- P2P and online direct lending not illegal but need consumer protection
- Regulations must give an edge to startups, and confidence to investors
THE fintech (financial technology) sector in Indonesia is booming, and some of the companies involved have begun discussions with the Financial Service Authority (OJK) on what shape regulations should take.
Last week, Digital News Asia (DNA) gave our readers an exclusive look at fintech startup UangTeman’s policy paper that it had submitted to OJK, arguing that fintech regulation would help grow the industry.
OJK concurs, saying that regulations would focus more on consumer protection – including security, risk management, and debt collecting procedures – rather than the technology aspects.
Speaking with DNA in Jakarta recently, senior research executive of OJK’s strategic policy development department, Hendrikus Passagi, says that the regulator will take its time to formulate the most suitable regulations for the fintech industry.
“People are always asking us when we will come up with fintech regulations, but that is not the right question to ask. We are in the process of drafting the regulations, but we will not rush it for the sake of fulfilling their expectations,” he says.
Hendrikus declines to put a timeframe, saying that OJK would have to put together a special team to review the industry first before starting to draft any regulations.
Once this is done, the team will review the best practices from countries which have such regulations, and then hold discussions with the industry.
“After all that, general fintech regulations will be issued, followed by technical and detailed regulations for each sector – whether it is in lending or payment – so it is quite a process to go through,” he says.
Fintech startups like UangTeman, which has been working closely with OJK, predict that the regulations would be issued by early next year at the latest.
The first regulatory step would be to officially recognise fintech as a new sector in the country’s financial services industry. Currently, OJK supervises banking, the capital market, and non-bank financial institutions, while fellow regulator Bank Indonesia supervises the payments and e-money industry.
According to Hendrikus, the Government has yet to come up with an official definition of ‘fintech,’ but because it touches so many aspects of the financial services industry, it cannot be supervised by OJK only.
“We are dividing fintech in two: Fintech 2.0, which covers the existing industry under OJK’s supervision like digital banking; and Fintech 3.0-3.5, which covers the startups which are currently not under OJK’s supervision,” he says.
“We have no problem at all with Fintech 2.0 as every product or service is in compliance with existing regulations,” he adds.
But he was also quick to point out that this does not mean that Fintech 3.0 to 3.5 should be considered illegal.
For example, if comes under a cooperative, it should comply with the Ministry of Cooperatives and SME regulations; but if it involves a futures exchange, then it should comply with the Ministry of Trade regulations.
“Loan-based fintech platforms, including peer-to-peer (P2P) and crowdfunding, are legal too because they provide direct and personal loans, and hence are protected under civil law,” says Hendrikus.
Indonesian civil law governs the establishment of contracts or agreements between one person and another which meet these four requirements: 1) The two parties must consent to the basic matters contained in the agreement; 2) The two parties are not under 21 years old and not under guardianship; 3) They have a certain object in the contract; and 4) They have a lawful purpose to consent with the contract.
“Any contract or agreement that fulfills the above requirements is legally binding and cannot be determined without the consent of both parties – P2P lending and direct online lending platforms are protected by this law,” says Hendrikus.
Know your business model
From OJK’s perspective, while the role of the regulations is to recognise fintech as a new industry, the detailed regulations cannot be standardised as they will depend on each fintech’s business model.
OJK is also advising fintech players to be careful and know their business model before they launch and run their business in the country.
“In the end, even though we do not have special fintech regulations, all activity in the financial sector is heavily regulated,” Hendrikus notes.
An example would be a fintech whose business model is keeping money from customers on its platform for payment purposes, in an escrow-type model.
“According to Bank Indonesia regulations, unless the company is registered as a bank, it is prohibited from keeping money from the public. The startup could face charges and [its management] be jailed for up to 15 years,” he says.
There are always ways to get around this and get the proper permits to do so, but the most important thing for a fintech company is to understand its business model and compare it against current regulations.
“If your business model is not regulated like P2P or direct online lending, then you can go forward with civil law, while consulting and discussing with regulators,” suggests Hendrikus.
“If a fintech company has any doubt about its business model and which regulations it needs to comply with, it really just needs to knock on our doors … and we will explain,” he adds.
Self-regulation … kind of
Hendrikus also encourages fintech companies to come up with their own policy papers – as UangTeman has done.
“The best practice is for you to come and let me know what aspects you want to be regulated in,” he says.
OJK will then review the paper, tweak it as needed, and give fintech players time to comply.
“Self-governance will bring the order needed in the industry without hampering its growth, and give each player a chance to compete,” he adds.
Ultimately, Indonesia is looking to build a regulatory sandbox for fintech players.
“OJK sees seeing fintech as a driver of Indonesia’s economic development if the industry can be nurtured and supported by the right regulations,” Hendrikus declares.
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