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Broader adoption, tighter regulations: What to expect from the Indonesian fintech sector in 2021

Written by Khamila Mulia Published on   6 mins read

The upcoming year will bring stringent requirements for fintech entrants, as the country is set to establish new rules to consolidate the sector.

2021 promises to be an exciting year for the Indonesian fintech sector, which started to develop in the country in 2016 and has been progressing rapidly since then, with the past year’s pandemic acting as a catalyst for users’ adoption of these services.

After focusing on two main verticals—electronic payment and peer-to-peer (P2P) lending—the Indonesian fintech sector has grown to cover other verticals, such as aggregators, innovative credit scoring, financial planning, and project financing. 

A positive trend for the industry can be seen in the growing number of licensed players in various fintech segments. According to the a survey by the Indonesia Fintech Association (Aftech), its members increased from 24 in 2016 to 275 at the end of 2019, and then to 362 in the second quarter of 2020. Aftech members represent 80% of licensed fintech startups in Indonesia, the survey says.

“There has been a significant increase in fintech adoption, especially in lending and payment segments. COVID-19 definitely accelerated fintech penetration and it will grow even faster going forward,” Aftech chairman Niki Santo Luhur said to KrASIA.

Throughout 2019, total loan disbursements from fintech lenders experienced a 200% year-on-year growth, according to the country’s Financial Service Authority (OJK).

The upcoming year will bring stringent requirements for new fintech players, as the country is set to establish new rules to consolidate the sector. During a webinar held by OJK at the beginning of the month, Deputy Director of Fintech Research and Development Regulation of OJK Munawar Kasan predicted fintech lending to grow higher next year compared to 2020. He also shared other insights and projections for 2021.

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Tightening on regulations for fintech lending 

The OJK is currently revising the POJK regulations 77/2016 that cover online lending. The changes, which are expected to be formalized by the end of the first quarter of 2021, will make it more difficult for new players to enter the industry, Kasan said.

“Peer-to-peer lending requires large capital so that firms can survive and develop their business. To apply for a fintech license, new platforms will need at least IDR 15 billion (USD 1 million) in core capital, as opposed to the current IDR 2.5 billion,” he said. 

The OJK will also demand a higher degree of transparency from fintech lending providers.

“P2P lending platforms must show their statistics on their websites, such as the number of borrowers, the number of disbursements, the number of bad debts, and so on, so that lenders can choose which platforms are suitable for them—to improve public confidence in general,” Kasan said.

According to a document on OJK’s website, the draft states fintech operators must have three directors and three commissioners, while the old regulation only requires one for each position. 

Aftech welcomes the proposed changes but maintains some concern. “At a certain point in time, once there’s enough scale [in the industry], there will be more regulations coming out to ensure there’s sustainable growth. The current OJK regulation was established in 2016, so it is only natural that there will be some additional requirements” Luhur said.

However, he argued that the country should use a “principles-based” approach rather than a “rules-based” one. Principle-based regulations are more suitable for new or early-stage industries, he said. “We can always see how things go and, hopefully, regulators will be flexible and always look at the market’s response.”

Indonesia’s economy has long been driven by cash, but innovations in fintech are creating new trends. Photo by Bady Abbas on Unsplash.

Fewer players but with wider reach

The draft states fintech lenders will need to double up the percentage of loans for the productive sector, from the current minimum of 20% to 40%, over the next three years. Currently, productive loans account for 35% of overall loans disbursed, as fintech lending is still dominated by personal consumption loans, Kasan said. 

“The OJK highly encourages us [fintech lenders] to provide loans in productive sectors, but most players are focusing on the consumptive segment at the moment, so it may take some time to reach this target,” Andi Taufan Garuda Putra, spokesperson of the Indonesian fintech lending association (AFPI), said to KrASIA.

The regulator also wants a wider distribution of loans all across Indonesia, including rural areas. Based on OJK data as of September, only 14.29% of loans were disbursed outside Java island, the country’s political and economic center. In the new regulations, the OJK will require P2P lending firms to gradually channel at least 25% of their total loan disbursement over the next three years in regions outside Java.

“The pandemic has severely affected Java’s MSMEs, as the lockdown was implemented in villages and small towns. Meanwhile, small businesses outside Java are relatively stable as they are far from the epicenter of COVID-19, so this is an opportunity for fintech lenders in general,” said Putra, who is also the founder and CEO of P2P lending platform Amartha.

A direct effect of the upcoming regulations might be seen in the number of mergers and acquisitions among fintech lenders, according to Bima Yudhistira Adhinegara, an analyst from the Institute for Development of Economics and Finance (Indef).

“With more tighten regulations, especially regarding capital, many platforms that are having difficulty raising funds may choose to merge with other players to survive,” he said to local media. He estimates the number of lending platforms registered with the OJK could shrink from 152 to fewer than 90 next year, following a trend already seen in 2020, when ten fintech platforms decided to withdraw from the OJK because of financial complications.

Read more: Can technology unleash the potential of Indonesia’s insurance market?


Data protection remains a major issue

As a backbone of the digital economy, fintech faces challenges such as data breaches, predatory lending, and financial crimes. Several Indonesian fintech companies made negative headlines in 2020 because of data breach cases. In early August, the personal records of around 890,000 users from fintech platform Kredit Plus were reportedly stolen and sold on the dark web, while fintech aggregator platform Cermati reportedly had 2.9 million of its users’ data stolen and sold on a hacker forum. Both cases are still under investigation.

“This is a complicated issue involving the government, regulator, industry players, and associations,” said Luhur, who added that Aftech is working to address this pain point. “We have a special task force for this and we’ve already compiled standards. A lot of them are influenced by other countries and international organizations, like the General Data Protection Regulation (GDPR) in the European Union.”

“We also need to consider the technical side, like improving the cybersecurity framework. This is an area where Aftech can give some very concrete recommendations. We are having an ongoing dialogue to ensure that the rules and standards can be properly implemented,” he said.

A new data protection bill, which is currently being discussed by the parliament and might be passed into law in 2021, will allow victims to sue platforms for violations in the handling of personal information, including data leaks, KrASIA reported.

E-money transactions to grow in 2021

The COVID-19 pandemic accelerated e-money adoption in 2020, a trend that will continue next year in Indonesia, according to Aftech.

“We saw a significant increase of e-money adoption this year and the COVID-19 pandemic is definitely a key driver, as everyone is staying at home and needs to make transactions remotely. There’s been a big growth of e-money transactions around e-commerce and food delivery,” said Luhur.

Total e-money transactions from January to August 2020 reached IDR 126.95 trillion (USD 8.9 billion), averaging IDR 15.86 trillion (USD 1.12 billion) per month, a 31% increase compared to last year, according to data from Bank Indonesia.

According to Luhur, the growth of other fintech segments besides lending and payment in Indonesia is still at the early stage, but the country is seeing “exciting developments” from a number of subsectors. “Aggregators, credit scoring, and financial planning are some of the new clusters that have been growing significantly this year.”


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