Indonesian Bank`s Service Improves Despite Profit Decline    
Industry News
27 Apr 2006
, Banks performance in 2005 was weaker compared to previous year due to the rising of non-performing loans (NPL). Despite national banks’ profitability declined due to unfavorable macro economic condition, there is no sign banks scaled down their efforts to spoil their customers. Survey conducted by Marketing Research Indonesia (MRI) shows that the level of first tier banks’ service quality is better compared to previous survey, conducted two years ago. A State-Owned Bank made a surprise by managing to secure a position in the top 10 Banks with Excellent Service.

BANKS do realize that service is the most effective tool to win the competition battle in the banking industry. Service becomes even more important as Deposit Insurance Company (LPS) will only guarantee deposits of up to a maximum of Rp100 million. As a result, competition to win third party funds will continue to intensify. Depositors are likely to avoid banks that show poor reputation and service. Is banking industry’s move to improve service quality related with the plan to establish a bank mediation agency? Is there any new trend in the way banks serve their customers?
The 2005 calendar was a cloudy year for banking industry. Although bankers’ hardworking managed to boost loan growth by 22.6%, banks’ profit, however, declined. The profit fall was the first time since national banking industry recovered from crisis in 2000. Based on Bank Indonesia report, banking industry’s profit last year reduced by 15.5% to Rp24.89 trillion from Rp29.46 trillion in 2004. Banks’ performance last year was also harmed by the increase of non-performing loans (NPL), which reached 7.56%.

The banking industry’s weaker performance was not without reason. The drastic increase of inflation rate last year has caused interest rate to go up. In addition, the sharp rise of fuel price (BBM) has damaged Indonesia’s macro economic condition, which ultimately caused difficulties for banking industry to operate. Besides having to shoulder high operational cost, banks must also pay higher cost for funds. Borrowers capability to repay their debts was also affected due to loan rate increase. As a result, banks NPL increased. The banking authority’s regulation to treat the quality of productive assets equal also contributed to the increase of NPL, in particularly for large-sized banks.

The trend of the rising of banks bad loans must be watched out. Banking industry’s level of NPL in 2005 has passed Bank Indonesia’s maximum limit of 5%. The NPL level also affects banks’ performance, at the time the banking industry is challenged by regulator to consolidate. At the same time, banking industry in Indonesia is entering a new phase that requires banks to rely on their own capability following the establishment of Deposit Insurance Company (LPS), which began operating on 22 September 2005.

With the implementation of LPS, banks must be able to gain trust from their customers. One factor, usually considered by depositors before putting their money in a bank, is financial performance of the bank. The implementation of LPS will enter second stage from March to September 2005, where maximum deposit that will be guaranteed is up to Rp5 billion. However, six month later, the amount of deposits that will be guaranteed is reduced to Rp1 billion. Starting from April 2007, banks will face new challenge, as LPS will only guarantee bank deposits of a maximum of Rp100 million. Banks must guarantee all remaining depositors funds placed in the banks by themselves. This mean, credibility of a bank will determine public’s trust on the bank.

This new rule will result in stiffer competition. Banking industry will transform into a hot battlefield for all banking industry players. The systemic effect in the form of migration of funds may happen. Banks therefore must be prepared for such situation. Banks that have poor reputation, and worsened by their poor financial performance, must take anticipatory measures to ensure their customers are not leaving their banks. Under this stiffer competition era, it is the customers who hold the key. Customers are free to choose banks they trust.

Therefore, the real battlefield is actually in the minds of customers. Banks must be able to create good impression of their banks in the minds of customers. Good reputation, which supported by superior service, will become the most effective tool to win depositors’ funds. Chance to win customers funds will be greater if banks’ financial performance is in good shape. Public will feel more comfortable in placing their money in such banks.

Under such changing banking business environment, banks have no choice but must provide excellent service to their customers. Although efforts to increase profit seems to be more difficult, while on the other hand banks’ NPL are rising, banks are still striving to provide excellent service to their customers. This is important, as a bank’s good image will stay in the heart and minds of customers if they satisfied with a bank’s service.

