Southeast Asia’s Internet economy is growing at an unprecedented pace, reaching $100 billion for the first time in 2019, more than tripling in size over the last four years, according to e-Conomy SEA 2019, a joint report by Google, Temasek and Bain. And the star is Indonesia, which stands out as a pace-setting country among its Southeast Asia neighbours.
The country’s Internet economy has “more than quadrupled in size since 2015,” boasting an average growth rate of 49 percent per year, the report found, noting that e-commerce and ride-hailing sectors “are firing on all cylinders, fuelled by intense competition between Indonesian and regional players.” Increased adoption of digital payments is another notable development in the fast-growing market.
“The fintech sector in Indonesia has witnessed a tremendous growth in the past few years to become one of the hubs of real innovation in Southeast Asia,” says Defrizal Djamaris, managing partner of Kudri & Djamaris.
Progress happens quickly in this dynamic economy. While last year, the e-Conomy SEA 2019 report found that of the nearly 400 million adults in Southeast Asia, only 104 million were fully banked” with full access to financial services, in Indonesia, there has been a significant increase in bank account ownership, following an aggressive push by the government.
“Compared with other countries, most of the new accounts were made operational and thus adoption rate is high in Indonesia, which is much attributed to its larger aspirant younger population,” observes Djamaris.
He cites the World Bank’s Global Financial Inclusion Index Database, which notes that Indonesia has made “impressive strides toward financial inclusion,” adding that the country has made “rapid strides to boost its digital economy, which is predicted to reach $133 billion by 2025.”
While there has been progress, banking services remain inaccessible to many. But Djamaris says Indonesia’s Internet penetration rates are “growing rapidly,” with fintech firms “capitalising heavily on this inequality.”
“Indonesian consumers are very receptive to new products in the digital economy. Growth of the market for fintech products in Indonesia shows an upward trend, evidenced by increases both in terms of transaction value and the number of startups. Data released in September 2020 by Financial Services Authority (OJK) show there are 156 licensed or registered fintech companies operating in Indonesia with the biggest market segment was peer-to-peer lending (P2P),” he adds.
Robert Hasan, senior associate at Ivan Almaida Baely & Firmansyah Law Firm (IABF), says over the past year there has been “significant interest from new players in the field of peer-to-peer lending who want to be registered as operators of lending and borrowing money services based on information technology with the Financial Services Authority (OJK).”
“On the other side, OJK has issued business license to some companies that have been registered (business license is the subsequent obligation after being registered). This shows that the field of peer to peer lending is still actively consistent to facilitate lending and borrowing money services,” Hasan adds.
While there may be little doubt about the fast pace of digital financial technology in Indonesia, the challenge for companies is often regulation, which can be somewhat overbearing.
From the perspective of fintech companies, Djamaris feels there is something of a disconnect between companies and the regulators. “The industry is heavily regulated with one hundred plus prevailing laws related to payments but is yet to cover many issues among other operational, licensing, data policy/protection, cybersecurity, and supervision,” he says.
While regulators must balance customer protection with the need for innovation, legislation to support this is not always cohesive.
“The newly revised Law No. of 2016 on Information and Electronic Transaction does not even cover personal data protection. The House of Representatives (DPR) however has recently approved Personal Data Protection Bill as the 2020 National Legislation Program (Prolegnas) this means DPR must prioritise to pass the Bill become law. Based on the data we obtain from the official website of DPR the Bill is now still being under discussion in the government,” Djamaris adds.
Of course, this has broader impacts on consumers. “The absence of provisions for the government to address uncertainties that may arise if a business fails will cost customers are in more risk. New regulations are also expected to crack down on illegal fintech as they often charge high-interest rates outside of the provisions regulated by OJK and make unethical charges to borrowers,” Djamaris notes.
Joel Shen, a technology lawyer at Withers, tells Asian Legal Business that the hurdles around fintech could “fill a book.”
“Indonesia is notorious for being a ‘high-friction’ jurisdiction, when it comes to business regulation, and nowhere is this truer than in the fintech sector. Regulations are often ambiguous, frequently contradict each other, and sometimes reflect a poor understanding of the sectors to which they apply (e.g. data onshoring requirements imposed by the Ministry of Communication and Informatics completely ignore the use of ubiquitous cloud technologies).”
- Joel Shen, Withers
Among those which Shen views as current bugbears are ambiguity and inconsistency in regulation and a “high-touch approach.”
“Indonesia is notorious for being a ‘high-friction’ jurisdiction, when it comes to business regulation, and nowhere is this truer than in the fintech sector. Regulations are often ambiguous, frequently contradict each other, and sometimes reflect a poor understanding of the sectors to which they apply (e.g. data onshoring requirements imposed by the Ministry of Communication and Informatics completely ignore the use of ubiquitous cloud technologies),” says Shen, noting that this then leads to inconsistent implementation and enforcement.
Meanwhile, an expectation that all new products, and even minor variations in functionality require prior regulatory approval, is another challenge for fintech companies in Indonesia.
Shen says the broader impacts of “inconsistent, ambiguous and onerous regulations,” means that compliance tends to be low.
“Among all but the largest and well-resourced fintech businesses, who recognise that it is easier to ask for forgiveness than it is to ask for permission,” he adds.
But on the flip side, sometimes a lack of specificity can be a challenge of its own.
“We have been monitoring the issuance of the new Financial Service Authority (OJK) regulation since early this year which is anticipated to amend the existing Chairman of OJK Regulation No. 77/POJK.01/2016 regarding Lending and Borrowing Money Services Based on Information Technology, but to date, it has not been issued,” says Hasan of IABF.
