Contributed By Assegaf Hamzah & Partners
Traditionally, the term ‘financial technology’ (FinTech) refers to financial services innovation that aims to help people to conduct their day-to-day business and activities. Now, though, along with the vast emergence and adoption of the traditional form of FinTech, as well as its impact on the financial industry as a whole, the definition of FinTech has expanded so as to be applicable in every aspect of the financial transaction ecosystem.
FinTech start-ups are growing in Indonesia and by the end of 2018, there were at least 161. Popular FinTech industries in Indonesia include digital payment, money transfer, lending, crowdfunding, InsureTech, personal finance, online wealth-management and blockchain.
The growth of FinTech start-ups is driven by key factors such as Indonesia’s large population – being the fourth largest in the world, with large numbers of active social media users – high internet penetration, high mobile-phone subscriptions and high gross domestic product growth compared to other neighbouring countries.
In the last ten years, Indonesia’s e-commerce boom has led FinTech start-ups, particularly digital payment start-ups, to grow significantly. Many digital payment start-ups have been set up and launched to provide solutions to e-commerce platforms to manage and organise payment transactions, and to increase transaction volume. It is hoped that the increased adoption of digital payment will eventually lead the Indonesian public to go cashless.
To date, Indonesia has seen the launching of various digital payment instruments and solutions such as e-money and e-wallet products and services. Examples of these products are Ovo (Lippo group) and Dana (EMTEK group). In the past year, Ovo and Dana have been active in introducing and launching products, services and promotional activities to gain more customers and increase transaction volume. Each of them has also collaborated with e-commerce platforms, namely Tokopedia and Bukalapak, which are Indonesia’s unicorns. Another e-money solution, GoPay (GoJek Group), has claimed to have the largest market share at the moment. GoPay is also very active in the market, particularly in collaborating with various merchants and vendors.
Indonesia’s e-commerce boom has also led to an increase in the number of payment gateway-providers in the market. Midtrans and Kartuku are among the big rising payment gateway-providers. Another smaller player, Moka, has also seen increased transaction volume, especially among smaller merchants and vendors.
Some Indonesian domestic banks have also joined the digital innovation; for example, BTPN, which has developed a digital platform called Jenius. DBS Indonesia has also launched digibank, a completely paperless and signature-free banking experience.
Equally important in the FinTech industry is the peer-to-peer (P2P) lending platform, which has been rapidly developing in the last two years and is continuing to grow. By the end of 2018, there were at least 88 peer-to-peer lending platforms registered with the Financial Services Authority (OJK). Players such as Investree, Modalku and Amartha have been receiving a warm welcome from the public and are anticipated to provide access to financing for micro, small- and medium-sized enterprises, which are traditionally perceived to have low productivity, despite being one of the biggest domestic revenue contributors to Indonesia, due to limited access to financing.
All in all, there was at least USD177 million of disclosed FinTech investment made in Indonesia by 2017 and a projected transaction value of USD23 billion by 2018, which grew by 16% annually. Investors in FinTech business are not only private and institutional investors, but also big banks such as Bank Mandiri. Through Mandiri Capital Indonesia (MCI), Bank Mandiri has invested in numerous FinTech start-ups, particularly those involved in payment options, P2P lending and small enterprise solutions. As evidenced by Bank Mandiri’s involvement, big banks can provide a huge boost to FinTech start-ups as they have financial expertise and access to a vast network of merchants and customers.
The traditional financial sector is, however, growing at a slower pace than the aforesaid growth, as the banked population remains very low. In light of this, the Indonesian government has tried to integrate FinTech in its roadmap with the aim of increasing financial literacy and banked population as well as strengthening the national and credit banks and micro-finance institutions. The implementation of this integration is, of course, not without its challenges, one of which, ironically, comes from the government’s attempt to regulate and keep up with the development of the FinTech industry.
Generally, the Indonesian government prefers to regulate any business (including FinTech) at the outset rather than later, following close observation of the operation of the business. The government’s policies are sometimes adopted based on practices of well-established banks, non-bank institutions and the capital market. Coupled with the government’s inclination to change policies from time to time, however, these policies often provide an operational hurdle to FinTech players, particularly to small-scale players, and restrict innovations and fund-raising opportunities of the relevant FinTech players.
Further, most of these policies are not available in a written form that is easily accessible to financial technology-providers and implementation of the said ‘verbal’ policy can suddenly be applied during the registration process (in the form of a response letter to the registration application) or from time to time during the supervision process.
Various government agencies have enacted regulations on FinTech and introduced several sandbox programmes. In light of this, the World Bank has ranked Indonesia as the country with the most improvement in bringing its public into the formal financial system in the past three years. Bank Indonesia (BI) and OJK, being the central bank and the Financial Services Authority respectively, are actively responding and supporting the growth of FinTech in Indonesia.
