New to the FinTech (Financial Technology) industry? Get to know further about the roles and supports of Bank Indonesia for the industry.
Today, technological advances seem to have no limit so that its power can penetrate many sectors—one of them is economy. That is how the industry of financial technology (FinTech) emerged. FinTech aims to make financial or banking services more efficient because it utilizes the presence of technology. In fact, Indonesia itself has currently been the home to more than 150 FinTech-based startup companies. Thus, welcome to the FinTech era.
What is FinTech actually?
Financial technology is the use of technology in financial systems that produce new products, services, technologies or business models, and can impact on monetary stability, smoothness, security, and reliability of payment systems, and financial system stability and/or efficiency.
The development of financial technology, on the one hand, has proved to bring benefits to consumers, business actors, and the national economy, but on the other hand, has potential risks that if not adequately mitigated can disrupt the financial system.
The Indonesian government regulation on FinTech
In order to maintain the stability of monetary and financial system, efficient, safe, and reliable payment system, as well as to apply the principles of consumer protection and risk management, Bank Indonesia as one of the financial regulators in Indonesia has published Bank Indonesia Regulation (Peraturan Bank Indonesia or PBI) and Board of Governors Regulation (Peraturan Anggota Dewan Gubernur or PADG) as regulations on financial technology and “Regulatory Sandbox” (Ruang Uji Coba Terbatas), i.e. limited testing “spaces” for the new business models or startup companies which are not protected under present regulation, or missed by institutions authorized in making the law on FinTech.
Through PBI No. 19/12/PBI/Year 2017 on the Implementation of Financial Technology, Bank Indonesia obliges Financial Technology Providers conducting payment system activities to register their companies. Such registration obligation is exempted for the Payment System Service Providers who have obtained permission from Bank Indonesia and for the Financial Technology Providers under the power of other authorities.
Furthermore, Bank Indonesia will announce the Financial Technology Providers which have been registered on its official website. The registration requirement does not eliminate the obligation of the Financial Technology Providers to file a license to Bank Indonesia or the relevant authorities.
In order to support the development and innovation of financial technology, Bank Indonesia provides spaces for Financial Technology Providers to test its products, services, technology, and/or business models at Bank Indonesia through Regulatory Sandbox. PADG No. 19/14/PADG/Year 2017 regarding the Regulatory Sandbox of Financial Technology clearly sets out the procedures and test processes done in the Regulatory Sandbox.
The registration procedure for the Financial Technology Providers is more clearly regulated in PADG No.19/15/PADG/Year 2017 on the Procedure of Registration, Delivery of Information and Monitoring of the Financial Technology Implementation. The registration will be done through an application that is still in the development process.
Categories of FinTech activities
Before starting up a company in the FinTech sector, one should know the types of activities on financial technology. Below are some of the main types in Indonesia.
Payment, clearing dan settlement
This is a FinTech company type that provides payment system services both held by the banking industry and by Bank Indonesia such as Bank Indonesia Real Time Gross Settlement (BI-RTGS), BI National Clearing System (SKNBI), and BI Scripless Securities Settlement System (BI-SSSS). Some of those that have been running their business in Indonesia are Kartuku, Doku, iPaymu, Finnet, and Xendit.
This type of FinTech company collects and processes data that consumers can use to help with decision making. This startup provides comparisons of products ranging from prices, features, to benefits. Some of the companies are Cekaja, Cermati, KreditGogo, and Tunaiku.
P2P (peer to peer) lending
This one brings together lenders (investors) with loan seekers in one platform. Later on, investors will get interest from the funds lent. The companies running on this type of FinTech are Modalku, Investree, Amartha, and KoinWorks.
Risk management and investment
FinTech provides services such as robo advisors (software that provides financial planning services and e-trading platforms and e-insurance. The existing companies of this type are Bareksa, Cekpremi, and Rajapremi.
The number of P2P lending players is the fastest growing. In 2016, the number of P2P lending players grew by 16%, and in the following year, it grew by 32%. P2P lending players have increased since the OJK (Financial Services Authority) launched P2P lending rules. The rest is divided into other sub-sectors although not much as in remittances, securities, insurance, and others.
How does Bank Indonesia respond towards FinTech’s development in Indonesia?
It is undeniable if digital technology in the financial sector or FinTech provides convenience for users in doing transactions. Thus, the business continues to evolve constantly.