Providing service to customers is in line with efforts to protect the interest of customers as stipulated under the Bank Indonesia Regulation (PBI) No 8/5/PBI/2006 on Banking Mediation. The plan to establish a banking mediation agency has forced banks to prepare and care enough to respond to complaints aired by customers.
Therefore, it is essential for banks to maintain and improve their service quality to prevent complaining from customers. If banks declined to respond to any customers’ complaints, or ignore any complaints aired by customers, banks are facing the risk of ruining their banks’ reputation. With the implementation of LPS, banks are required to stand on their own feet. Banks must realize that it is difficult for them to survive if their reputation is poor.

A survey conducted by Marketing Research Indonesia (MRI), held from November 1, 2005 until January 30, 2006, measuring the service quality of 20 banks, generally show improvement. The survey was carried out by using mystery shopping method. Based on survey, 10 banks were voted by customers to have the best services with their own uniqueness. Although the 10 banks show improvement in service quality, their position however changed from previous’ survey. Some banks moved up the ladder, while others moved downward as their position is taken over by other banks.

Bank Danamon, which was voted as the most excellent service bank two years in the row, now must be satisfied to stay in the second position. PermataBank under the current survey secures the top position in term of service, rising from second position in previous survey amid continuous improvement of service. PermataBank’s score rose to 89.13, higher than Bank Danamon’s score of 87.17 points.

The new management of PermataBank seems to inherit with good service from the previous management headed by Agus D.W. Martowardojo, who was appointed to take the top position at Bank Mandiri. Since becoming CEO of PermataBank, a result of merger of five banks (Bank Bali, Bank Universal, Bank Artha Media, Bank Prima Express, and Bank Patriot) in 2003, Agus and his management team worked very hard to adopt good values and corporate culture in the bank. As a result, the PermataBank service in the eyes of customers has consistently improving every year. It is not surprising if PermataBank is voted by customers to have the most excellent service for this year, as shown by the MRI survey.

Many theories say that leadership plays a pivotal role in motivating members of an organization. The presence of Agus Martowardojo in Bank Mandiri has brought fresh and new spirit in the area of providing good service to the bank’s costumers. The giant bank, according to the result of the service excellence survey, was not in the Top 10 in term of service in previous’ MRI survey. Now the bank secures the third position in term of service quality provided to its customers.

It is interesting to note that such achievement was accomplished at the time the bank is facing with rising non-performing loans left behind by the previous management, headed by E.C. W. Neloe. “We thank God, that achievement in service area has become a consolation for us, and should encourage us to do things even better,” said Agus during a meeting with Infobank in mid March.

Bank Mandiri’s achievement to secure the third position for the quality of service provided to customers is a surprising development. Since the service excellence survey conducted by MRI in 2001 and published by InfoBank Magazine, this is the first time a State-Owned Bank that secured such prestigious position. Previously, private and foreign banks secured all the Top 10 Banks with Excellent Service.
It is a fact, however, that out of 20 banks surveyed by MRI in Jakarta and Semarang, private banks still dominate the list of 10 banks with excellent service. The 10 banks are, (1) PermataBank, (2) Bank Danamon, (3) Bank Mandiri, (4) Bank Niaga, (5) Bank NISP, (6) Citibank, (7) Bank Bukopin, (8) Bank Mega, (9) Hongkong and Shanghai Banking Corporation (HSBC), and (10) Bank Central Asia.

Bank Mandiri’s success to be among the Top 10 Banks with Service Excellence, is considered as a momentum for the bank to eliminate perception that State-Owned Banks are not good enough in providing service to their customers. Such momentum should stimulate other State-Owned Banks, such as Bank Negara Indonesia (BNI), Bank Rakyat Indonesia (BRI), and Bank Tabungan Negara (BTN) to be on the same level playing field with private and foreign banks in term of service quality.

It is clear that private banks must continue their passionate in providing the best service to their customers. Otherwise, be ready to be overtaken by other players as other players are striving to improve their service quality. Just look at the experience of Bank Niaga, which won the top service excellence in the 2001 and 2002 survey. Its position declined to second position, then third and this year the bank moved down the ladder to fourth position. The position decline, however, does not mean that Bank Niaga’s service was not improving. Bank Niaga’s score in this year’s survey reaches 85.91 points, higher when the bank secured the top position, with score of 85.36 points in 2001 survey.