Traditionally, BI regulates and supervises the payment system, while OJK regulates and supervises the capital market, banks and non-bank institutions. Hence, in the FinTech industry, BI regulates and supervises FinTech players involved in the payment system, such as e-wallet and e-money issuers, payment gateway-providers and principals, switching providers, acquirers, clearing houses and settlement agents. However, OJK regulates and supervises FinTech providers in the financial services sector, such as P2P lending, equity crowdfunding, InsureTech, investment management and others. Other government agencies, namely the Ministry of Telecommunication and Information Technology of the Republic of Indonesia (MOCIT) and the Commodity Futures Trading Regulatory Agency (Badan Pengawas Perdagangan Berjangka Commodity, or BAPPEBTI), have also started showing an interest in regulating and supervising IT and telecommunications innovation and cryptocurrency commodities trading respectively, despite BI and OJK’s restriction on the use of cryptocurrency as a payment instrument in Indonesia.
Payment system and instruments
Since 2016, BI and OJK have enacted various regulations on FinTech. In 2016, BI enacted new regulations that focused on payment instruments and payment transaction processing, namely e-wallet, payment gateway and switching. Every e-wallet, payment gateway and switching provider must obtain licences from BI. Further, BI requires all payment transactions occurring in Indonesia to be processed domestically, which means that the database must be located in Indonesia and must be approved by BI.
In 2017, BI introduced the National Payment Gateway (NPG) concept with respect to domestic transactions. In relation to this, BI has taken a key role as the settlement agent for domestic transactions. While relatively new in Indonesia, NPG is not a new concept in the domestic payment environment for other countries. Russia, India and Malaysia have created and implemented their own NPG scheme long before Indonesia. Currently, BI is focusing on NPG implementation for ATM and debit card payment transaction-processing. With the introduction of NPG and the payment transaction-processing scheme and regulation, BI has tightened the foreign shareholding limitation in the payment transaction-processing business – particularly the back-end transaction-processing business, namely principal, switching providers, clearing house and settlement agents – to a maximum of 20%. This restriction forces foreign back-end transaction-processing business players to refrain from investing in the domestic payment transaction processing business.
In 2018, BI enacted a new regulation on e-money as an amendment to the initial e-money regulation that was enacted in 2009. This new regulation is a game changer to the e-money business in Indonesia due to the tightening of the foreign shareholding limitation and requirement for the controller of the business to maintain control in the e-money issuing company for a certain period of time. BI also requires every product, initiative and collaboration to be carried out by payment transaction-processing providers to be approved by BI, which restricts the moves and initiatives of the business players, particularly small-scale players.
In 2016, OJK enacted regulations on P2P lending. A P2P lending facilitator must first be registered with OJK. Upon obtaining a registration certificate, the P2P lending facilitator must then apply for a licence within one year as of the date of its registration certificate. The P2P lending business has been gaining more popularity in Indonesia. By the end of 2018, there were at least 88 peer-to-peer lending platforms registered with OJK. Many domestic and foreign investors have also invested in registered P2P lending facilitators. To date, however, OJK has issued only one licence to a P2P lending facilitator, DANAMAS (part of the Sinarmas group, one of the largest conglomerates in Indonesia). Other registered P2P lending facilitators are still waiting for OJK’s decision in relation to their licence, without certainty of timing and approval.
As part of FinTech inclusion in its roadmap, OJK has been conducting a roadshow throughout Indonesia by way of market visits, training and education to encourage micro-, small- and medium-sized enterprises to participate in borrowing through P2P lending platforms. Going further, OJK even requires registered P2P lending facilitators, with assistance from the Indonesia FinTech Association, to provide financial literacy education to micro-, small- and medium-sized enterprises, including making provision of financial literacy education as part of the licensing requirement.
OJK is also proactive in carrying out its supervision task. In 2018, OJK forced domestic and foreign unregistered P2P lending facilitators that conducted business in Indonesia to shut down or be registered with OJK.
Numerous banking and financial regulations and policies have been implemented to P2P lending facilitators, from anti-money laundering and terrorism-financing preventive measures, and International Standards Organisation-proven solutions, to non-performing loan management; creating a challenge for the facilitators in developing their business.
OJK closed 2018 by issuing an equity crowdfunding regulation. OJK regulates the direct offering of shares to investors (Equity Crowdfunding) through an open electronic system platform. This regulation is ultimately aimed at boosting economic growth in Indonesia by providing access to start-up companies and SMEs in raising funding electronically for the development of their business. This OJK regulation applies to any offering of shares or other equity securities (as determined by OJK) by an issuer (Issuer) directly to investors through an electronic platform that is managed and operated by a provider (Provider). The offering of a company's equity securities through Equity Crowdfunding is not considered as a public offering as defined under the Capital Market Law if:
Further, the Issuer is not deemed as a public company under the Capital Market Law if the number of shareholders of the Issuer is fewer than 300 and the paid-up capital of the Issuer is less than IDR30 billion. The parties involved in the Equity Crowdfunding will be subject to OJK's supervision. While this regulation is relatively new, OJK will still need to enact implementing regulations on the registration process and organisation of Equity Crowdfunding.
IT and cryptocurrency commodities
Since 2012, all electronic system-providers must be registered with MOCIT. This requirement is aimed at providers of public services, such as those involved in public goods procurements.