BI senior deputy governor Mirza Adityaswara said based on statistical data, the total transaction value of Financial Technology (FinTech) in Indonesia in 2016 was estimated at US $15.02 billion (Rp202.77 trillion). That number grew by 24.6% from the year earlier. In 2017, the total transaction value in the FinTech market is projected to reach US $18.65 billion (Rp251.77 trillion).
Due to the development of FinTech which is predicted to continue to rise, BI as the holder of the payment system authority continues to synergize several interests through three things:
- Promoting a conducive payment system
- Directing the industry to move efficiently
- Strengthening consumer protection
The active role of Bank Indonesia (BI) in the FinTech sector is also shown by the formation of Bank Indonesia FinTech Office which often makes regulations to manage the course of this new sector safely and comfortably.
Bank Indonesia’s roles and supports for FinTech in Indonesia
The vast development and potential on FinTech in Indonesia made Bank Indonesia (BI)—one of the financial regulators in Indonesia—establish FinTech Office in November 2016. BI FinTech Office was formed to issue rules aimed at encouraging the growth of new innovations, especially those related to technology and the financial sector.
The establishment of BI FinTech Office is in line with the rapid development of the FinTech industry in Southeast Asia by 2016. In the second half of 2016, the number of FinTech startup companies in Southeast Asia that received investments outpaced the e-commerce sector, although nominally the money still remained smaller.
Junanto Herdiawan, Acting Head of BI FinTech Office explained about the roles and supports of BI for the development of FinTech industry in the country.
FinTech industry mapping in Indonesia
In order to be able to arrange regulations in accordance with conditions in the field, BI FinTech Office regularly holds meetings with various FinTech companies to do mapping on the current conditions. Mapping is done to find out who the performers of FinTech industry are, what business they run, how big the scale of the business is, and so forth.
Mapping is not centralized in the banking sector that innovates in FinTech scope. They also invite the performers of e-commerce, startups, and others. Mr. Herdiawan explained that they coordinate with the FinTech associations, e-commerce associations, friends of startup companies, and so on.
Mapping by BI FinTech Office is expected to produce complete data and information about FinTech ecosystem in the country. The data can serve for various analyzes, from the impact of FinTech’s industry towards the economy in general, to financial stabilization.
Consumer protection and risk mitigation
In that case, Mr. Herdiawan explained that the primary purpose of BI FinTech Office is to encourage innovation and development of FinTech ecosystem. On the other hand, their duties are also to do risk mitigation and protect consumers.
Mitigation of risks and consumer protection are indeed one of the functions of Bank Indonesia associated with the payment system. Consumers of various payment services, including those held by the FinTech industry, must have the legal certainty as well as the path to report the problem in the event of financial loss from the services it uses.
As a state institution authorized to set up payment systems, Mr. Herdiawan said the short-term focus of BI FinTech Office is to scrutinize and manage the FinTech industry in the areas of payment, clearing, and settlement. However, it is possible that the company will also review long-term industry sectors such as P2P lending, crowdsourcing, investment, and others.
Making regulation updated with the latest innovations
According to Mr. Herdiawan, technological developments so often make the current regulation become irrelevant. Not infrequently such a constraint also occurs in the realm of the financial industry. When an innovative FinTech product appears, the BI regulation has not reached it yet. This can be a hindrance to the development of financial technology. Therefore, BI FinTech Office released Regulatory Sandbox.
Regulatory Sandbox is a special “space” that is dedicated to innovators in the FinTech industry. The actors who have innovative products but are constrained by the regulations that do not yet exist to manage their operations, can apply to the program.
BI FinTech Office will look at the product specifications, business models, to the scope that would be the business of the company. If approved, business actors can operate on a limited basis under the supervision of BI without having to worry about tripping over regulatory issues.
This Regulatory Sandbox allows FinTech industry players who have innovative products to operate with a number of more mature regulations. BI here serves as the party that will provide the provisions and tolerates some rules that are still unclear or can be said to still be in the gray area.
In addition, the head of FinTech Office’s BI division also adds the functionality of the Regulatory Sandbox, which increases consumer confidence. If they see that the product is monitored by BI, then the use of the product will be felt more secure.
Registration into the Regulatory Sandbox is voluntary from each party. Not only start-up companies, but large companies can also join in. However, not all applicants will be allowed to get into the Regulatory Sandbox. There are several criteria that can make a FinTech product rejected, as there have been official rules for the type of product to be operated on, or there are certain restrictions.
