How-to understand financial technology regulation in Indonesia

The fintech (financial technology) industry in Indonesia is currently experiencing very rapid development. This is evidenced by the large number of fintech business actors who have been registered and/or registered with the Financial Services Authority (OJK) . Based on data compiled from the OJK website as of May 17, 2022, until April 22, 2022, the total number of fintech peer-to-peer lending or fintech lending providers licensed at OJK is 102 companies.

Governing law and regulation 

• Law No. 8/1999 concerning Consumer Protection
• Law No. 11/2008 concerning Information and Electronic Transactions as amended by Law No. 19/2016 
• Government Regulation (PP) No. 71/2019 concerning the Implementation of Electronic Systems and Transactions 
• Regulation of the Financial Services Authority (POJK) No. 18/POJK.07/2018 concerning Consumer Complaint Services in the Financial Services Sector Code of Conduct for Responsible Information Technology-Based Lending and Borrowing Services
• Regulation of the Financial Services Authority (POJK) No. 77/POJK.01/2016 concerning Information Technology-Based Lending and Borrowing Services
• Regulation of the Financial Services Authority (POJK) No. 13/POJK.02/2018 concerning Digital Financial Innovation in the Financial Services Sector
• Regulation of the Financial Services Authority (POJK) No. 37/POJK.04/2018 concerning Crowdfunding Services through Information Technology-Based Stock Offerings (Equity Crowdfunding)
• Bank Indonesia Regulation (PBI) No. 19/12/PBI/2017 Year 2017 Implementation of Financial Technology

Introduction

Fintech is an innovation in the financial services industry that utilizes the use of technology. Based on Article 1 of PBI No. 19/12/PBI/2017 concerning the Implementation of Financial Technology, it is explained that Financial Technology is the use of technology in the financial system that produces new products, services, technology, and/or business models and can have an impact on monetary stability, financial system stability, and/or efficiency, smoothness, security, and reliability of the payment system. Fintech products are usually in the form of a system built to carry out specific financial transaction mechanisms. Several fintech products that have developed a lot in Indonesia at this time and have been regulated by the OJK are Information Technology-based Lending and Borrowing Services (LPMUBTI or Peer-to-Peer Lending), Digital Financial Innovations (IKD), and those that are currently starting to grow to be developed is Crowdfunding Service Through Information Technology-based Stock Offering (equity crowdfunding).

Legal aspects in fintech business establishment

1. Legal Framework (Legal Framework). What must be considered in this legal framework is the determination of the type of fintech and the relevant fintech legal corridors.
2. Corporate Aspect. In the corporate aspect that needs to be considered are the form of business, ownership, and capital as well as changes in ownership including share ownership by foreign parties.
3. Aspects of Licensing and Legal Compliance. In this aspect, business actors must pay attention to registration and licensing at the OJK as well as registration as an electronic system operator at the Ministry of Communications and Information, including the obligation to report periodically to OJK and legal prohibitions and sanctions.
4. Employment Aspects. Business actors must also pay attention to the qualifications of human resources in the fintech business, one of which is the obligation to have employees who have expertise in the field of information technology.
5. Electronic System Aspect. In this aspect, it is necessary to pay attention to the governance of information technology systems, data centers and disaster recovery centers, data confidentiality, audit track records, security systems.
6. Governance, Risk and Compliance Aspect. Fintech must develop and adopt good governance, effective risk management, and compliance to all rules and regulations to ensure a safety and sound practice.
7. Monitoring and Surveillance Mechanism. Though regulated and supervised by OJK, fintech must also conduct risk self-assessment. During the regulatory sandbox, they must submit quarterly performance reports; once these are registered, the firm must submit a monthly risk self-assessment report. Fintech firms must also continuously report to customers about the performance of their portfolio.
8. Customer Protection Aspect. Fintech firms must apply the following basic principles of customer protection including transparency, fair treatment, reliability, data privacy and security, as well as effective and efficient handling of customers’ complaints. It must also comply with Law No. 8/1999.