While BI and OJK prohibit cryptocurrencies from being used as a payment instrument, BAPPEBTI allows crypto-assets to be traded as commodities in the commodities exchange. In order to cater to the increasing enthusiasm for crypto-assets trading in Indonesia, BAPPEBTI recently issued a regulation to legalise the crypto-asset trading market in Indonesia. This regulation is aimed to give certainty to the digital commodity market. The regulation states certain requirements that must be satisfied by parties involved in the crypto-asset trading, such as the future exchange, broker, customer, clearing and settlement institution, as well as the custodian. The requirements range from minimum capital requirement, employment of qualified human resources, to adequate internal standard operating procedures and IT infrastructure. The regulation also contains an exhaustive list of technical and non-technical requirements that must be fulfilled by the broker to ensure the security of the IT system for online trading of the crypto-assets. Prior to being traded, a crypto-asset must be included in BAPPEBTI’s list of tradeable crypto-assets in Indonesia. To be included, that crypto-asset must meet several criteria, among others, that distribution is made using ledger technology, the relevant crypto-asset is in the form of utility crypto or crypto backed-asset and the market cap size is in the top 500 worldwide (for a utility crypto-asset).
The regulation also contains the relevant trading mechanism, starting from the opening of a bank account, crypto-asset transaction, and the disbursement of crypto-assets and funds from and to the customers. Further, the regulation stipulates that crypto-assets trading must only use the Delivery versus Payment (DvP) method as BAPPEBTI restricts short-selling trading. BAPPEBTI also introduces the mandatory use of Indonesian rupiah in crypto-assets trading in Indonesia.
In the transition period (ie, one year as of the enactment of this regulation), all brokers that have conducted crypto-asset trading prior to this regulation must register themselves to BAPPEBTI. During the transition period, the brokers can only conduct limited business activities.
By enacting this regulation, Indonesia is one step ahead in acknowledging crypto-assets as an alternative investment product, a new class of commodity, for both retail and corporate investors, as opposed to being a disruption to conventional investment products. In addition, crypto-assets also provide a source of funding for companies seeking investors.
Nevertheless, in order to be perfectly implemented in Indonesia, crypto-asset trading still requires the active participation of each party involved, which, in turn, requires compatibility between the parties’ different IT systems and upholding of the security of their IT infrastructure. Yet the scope of this regulation is not intended to cover initial coin offerings (ICOs).
The Indonesian government, although relatively later compared to other neighbouring countries such as Hong Kong, Singapore, Thailand and Malaysia, has introduced its own sandbox programmes. A sandbox programme was introduced by BI in 2017 that focused on digital innovation related to payment systems. In 2018, OJK introduced its own sandbox programme, which focused more on digital financial innovation. BI’s sandbox programme is organised and managed by the BI FinTech Office, and OJK’s sandbox programme is organised and managed by OJK Infinity. BI and OJK have been encouraging FinTech innovators to register with BI or OJK since the launching of the sandbox programmes. The public have also welcomed both programmes enthusiastically.
BI and OJK’s sandbox programmes typically comprise two stages: FinTech innovators must first register with BI or OJK (as applicable) and, following registration, innovators may distribute their products and services to a limited market for up to six months as of the registration. During the registration phase, BI or OJK will analyse the impact of the FinTech innovation on payment systems and financial business. If they view that the FinTech innovation is novel and potentially disruptive to the financial system and business, BI or OJK would require the registrants to join the sandbox programme.
The completion of a regulatory sandbox may take approximately another six to twelve months as of the commencement. BI or OJK will conduct an in-depth analysis to determine the sandbox participants’ business and whether they will issue a new regulation on the business, provide leniency in terms of licensing requirements or even allow the business to operate fully without any licence, while allowing BI or OJK to observe. Compared to BI’s sandbox programme, OJK’s sandbox programme implements a group or cluster test approach in which OJK first creates groups of FinTech innovation based on similarity of innovation and OJK will then choose one innovator within one FinTech group to participate in the sandbox programme to be further analysed and scrutinised.
In reality, while there is high enthusiasm for BI’s sandbox programme, so far, BI has approved only one registrant to participate in it. BI is still conducting the analysis process on the impact of the sandbox programme participant’s business on the payment system environment and regulations. As for OJK’s sandbox programme, being relatively new, OJK’s analysis of and approach to a registrant's business impact on financial business and regulations are yet to be seen.
As evidenced by the above discussion, the laws and regulations in Indonesia are trying hard to catch up with developments in the FinTech industry. To date, various regulations and procedures, such as the sandbox programmes, have been enacted in the hope of better regulating the industry. The government’s interest, however, in seeing the growth of the FinTech industry has instead led it to take a more protective and restrictive approach. Rather than just being observant of a FinTech business's development, the government tends to control the establishment and growth of the FinTech business from the outset, leaving the business player less room to grow and innovate.
The advantages of the FinTech industry to the public, particularly to micro-, small- and medium-sized enterprises, are expected to increase the banked population and strengthen banks and other financial institutions in Indonesia. Given the dynamic nature of FinTech, start-ups inevitably would require more capital to grow and more initiatives to develop their business. Fast response and support from the government are very much required in the industry.