August 29, 2024 | Indonesia's Regulation

First-step Analysis: Fintech Regulation in Indonesia

Financial regulation

Regulatory bodies

Which bodies regulate the provision of fintech products and services?

Fintech products and services in Indonesia are regulated mainly by two government bodies, Bank Indonesia (BI) and the Financial Services Authority (OJK). BI’s authority is primarily geared toward payment system operators and fintech products relevant to payment systems, while the OJK oversees bank and non-bank financial institutions and the fintech products related thereto. In the case of certain entities such as banks, both the OJK and BI have jurisdiction, regulating their products and services.

Business activities related to cryptoassets are currently under the jurisdiction of the Commodity Futures Trading Regulatory Agency (Bappebti). However, pursuant to Law No. 4 of 2023 regarding the Development and Strengthening of the Financial Sector (the P2SK Law), the regulatory authority of cryptoassets is projected to shift from Bappebti to the OJK as of January 2025.

Regulated activities

Which activities trigger a licensing requirement in your jurisdiction?

In general, all parties that conduct business activities in Indonesia are subject to licensing and registration requirements under the authority of the Ministry of Investment / Indonesian Investment Coordinating Board. For businesses in the financial sector, there are additional specific licensing requirements under the authority of BI or the OJK, depending on the scope of business activities in which a company engages.

With regard to innovations within the fintech sector, the P2SK Law provides a broad scope of technology innovations that fall under the cluster of Technological Innovation in the Financial Sector (ITSK). ITSK activities are subject to licensing requirements under the supervisory authority of both the OJK and BI, depending on the specific ITSK activity.

In February 2024, the OJK issued OJK Regulation No. 3 of 2024 regarding the Implementation of ITSK (OJK Reg. 3/2024) regarding the implementation of ITSK, providing a new licensing regime for business activities connected to technological innovations in the financial sector. Pursuant to OJK Reg. 3/2024, the following ITSK activities fall under the jurisdiction of OJK:

  • transaction settlement activities for securities transactions relating to the clearing, settlement, recording and custody of financial instruments in the money market, foreign exchange market, and capital market;
  • capital raising activities, including equity crowdfunding and smart contracts;
  • investment management activities utilising advanced algorithms, which include robo-advisory services, digital financial planning services and retail algorithmic trading;
  • risk management activities related to product development and underwriting;
  • fundraising and fund disbursement activities like peer-to-peer lending and financing agents;
  • market support activities, including credit scoring, aggregator, and e-know your customer utilising technologies such as AI and big data;
  • activities related to digital financial assets such as cryptoassets; and
  • other digital finance activities such as Islamic digital financing, invoice trading and blockchain-based applications.

 

ITSK activities that fall under the jurisdiction of BI are technological innovations utilised in payment systems, specifically in the processing of payment transactions (ie, the pre-transaction, initiation, authorisation, clearing, final settlement and post-transaction stages of payment transactions). However, BI is yet to issue an implementing regulation specifically regulating these ITSK activities. Nevertheless, companies engaged in ITSK activities related to payment systems will be subject to the current legal framework and licensing regime for payment systems under BI regulations.

Foreign organisers of trade through an electronic system, namely, any business practitioner that provides electronic communication facilities used in trade transactions and operates from outside Indonesia and meets certain criteria, shall be required to appoint a representative in Indonesia and consequently must have a foreign trade company representative office in the country.

Consumer lending

Is consumer lending regulated in your jurisdiction?

Consumer lending is regulated in Indonesia, with a particular focus on IT-based money lending services (peer-to-peer lending), as regulated under OJK Regulation No. 10/POJK.05/2022 regarding Information Technology-Based Co-Financing Services, dated 29 June 2022 (OJK Reg. 10/2022). This regulation requires providers of IT-based co-financing services to be a limited liability company and meet certain prerequisites.

The OJK has the authority to regulate, register and issue licences, as well as supervise the fintech consumer lending industry. Pursuant to this regulation, a company engaging in the provision of peer-to-peer lending activities can have a maximum foreign ownership of 85 per cent, which means at least 15 per cent of the ownership must be in the hands of Indonesian parties.

Further, the provider must have at least 25 billion rupiahs (approximately US$1.7 million at current exchange rates) in issued capital during its establishment. The issued capital must be fully paid and placed in a time deposit. Providers must also have a minimum equity of 12.5 billion rupiahs (approximately US$850,000 at current exchange rates) at all times. The fulfilment of this minimum equity requirement can be done gradually, as follows:

  • at least 2.5 billion rupiahs for one year as of the promulgation of OJK Reg. 10/2022;
  • at least 7.5 billion rupiahs for two years as of the promulgation of OJK Reg. 10/2022; and
  • at least 12.5 billion rupiahs beginning as of three years from the promulgation of OJK Reg. 10/2022.