Fintech activities in Indonesian payment system and financial services system

1. E-Money

Electronic Money (e-Money) is a means of payment that meets the following elements: 

• Issued on the basis of the value of money that was deposited in advance by the holder to the issuer;
• Value of money is stored electronically in a medium such as a server or chip;
• Used as a means of payment to merchants who are not the issuers of the electronic money; and
• The value of electronic money deposited by the holder and managed by the issuer is not a deposit as referred to in the law governing banking.

Further rules for e-Money activities are regulated in PBI No.11/12/PBI/2009, PBI No.16/8/PBI/2014 and PBI No.18/17/PBI/2016 concerning Electronic Money.

2. E-Wallet:

Electronic Wallet (e-Wallet), hereinafter referred to as Electronic Wallet, is an electronic service for storing data on payment instruments, including payment instruments using cards and/or electronic money, which can also accommodate funds, to make payments. The further rules for this e-Wallet activity are regulated in PBI No. 18/40/PBI/2016 concerning the Implementation of Payment Transaction Processing.

3. Payment Gateway

Payment Gateway is an electronic service that allows merchants to process payment transactions using payment instruments using cards, electronic money and/or Proprietary Channels. The further rules for this Payment Gateway activity are regulated in PBI No. 18/40/PBI/2016 concerning the Implementation of Payment Transaction Processing.

4. Peer to Peer (P2P) Lending

Information Technology-Based Borrowing and Borrowing Services is the provision of financial services to bring together lenders and loan recipients in order to enter into lending and borrowing agreements in rupiah currency directly through an electronic system using the internet network. The further rules for P2P Lending activities are regulated in POJK No. 77/POJK.01/2016 concerning Information Technology-based Lending and Borrowing Services.

5. Mutual Fund Marketplace or Marketplace Reksadana

Mutual Funds Selling Agent is a Party that sells Mutual Funds based on a cooperation contract with the Investment Manager who manages the Mutual Funds. Further rules for Mutual Fund Marketplace activities are regulated in POJK No. 39/POJK.04/2014 concerning Mutual Fund Selling Agents.

6. Insurance Marketplace or Marketplace Asuransi

Insurance Broker Company is a company that provides consulting and/or intermediary services in the closing of insurance or sharia insurance and the handling of claims settlement by acting for and on behalf of the policyholder, the insured, or the participant. The further rules for this Insurance Marketplace activity are regulated in POJK No. 69/POJK.05/2016 concerning the Conduct of Insurance Company Business.

Criteria for fintech business activities

Based on article 3 of PBI No. 19/12/PBI/2017 concerning financial technology, this financial technology must meet the following criteria:

1. Innovative
2. May impact existing products, services, technology and/or financial business models
3. Can provide benefits to society
4. Can be used widely
5. Other criteria set by Bank Indonesia

Key content of fintech regulation

Currently, there are two authorities that regulate fintech in Indonesia. Bank Indonesia regulates fintech related to payments, while OJK regulates all fintech that provides financial services, such as digital banking, P2P lending, crowdfunding, insure-tech, investment, and market aggregators. OJK issued POJK No. 13/POJK.02/2018 as a legal umbrella for all types of fintech. It was designed as a principles-based regulation for the fintech industry and aims to create responsible digital finance innovation.

All fintech companies that are not regulated by other authorities must comply with OJK regulations and follow three main steps:

1. Recording. Fintech companies must submit all required documents to OJK for verification and analysis to decide whether they meet the criteria as an innovator and meet the provisions of the OJK, selected to be tested on a regulatory sandbox; and in which cluster they are classified based on the business model mapping.
2. Regulatory Sandbox. The regulatory sandbox is carried out using sampling and prototyping methods, where selected fintechs from each business model (cluster) are tested. There are five key steps involved in understanding business models, business processes, and governance, selecting a review methodology and scenario, testing and experimentation, model improvement, and final evaluation. The review process involves a supervisory panel forum that will provide an opinion whether the fintech model is recommended, needs improvement, or is not recommended for registration or operation. The length of the regulatory sandbox process can vary from a few months to 1 year, with an extension of up to 6 months if they are asked to improve their business.
3. Registration. Fintech companies recommended by the regulatory sandbox must apply for the registration stage no later than 6 months after obtaining recommendation status.