Indonesia has embraced the digital banking revolution, laying the groundwork for fintech companies to challenge traditional banks
Indonesia is one of a growing number of Southeast Asian economies to have embraced the digital banking revolution, introducing new reforms designed to speed up the pace of this transformation.
Indonesia’s Financial Services Authority (OJK) issued two new regulations covering both digital and commercial banks on July 30 – OJK Reg 12/2021 and OJK Reg 13/2021 respectively – with the changes coming into effect on October 30.
The new rule sets not only streamline a number of existing regulations, but have also introduced the country’s first clear definition of a digital bank. They are designed to enhance both the banking system’s efficiency and its competitiveness, with the OJK noting at the time that it wanted to see greater consolidation within the sector.
With the country’s e-commerce transactions soaring in recent years, thanks to the widespread adoption of smartphones, the Indonesian government sees the digitalisation of the banking sector as key to the country’s long-term economic success.
Mikiko Steven, Xendit’s head of customer solutions.
“(…) Bank Indonesia’s announcement in August that all banks would have to adopt a universal open application programming interface (API) for payments by 2025 would be a gamechanger.”
Digital age
Indonesia’s e-commerce transactions have soared in recent years, owing to smartphones’ rapid penetration. Around 64% of the Indonesian population accessed the internet from their mobile phones in 2020, according to data published by Statista, up from around 29% in 2015. This figure is projected to grow to 89% by 2025.
The number of digital transactions, meanwhile, has soared from just 203mn in 2014 to 4.63bn in 2020, according to Bank Indonesia data, with the value of these transactions also expanding from IDR3.32tn (US$234.3mn) to IDR204.9tn (US$14.46bn) over the same period.
Although Indonesian e-commerce has grown rapidly in recent years, the global coronavirus (COVID-19) pandemic has further spurred growth in the sector. This, naturally, is creating new opportunities within the digital banking space.
“The pandemic has made digital transformation in the banking sector into an inevitability,” OJK’s top banking supervisor, Heru Kristiyana, said in July.
OJK opted not to implement additional rules for digital banks that did not also apply to regular banks, with Kristiyana saying: “The OJK does not dichotomise banks with existing digital services, incumbent banks that have transformed into digital banks, and new, full digital banks. After all, a bank is a bank.”
The decision to create an even playing field between digital and traditional banks should help drive consolidation within the banking industry, which is one of the OJK’s stated goals.
Freddy Karyadi, partner at Indonesian legal firm ABNR.
“ Indonesia has more than 17,000 islands, so expanding any offline bank’s reach is a logistical nightmare.”
Streamlining the sector
Freddy Karyadi, a partner at Indonesian legal firm ABNR, told Conventus Law that the OJK’s desire to whittle down the number of banks revolved around a need to strengthen the sector.
“There are a lot of not very active banks that are operating. These banks are ‘alive’, but they don’t have enough customers or transactions to grow,” he said. The country had more than 1,600 rural and commercial banks as of June 2020, according to data from Statista.
These not very active banks represent a hurdle to the government’s goal of creating an efficient and competitive banking sector. The OJK took one of its first steps toward dealing with this problem in March 2020, when it issued a new regulation requiring all banks to increase their core capital requirement to IDR3tn (US$212.08mn) by 2022 from IDR1tn (US$70.7mn) previously.
Karyadi said a smaller number of banks, coupled with the greater capital requirements, should ensure that each player enjoys a stronger market position. He added: “Indonesia has more than 17,000 islands, so expanding any offline bank’s reach is a logistical nightmare.”
Rifai Taberi, the head of government relations at fintech company Xendit, echoed this sentiment, adding: “The only thing that can unite 17,000 islands is the digital space.”
As it stands, the country’s large number of operational banks also poses challenges to the government’s ability to monitor and oversee the sector.
Opportunity for growth
Mikiko Steven, Xendit’s head of customer solutions, told Conventus Law that the central bank had been striving towards a more streamlined digital banking space while also strengthening the role of financial technology in support of digital transactions.
He said: “Bank Indonesia has grouped all payment service providers into three categories, reducing the previously high number of licences that an operator was required to obtain. For example, Xendit is in the second category, which allows us to provide products that are classed as account information services (AInS) and payments acquiring and initiation services (PIAS). Previously, each of these products would have required a successful application before the payment service provider could begin providing them.”
The executive also said Bank Indonesia’s announcement in August that all banks would have to adopt a universal open application programming interface (API) for payments by 2025 would be a gamechanger.
Steven said: “When Xendit first wanted to offer basic financial services in 2017 – that is, helping merchants accept digital payments – we had to approach so many different banks. This meant we had to unify all of their different banking APIs, which was time consuming and expensive.”
Pushing the adoption of open banking API should ensure that digital banking products can be rolled out to the market much more quickly and to a wider audience.
Steven said: “Digital banking removes the logistical barriers for those outside of urban areas and democratises the banking process.”
“The Indonesian government has been a big supporter of e-commerce and the internet of things (IoT). The country has been the region’s fastest adopter of e-commerce and this is very attractive to international investors. As such, further government reforms should be expected as the government learns from the experiences of those currently on the ground.”
Freddy Karyadi, a partner at Indonesian legal firm ABNR.