The advantages one can get from the Regulatory Sandbox by BI FinTech Office
With the existence of Regulatory Sandbox, BI provides an opportunity for FinTech industry players who have innovative products to operate and mature their concepts within a limited scope. BI will provide a number of tolerances related to the regulation that feels to be in a gray area, on a condition that the concept or product being tested has been approved by BI FinTech Office beforehand.
In addition to obtaining operational permits, Regulatory Sandbox participants may also benefit the increasing consumer credibility. If they see that the product has been monitored by BI, they can feel safer to use the product. Having been released in mid-2017, Regulatory Sandbox is open for any FinTech companies in the country.
Requirements to join Regulatory Sandbox from BI
Financial Technology Providers registered with Bank Indonesia may participate in a trial in the Regulatory Sandbox in accordance with the provisions set forth in PADG No.19/14/PADG/Year 2017 on the Regulatory Sandbox of Financial Technology. The intended Financial Technology Providers shall be determined by BI to participate in a trial in the Regulatory Sandbox.
Previously, organizers or companies in FinTech are required to complete several reports in the attachment of Regulatory Sandbox by BI FinTech Office as registration requirement documents. Attachment of documents with the name of the Regulatory Sandbox Document Submission Form can be downloaded on the official website of Bank Indonesia. The requirements that must be fulfilled by the Financial Technology providers in addition to filling out the form are:
- A company profile
At least the one that includes:
- organizational structure;
- the composition of the Board of Directors and Board of Commissioners, including the Board of Directors responsible for the operation of payment system services; and
- capital structure.
The composition of the Board of Directors and Board of Commissioners shall contain information on the name, position, address, identity card number and Taxpayer Identification Number, if any.
- Photocopy of the deed of establishment established by the Minister of Law and Human Rights of the Republic of Indonesia and all amendments to the Articles of Association of the Company together with a copy of the letter of approval/receipt of notices from the Minister of Justice and Human Rights of the Republic of Indonesia.
- The license of business activity owned (if any).
- Certificate of domicile from the village head to the head of the district where the company is located.
- Company Registration Certificate (Tanda Daftar Perusahaan or TDP).
- The latest financial statement.
- The Statement Letter from each member of the Board of Directors and Board of Commissioners that declares that the company:
- has never been declared bankrupt or a member of the Board of Directors or Board of Commissioners found guilty of causing a business entity to be declared bankrupt in the last 5 (five) years before applying;
- has never been convicted of criminal offenses in banking, finance, and/or money laundering based on court decisions that have had permanent legal powers;
- is not included in the list of bad debts at the time of application; and
- has never been included in the national blacklist of blank checks which is administered by Bank Indonesia.
Stamp duty is also required to be attached on The Statement Letter.
- Approval from the regulatory authority or the relevant authority over the plan for the operation of the service of the payment system.
- Proof of legal instrument readiness, in the form of a final draft written cooperation agreement with other Payment System Service Providers, Supporting Organizers, and/or other parties set forth in the Indonesian language.
- Evidence of operational readiness that at least includes:
- the organizational structure, job descriptions, powers, and responsibilities of the work unit responsible for the administration of the payment system services;
- the readiness of human resources (quantity and quality of human resources);
- plans and/or evidence of the readiness of equipment and facilities for the administration of payment system services shall at least contain information on the location or room to be used, the location/room layout, and the security of the access of the space;
- hardware and software specifications, and the network used.
- Report of audited information system result by an independent auditor towards the implementation of payment system service activities.
- Document of security control procedures.
- Document stating that the candidate has conducted an assessment of the security and reliability of the system to be held.
- Business analysis of the next 5 (five) years which demonstrates the viability and potential of the ongoing business for the provision of payment system services to be performed.
- Evidence of risk management readiness that at least covers operational risks, legal risks settlement risks, liquidity risks, and reputation risks.
- Complete information on the payment system services performed to its users, at least provided service features, costs, settlement mechanisms, benefits, and risks.
- Provision of information or transaction data required in the event of a consumer complaint.
In conclusion, it is clear that Bank Indonesia is very supportive to the development of the FinTech industry in Indonesia. Our part is to support or create more innovations in the industry to help the country earn its further development, especially in the economy sector. Keep Spirited!
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