Previous survey’s winners lost out their position as their competitors have made significant improvement in service area. Under the current tight competition, all banks are always trying to keep a close eye on other banks and striving to provide the best service to their customers. The first-tier banks usually have a special division to monitor service provided to customers. Bank Bukopin, which maintains its seventh position with previous’ survey, for instance, has a special division which oversees customer service, which supervised directly by a Director.

According to Tri Joko Prihanto, Director for Operation of Bank Bukopin, the task of service division in the bank includes developing service standard in all of Bukopin’s branches. “The division conducts internal survey whether the current service is up to the standard or not. The division may also conduct a survey on service quality provided by other banks,” he told InfoBank at his office in mid March.

Lessons that can be learned here is that banks must continuously improve their service, including banks that have been voted to pose the most excellent service by customers. PermataBank as the champion for service excellent in the current survey can be an example for other banks. Although the result of Trisakti Institute of Service Management Studies (ISMS) last year recorded that PermataBank customers feel most satisfied with the bank’s service compared to customers in other banks, PermataBank has never stopped its efforts to improve its service. This has paid off, the bank not only wins the service excellence survey, but the score recorded by the bank is higher than the score of the winner of the MRI’s previous service excellence survey.

All aspects of banks’ service provided to costumers continued to be improved, such as the teller unit, customer service, security officers, call center, physical condition of the branch office, electronic delivery-channel, etc. “What is important is continuous improvement,” said Mahdi Syahbuddin, Managing Director PermataBank to Enny Ratnawati from InfoBank in mid March.

According to Mahdi, the improvement carried out by the bank is focused more on human resource aspect, in particularly the front office staffs who hold important role in providing service to customers. “What we do, first is training. Second, coaching. Thus, what is important is how branch office head undertakes coaching to his or her subordinates,” he said.

Many banks decide to make their front-liners as ‘shining’ as possible to maintain their customers trust. Indeed, it is the front-liners that become the gateway for banks to touch the minds and hearts of their customers. However, the main challenge ahead is not merely a friendly smile of a teller officer, customer service or security officer, or a cozy and comfortable office building, but also the capability of electronic channel (e-channel). E-channel, which functions as distribution channel supported by advance information technology (IT), complements the traditional channel such as branch office.

Besides personal touch of front-liners office staff and physical aspect such as comfortable office, e-banking service has also spoilt customers, who always expect helpful service from banks. Furthermore, the advancement of IT application should reduce customers’ complaints.

Therefore, besides measuring the ATM performance, the MRI survey also measures the new e-banking service, which covers phone banking, internet banking and SMS banking. This is because e-banking is getting more important in the eyes of customers, in particularly for certain segment of customers such as young professionals, who have felt comfortable in using e-banking to make transactions. This trend is supported by the declining of concern over security when carrying out transaction through e-banking. The security of electronic transaction today is more secure than before.

The advancement of IT in a bank has become a parameter for the maturity of a bank. Banks that dominate the market at the moment are competing to improve their IT infrastructure. Last year, total IT spending of banking industry reached US$1 billion. Jos Luhukay, President Director of LippoBank said IT investment in the future is predicted to reach approximately 40% of banks capital expenditure. Large size banks like Bank Mandiri, allocates IT spending of US$30 million plus Rp40 billion in 2006. While, Bank Permata’s IT investment this year is estimated to reach US$5 million and Bank Niaga expects to spend Rp150 billion to upgrade its IT infrastructure.

The IT need is becoming more and more important partly due to implementation of Indonesian Bank Architecture (API) and Basel Accord II. Not only that, by having advanced IT system, banks will be able to maintain and keep growing under the globalization era. The establishment of a strong IT infrastructure will also support electronic delivery channel, the impact of which not only strengthens banks’ service quality but also improves their customer base.

With a strong and loyal customer base, banks will be stronger although banks have to fight in the deadly competition battlefield. When the interest rate level rises, banks do not need to engage in interest rate war so that they do not need to shoulder expensive cost of fund. They realize that loyal customers would not be easily seduced by higher interest rate of deposits and gifts.

Banks, which ignore service and only attract customers with high deposit rate to win depositors’ money, must shoulder expensive cost of funds. In order to reap profitability, loan rate that is offered by banks become less competitive and increase banks’ risks. When the macroeconomic climate is cloudy and uncertainty prevails in real sector, banks could encounter with rising NPL level.
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