“The current hurdle with the existing regulation is that it has not covered more detailed provisions that evolve around the peer to peer lending activities, such as risks mitigation, access and usage of personal data and partnership cooperation,” he notes.
Of course, the pandemic has proved a disruptive force for many businesses, but for customers, it has also heightened the need for contactless experiences.
Shen says the pandemic has “generally accelerated the adoption of digital technologies (including fintech) among consumers and businesses alike,” but that its “specific effect on individual fintech companies is more varied.”
“Take, for example, the use of e-money and e-wallets. OVO and Gopay saw their usage and revenues increase in tandem with the consumption of food delivery services provided by Grabfood and Gofood respectively. However, government-owned Linkaja, which has a state-sanctioned monopoly of payment services to toll road and public transport operators, saw its revenues decline during the COVID-induced lockdowns this year,” Shen says.
Djamaris agrees that the pandemic has in general “facilitated swift and non-anticipated cashless online payment adoption by general public thus unfolding a higher market potential,” but he adds that a few companies have been adversely affected.
“New entrants involved in lending to microenterprises and low/middle-income groups have seen a considerable rise in non-performing loans. Even platforms catering to crowdfunding saw a drop in number of investors during the pandemic period as investors have adopted an approach involving conserving the fund,” he adds.
“Comparatively well-established fintech companies had a contrasting but positive experience. In general, these established players have benefited as first-movers through wider and deeper market exposure, operational stability and strong funding support. These players have encouraged the use of sophisticated technologies namely Data analytics, to overcome the impact of the pandemic,” Djamaris notes.
“Government intervention is necessary and should act as a catalyst for the survival and growth of smaller fintech startups as ignoring them would undermine their potential to solve existing problems through scalable solutions. Apart from offering a general package of assistance for small and medium-sized enterprises, the government has not adopted any specific regulatory changes or measures to support tech-enabled startups as Indonesia’s Omnibus Law that newly enacted does not even cover these matters.”
— Defrizal Djamaris, Kudri & Djamaris
During the pandemic, Djamaris suggests a tailored approach towards regulation.
“Government intervention is necessary and should act as a catalyst for the survival and growth of smaller fintech startups as ignoring them would undermine their potential to solve existing problems through scalable solutions. Apart from offering a general package of assistance for small and medium-sized enterprises, the government of Indonesia has not adopted any specific regulatory changes or measures to support tech-enabled startups as Indonesia’s Omnibus Law that newly enacted does not even cover these matters,” he notes.
Measures that can “boost the ecosystem in future” should also be undertaken.
“Efforts to enhance the resilience of the fintech sector and support rapid scale-up which can be achieved to an extend by passing a personal data protection bill immediately, and then allowing increased access to the national ID database to enable electronic know-your-customer processes that can streamline customer onboarding for fintechs,” Djamaris says.
It is likely, says Shen, that the lack-lustre performance of the Indonesian economy (exacerbated by the pandemic) has “prompted the Indonesian government to push through the anticipated, but controversial, Omnibus Law, which is expected to facilitate foreign investment, streamline bureaucracy and reform some of the most onerous tax and manpower regulations in the world.”
“I wanted to flag that this will be the most significant regulatory development in 2021,” he says, noting that, in Indonesia, “all eyes are on the Omnibus Law and its implementing regulations.”
“While not specific to the fintech sector, one hopes to see changes in tax and manpower regulation, liberalisation of technology businesses (especially fintech businesses) to foreign investment, the relaxation of work permit and global taxation requirements for foreign workers (especially in the technology sector, where talent is scarce). We are also expecting Indonesia to pass a new standalone data protection law, which will apply to all businesses, including fintech,” he adds.
Looking ahead, Djamaris says the fintech segment is going to see large scale acquisitions and mergers, “considering how fintech payment platforms need economies of scale to keep pace with the country’s consumer market.”
This will help companies to expand their offerings and “pull ahead as the preferred mobile wallet in the long run,” Djamaris predicts.
“Two major Indonesian mobile wallets, OVO and DANA, are reportedly close to finalising their merger, which has been in the works since September 2019. GOPAY through its partnership with Facebook and PayPal is already prepared to tap into the American companies’ user base in Indonesia along with their network of merchants,” he explains, breaking down the latest developments.
“The market currently dominated by local players may see a steep competition by entry of highly used messaging platform like WhatsApp which have a very large user base globally. WhatsApp has launched its payment feature in India and Brazil. It is expected that tech giant will bring the feature to Indonesia soon,” Djamaris notes, adding that he expects WhatsApp Pay “could be a threat to local digital payment platforms, especially since WhatsApp users may opt to pay using the messaging app for convenience.”
As a result, there’s likely to be smaller platforms exploring offerings such as comprehensive services. “Many already started working towards it by bringing additional financial services to its app through third-party collaborations. Additional services provided in these platforms include mutual fund investment, pay-later feature and insurance,” Djamaris notes, adding that the potential of fintech “as a complement to traditional banking is the best hope for recovering momentum in current economic situation,” he says.
“Fintechs are flexible and more adaptive than traditional financial institutions, which still highly depend on legacy technology for its core operations. Hence, Fintechs will empower the automation and digitalisation of banking processes in a far more agile manner. Dedicated support from the government and more enabling regulations for these businesses can give a boost to the economy,” Djamaris adds.
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