Democratic banking
While Indonesia has the world’s fourth largest population, only 51% of the adult population has access to a bank account.
Raising this figure is key to boosting economic growth, but Steven argued that it only represented one aspect of the banking sector’s contribution to the wider economy.
He said: “It’s not just the number of people who have access to banking services, it’s also about how often they use those services.”
Many Indonesians use their bank accounts simply to receive government subsidies, the executive observed, adding that this meant there was a lack of useful data being generated. Without this data, lenders struggle to build risk profiles that can then open the door to financing for different segments of the population.
Steven said: “The key to economic growth is ensuring that people have access to financing. Getting the population outside of the cities actively banking will drive data aggregation and the rollout of additional banking options. The country’s unbanked have vast untapped potential.”
Indonesia has already granted seven digital banking licences and is reviewing another seven licences as it seeks to overhaul the sprawling industry. Reforms aimed at streamlining the sector should lead to a wider availability of attractive digital banking products in the coming years.
Karyadi said: “The Indonesian government has been a big supporter of e-commerce and the internet of things (IoT). The country has been the region’s fastest adopter of e-commerce and this is very attractive to international investors. As such, further government reforms should be expected as the government learns from the experiences of those currently on the ground.”
This article was written by Andrew Kemp for Conventus Law in association with ABNR.
The views and opinions expressed in this article are those of the author and do not necessarily reflect the opinions, position or policy of ABNR or its other employees and affiliates.
For more information on digital banking in Indonesia, please contact:
Freddy Karyadi, Partner, ABNR
Email: fkaryadi@abnrlaw.com
Freddy Karyadi has over two decades of practising law in Indonesia and has been heavily involved in numerous complex cross border deals including TMT, TAX, restructuring distressed assets, M&A, investment, employment and dispute settlement/bankruptcy.
Karyadi was one of the pioneers who focused on the DIGITAL INDUSTRY and is the head of fintech practice team. Freddy led ABNR team in handling many transactions involving technology and fin-tech / health-tech / edu-tech/Media/ TMT companies, from early stage fund raising, integration, incorporation-expansion, exit, public offering preparation to regulatory compliance and has represented independent power producers (IPP), giant ECAs and commercial banks for various electricity sector financing. Karyadi’s clients vary from multinational to start-ups which span across a wide range of industries including natural resources, energy, financial institutions (including MULTIFINANCE, P2P, insurance, insurance brokerage, bank, etc), health-care, private equity funds – venture capital, and property. With a strong knowledge of legal, commercial, TAX and accounting issues that these industries encounter, Karyadi can quickly identify the key issues and offer practical business oriented legal solutions.
On litigation matters, Karyadi handled various suspensions of payment and bankruptcy proceeding of various industries including aviation, shipping, and mining sectors and also assisted clients in TAX disputes.
Karyadi has been consistently rated as a leading lawyer by several international publications including Legal500, Asian Business Law Journal (Vantage Asia), IFLR 1000 and Asialaw for the last half decade.
He is a member of the Board of Ethic of AFTECH (Indonesian FINTECH Association) and the Editorial Board of The Derivatives and Financial Instrument Journal of the International Bureau of Fiscal Documentations. He contributes numerous TAX and law articles of Conventus Law, IFLR, International Tax Review, Thomson Reuters, Lexology, International Comparative Legal Guide and Getting the Deal Through. Karyadi was also a speaker at IBA, IPBA, IFA and IFLR events and gave seminars for tech start-up communities.
Recent transactions highlight:
Leading ABNR team in advising PT Indo Raya Tenaga, the (around US$ 3.6 billion) project company Java 9&10 power plant; (2020);
Leading ABNR team in advising a prominent investor in the approx USD 18 billion mega-merger of Indonesian top tech companies (2021);
Leading ABNR team in assisting a divestment majority stakes in around USD 100 million dollars fintech to a top leading Indonesian technology company (2020);
Leading ABNR team in assisting major international fintech driven investment firm in providing multimillion dollars facility to a leading peers to peers platform (2020);
Leading ABNR team in assisting a world leading manufacturer in the rack-and-pinion rail vehicle industry in its cooperation (initial investment around USD 100 milion) with the Indonesian state-owned integrated rolling stock manufacturer (2019);
Leading ABNR team in assisting a multi million dollars partial divestment in a market leading printing company to a major Japanese printing company and the relevant cooperation (2019);
Leading ABNR team in assisting PT Layar Persada in sale of shares in PT Graha Layar Prima Tbk (an Indonesia-based company primarily engaged in the operation and management of movie theater chain and food and beverages) to Coree Capital Limited amounting to approximately US$ 70 million (2018);
Leading ABNR team in assisting a prominent conglomerate investor in the USD 50 million funds raising by PT Sicepat Ekspres Indonesia, an e-commerce-focussed logistics company (2018);
Leading ABNR team in advising a giant investor in the around USD 100 million IPO of a leading hospital chain (2018).
Languages
English & Bahasa Indonesia
Memberships
Indonesian Tax Consultant Association (IKPI)
International Fiscal Association (IFA)
International Federation of Accountant (IFAC)
Indonesian Capital Market Legal Consultant (HKHPM)
Indonesian Advocates Bar (PERADI)
