Fintech’s Regulatory Future

Indonesia’s culture of teamwork would help regulate and supervise the infant industry, says Hendrikus Passagi of the OJK

By Karmila Bain
Monday, July 24, 2017

Indonesia’s Financial Services Authority (OJK) plays a key role in terms of regulating and supervising the overall activities of the financial sector in Indonesia. Recently, it faces a new challenge – financial technology, commonly known as fintech.

The rapid rise in the use of fintech for a wide variety of transactions has made the job of the OJK much more challenging as it grapples with how to keep up with this burgeoning technology.

But by taking very much a proactive role – as shown by the recent enactment of the regulation on peer-to-peer (P2P) lending that was formulated through intensive dialogues with fintech players – the OJK says it is determined to benefit from the new technology, rather than outlaw the nascent industry. Indeed, Hendrikus Passagi, Senior Research Executive for the OJK Strategic Policy Development Department, told AmCham Indonesia that most of the text on the regulation came from fintech players themselves.

AmCham sat down with Hendrikus to further discuss his view on the rise of fintech in Indonesia, and the role of the OJK in both facilitating and regulating it.

AmCham Indonesia: What is the role of the OJK regarding fintech?

Hendrikus Passagi:  The OJK’s duties are to regulate and supervise financial services activities in the banking, capital market, and non-bank financial industry sectors. The objectives of the OJK, besides ensuring organized, fair, and transparent financial conduct in a sustainably and stably growing manner, are also educating and protecting the interests of consumers and society.

On fintech per se, we highlight the national financing needs--the means of how an individual or group finance their projects or activities. OJK regulates every fintech activity (except Fintech payment) that are related to banking, capital market and non-bank financial industry.

In Indonesia, P2P lending is regulated by the OJK in POJK no 77/2016, which outlines some fundamental requirements for the sector: minimum capital requirements, licensing, consumer education and consumer protection.

How does the OJK support and guarantee consumer protection in fintech?

Consumer protection is not only applicable to fintech, but also financial industry as a whole.

We aim to include fintech consumer protection because we believe it touches many people. Although the job seems to be massive, we often forget that it is much easier for the OJK to protect consumers in fintech industry rather than other conventional ones because on average, the technology deployment rate of a company in the fintech industry is 80-90%, while it is only 10-20% in the conventional industries. Therefore, it is more practicable to do real-time monitoring in fintech industry rather than in conventional ones.

How does the OJK view the rapid growth of fintech in Indonesia?

Nowadays the government is challenged to maintain economic growth while improving equality. We believe that such macroeconomic indicators rely much on the growth of the business world. Furthermore, one the main activities of the business world is trading—buying and selling goods. In coping with the dynamic business world, the government is now trying to develop what we call as e-commerce.

Responding to the government’s interest on the development of the e-commerce or trade system, the OJK takes part in facilitating the role of financing. The question is, how could OJK make a real contribution to economic growth?

We started from a basic understanding that having limited access to financing sources hinders an industry to achieve growth. Thus, the OJK sees an opportunity to solve the missing link through fintech lending.

The reasons are, firstly, P2P lending provides end-to-end lending, no middleman, and it is easier for the lender to know the borrower’s risk profile. Secondly, P2P lending minimizes the lender’s risk of losing their money so that Indonesia could gain more trust from the foreign investors.

Moreover,the most familiar financing sources for people in Indonesia are from the banking industry. From the regulatory side, related to the stability of the financial system, there exists a basic risk that cannot be eliminated – bank runs, which means the withdrawal of funds by many people at the same time. In capital markets there is something similar, which we call sale off - massive sale of capital market instruments at the same time. For the fintech lending case, the chance of of a similar risk of bank runs and sale offs is minimized by the nature of its operation. Thus fintech lending also indirectly maintains financial system stability.

Ultimately, the OJK wants fintech lending to have space to grow, and become strong enough to assist existing financial industries.

Indeed, our vision is to make fintech lending an alternative financing sources to fulfill the needs of financing while also maintain the stability of the financial system.

How has the public responded to the growth of fintech in Indonesia?

The response from the public has been quite good. Since Indonesia has a culture of “gotong-royong” or teamwork, therefore, fintech can grow and develop in Indonesia as crowdfunding is part of the gotong royong culture. Secondly, from a long time ago, gotong royong between neighbors has been common. This is not a new business model, but one modified with elements of technology.

As time goes by and the world is modernized, it is easy for the young generation to use smartphones or other technologies. I predict fintech in Indonesia will grow to 800 P2P lending organizers; today we have 40.

How do you respond to critics who say fintech lending threatens conventional banks?

P2P lending is not the same as a bank’s business model. It does not raise public funds, it only brings together two parties that need each other.

Banks raise public funds and distribute credit, therefore a bank must be very strict when doing a risk assessment.  Banks require collateral before they propose funding. However, this is something that the unbanked and some communities cannot do. They do not have the assets to start a business. Fintech offers such flexibility which banks cannot.

Moreover, if the [loan] amount and collateral is close enough to fulfill the requirement, the bank [still] cannot give you the money at that time. You have to wait until the assessment team has done their job.

Nothing is wrong. Everything is written in the POJK. We need to emphasize that fintech lending is not a competitor to banks, as they each target different people and systems.

What are the next steps for the OJK, especially on fintech?

Our main goal is that everything should be digitalized. We will continue advocating the supporting items of fintech, for instance, the implementation of digital signatures to related ministries. As the industry grows, we are keen to continue to work with other ministries as well as related regulatory bodies, to collaboratively provide both regulation and infrastructure for fintech.



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