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Fintech growth unregulated in Indonesia

Jun 10. 2016
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JAKARTA - While traditional banks require customers to do transactions at physical branches or ATMs, a lot of fintech companies offer the luxury of doing everything, including signing up, online.

Local fintech firm Doku, which claims to be Indonesia’s largest and fastest-growing facilitator of electronic payments, offers consumers an electronic wallet that can be topped up at any time through bank transfers.

The “Doku wallet” can be used to make payments at various retail stores, tour and travel agencies, and at electronics shops, as well as at many more merchants that are in partnership with Doku. The electronic wallet can also be|used to pay for donations, TV cable services and insurance premiums.

Withdrawing money is also possible with a “Doku wallet” through Alfamart Group points of sale that total more than 10,000 across the archipelago. The e-wallet can even be used to transfer money to friends who don’t have a Doku account, only requiring the recipient’s email address.

These conveniences are just a few examples among many of how fintech is mushrooming in Indonesia, the largest economy in Southeast Asia, where only 20 per cent of the adult population has an account in a formal financial institution.

Estimates vary about the size of Indonesia’s fintech industry. Statista’s Digital Market Outlook estimates that the transaction value of local fintech reaches US$14.5 billion at present and expects it to grow by 18 per cent annually until it reaches $28.8 billion in 2020.

That compares with commercial banks’ total assets of more than 6 quadrillion rupiah ($451.20 billion) as of March this year and nears the sharia banks’ total asset value of 290 trillion rupiah ($22.4 billion).

“There needs to be a clear regulatory framework that creates a win-win solution for all stakeholders. Otherwise, it will be chaos without clear standards,” said Teddy Setiawan Tee, chairman of the fintech division at the Indonesian Venture Capital and Startup Association (Amvesindo).

The future potential for fintech is lucrative. Indonesia’s local marketplace for peer-to-peer lending, Modalku, launched in January and has already disbursed 22 loans worth 5.1 billion rupiah with zero defaults.

Modalku facilitates lenders and borrowers for financing worth 50 million rupiah to 500 million rupiah, considered the “missing middle” lending segment, with a tenure of three to 12 months.

They are targeting micro enterprises that total about 57 million, of which only 1 per cent manage to grow to the sustainable size of small and medium enterprises (SMEs), partly because of a lack of access to credit, according to research conducted jointly by Oliver Wyman and Modalku.

For Indonesia, the research suggests regulations should be put in place as soon as possible. “Regulators should equip the |[fintech] industry with protective mechanisms before it grows too big and maintain comprehensive vigilance while also keeping regulatory compliance costs down,” it read.

Global financial regulators put fintech in the spotlight at a recent Financial Stability Board (FSB) meeting of the G20 countries, inching closer to regulating the sector that may potentially “|disrupt” traditional banking, to ensure its rapid growth does not pose any risks to the financial |system.

The Indonesian Financial Services Authority (OJK) is working on it. The regulation, which will be rolled out before year-end, will protect both consumers and fintech and not limit development of the new sector by any means, said Dumoly Pardede, the OJK’s deputy commissioner for non-bank financial institution supervision.

“The regulations are more to regulate business transparency on how they capitalise and manage the businesses and what kind of sanctions are to be imposed if breaches are committed. However, we’re not going into details like setting their loan interest |rates or others, for example,” he added.

Major banks such as Bank Mandiri and Bank BCA have already partnered with or pledged funding to fintech companies, but most of them have not yet considered the threat of fintech, which has a miniscule market share of less than 1 percent of the overall commercial banking industry assets.

Bank Mandiri digital banking and technology director Rico Usthavia Frans said collaboration with fintech companies should be established as soon as possible as the latter could eat banks’ market shares if ignored.

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