difference before and after the IV. RESULTS AND DISCUSSIONS
emergence of Fintech on ROA in rural bank
H3: There is a difference before and after the To test the hypothesis, researcher look the result
emergence of Fintech on LDR in rural bank from the table III. In table III, it shows that hypothesis 1
H4: There is a difference before and after the and 2 are accepted. This result is supported with previous
emergence of Fintech on NLTA in rural bank research that stated Fintech have similar market segment
with rural bank, which is Fintech in line with the value
III. METHODOLOGY chain of a traditional bank, and financing is by far the most
important segment of the emerging Fintech market [5].
Population in this research are conducted on rural And this finding also confirm the previous research, which
banks in Indonesia. Financial Services Authority in stated the credit facilities for consumers at a lower cost
Indonesia report that until September 2018, there were and Fintech facilities made it easier for borrowers to make
1,598 rural banks that spread throughout Indonesia. The loans. It causes a decline in profits at the Rural Bank,
rural bank samples were selected by considering the because the borrower cannot pay off the loan which
following criteria: causes an increase in the NPL [15]. In addition, Fintech
firms have other potential cost advantages which may
a. Rural banks registered in the Financial Services partially offset advantage of banks such as lower
Authority and Indonesian Bank regulatory costs and more effective utilization of
b. Rural banks that publish their annual financial information technology [28].
statements from 2013 until 2018. Another research stated that Fintech disturbs
c. Rural banks that have assets of 25 billion traditional banking services especially in providing credit
rupiahs to 1 trillion rupiahs and this disruption was evidenced by the success of the
d. The sample companies have complete data. Fintech company called Lending Club in the US, which
Based on the four criteria, this research obtained 76 resulted in a decrease in ROA for traditional banks [14].
rural banks with 50 rural banks which have complete data, Research conducted in commercial bank in China, stated
and there are 38 samples Rural Bank that can be used in that there is a change in the scenario in the financial
this research. The data in this research was secondary services business, where the Rural Bank gets a threat from
data collected from financial services authority (FSA), the emergence of Fintech [38]. The impact from the
Indonesian bank (BI), and library research. The emergence of Fintech also found in the previous research
investigation was conducted in 2013-2018. The variables which stated, the emergence brings new ideas for rural
of this research were NPL, ROA, LDR, and NLTA, which banks [19]. Fintech can help rural bank to reduce
measured in a period of three years before the operating cost, and the impact is relating to the size,
emergence of Fintech and three years after the complexity, and nature of business [16]. Therefore, the
emergence of Fintech. To test the hypothesis, this emergence of Fintech is disrupting the rural bank, and it
research employed paired sample t-test. The use of can be seen from the increasing NPL and decreasing ROA.
variables can be seen on table I and table II. However, hypotheses 3 and 4 are rejected which
means there is no difference before and after the
Table I. Variables before the emergence of Fintech emergence of Fintech on LDR and NLTA. This result is
opposite to previous research which stated that there are
ANPLBF Average Non-Performing Loan differences before and after the emergence of Fintech.
Before Fintech The results obtained from this research test during 2013-
AROABF Average Return On Asset Before 2018 indicate that rural banks still have sufficient liquidity
Fintech for their business expansion and only a few assets are
ALDRBF Average Loan To Deposit Ratio bound in the loan.
Before Fintech Based on previous research and test results in this
ANLTABF Average Net Loan To Total Asset research, it can be concluded that the emergence of
Before Fintech Fintech influences asset quality and profitability of rural
banks, but it does not influence the liquidity of Rural
Banks. Therefore, there is no difference before and after
Table II. Variables after the emergence of Fintech the emergence of Fintech on the liquidity of rural banks.
ANPLAF Average Non-Performing Loan Table III. Variables Comparison Before and After the
After Fintech Emergence of Fintech
AROAAF Average Return On Asset After
Fintech Indicator Means Significance Conclusion
ALDRAF Average Loan To Deposit Ratio ANPLBF – 2.05 - 0.000 Accepted
After Fintech ANPLAF 3.07
ANLTAAF Average Net Loan To Total Asset AROABF – 4.22 - 0.001 Accepted
After Fintech AROAAF 3.71

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