 

Peer-to-peer providers shall directly apply to the OJK for a licence. The OJK further requires providers to obtain an Electronic System Provider Certificate (ESP Registration Certificate) issued by the Ministry of Communication and Informatics (MOCI), in addition to the licence issued by the OJK. Providers are restricted from conducting any funding activity before obtaining an ESP Registration Certificate. Within 30 calendar days after obtaining an ESP Registration Certificate, providers must begin funding activity. Failure to obtain an ESP Registration Certificate or to conduct funding within the given timeline will result in the OJK cancelling the provider’s existing licence.

Secondary market loan trading

Are there restrictions on trading loans in the secondary market in your jurisdiction?

Currently, the trading of loans in the secondary market in Indonesia is not specifically regulated under Indonesian law. There is no specific restriction on this activity and loans are generally transferable unless agreed otherwise by the parties involved.

Collective investment schemes

Describe the regulatory regime for collective investment schemes and whether fintech companies providing alternative finance products or services would fall within its scope.

Under Indonesian law, two types of collective investment schemes are recognised: collective investment contracts (CICs) and joint investment contracts (JICs). A CIC is a contract in which an investment manager and a custodian bank jointly bind investors. In this arrangement, the investment manager is authorised to manage the collective investment portfolio, while the custodian bank is responsible for implementing collective custody. This is often structured as a mutual fund.

A JIC is managed by a venture capital company with the approval of the OJK, even though a JIC is not considered a legal entity in Indonesia. However, entities established through venture fund joint investment contracts are considered legal entities.

It is important to note that alternative finance products or services, such as peer-to-peer lending and crowdfunding platforms, do not fall within the purview of these regulations. They are instead subject to their own specific regulations.

Alternative investment funds

Are managers of alternative investment funds regulated?

In general, investment managers are regulated by the OJK, pursuant to OJK Regulation No. 24/POJK.04/2014 regarding Implementation Guidelines for the Functions of Investment Managers, dated 19 November 2014. The roles of investment managers are also regulated under the following regulations:

Peer-to-peer and marketplace lending

Describe any specific regulation of peer-to-peer or marketplace lending in your jurisdiction.

While marketplace lending is not specifically regulated in Indonesia, peer-to-peer lending is. The activity of peer-to-peer lending is specifically regulated under OJK Regulation No. 10/POJK.05/2022 regarding Information Technology-Based Co-Financing Services, dated 4 July 2022. It provides the OJK the right to regulate and supervise peer-to-peer lending activities, including handling the registration and licensing of peer-to-peer lending platform providers. Peer-to-peer lending in Indonesia is described as the provision of financial services, whereby the lender meets the borrower in conducting conventional funding or based on shariah principles directly through an electronic system using the internet.

Shareholders in peer-to-peer lending companies can be Indonesian individuals or legal entities or a combination of Indonesian and foreign individuals or legal entities. The funding limit is set at 2 billion rupiahs (approximately US$135,000 at current exchange rates) for both the funding receiver and provider. Members of the board and officials must have competency certification issued by a professional certification institution in the financial technology sector. Foreign board members must obtain Bahasa Indonesia certification within one year of approval. Primary parties, including controlling shareholders, board members, and commissioners, must pass a ‘fit and proper’ test before taking any actions. Additional requirements for peer-to-peer providers include electronic system requirements, risk management and internal audit obligations, and controlling shareholder requirements.

Crowdfunding

Describe any specific regulation of crowdfunding in your jurisdiction.

Equity crowdfunding covers the provision of share-offering services conducted by issuers to sell shares directly to investors through an open electronic system network. Equity crowdfunding is regulated under OJK Regulation No. 57/POJK.04/2020 regarding Securities Offerings Through Information Technology-Based Crowdfunding Services, dated 11 December 2020, as amended by OJK Regulation No. 16/POJK.04/2021, dated 26 August 2021. Under this regulation, a licensed equity crowdfunding platform provider or organiser is able to provide issuers (Indonesian limited liability companies) access to sell their shares to investors that are also using the platform. An equity crowdfunding platform company is required to be an Indonesian limited liability company or an Indonesian cooperative and have registered with and received a licence from the OJK to provide, manage and operate the equity crowdfunding platform.

Invoice trading

Describe any specific regulation of invoice trading in your jurisdiction.

There are no prevailing regulations under Indonesian law specifically regulating invoice trading. Nevertheless, invoice trading is stipulated as one of the activities considered as digital financial innovation within the scope of ITSK under OJK Reg. 3/2024. Accordingly, companies seeking to engage in invoice trading activities are subject to the ITSK licensing regime, which essentially involves the following steps: (1) regulatory sandbox participation; (2) registration as an ITSK provider; and (3) ITSK licence application. Further, OJK Reg. 3/2024 stipulates that companies engaged in ITSK activities must be in the form of a legal entity established under Indonesian law, such as a limited liability company.

Payment services

Are payment services regulated in your jurisdiction?

Payment services in Indonesia are regulated mainly by Indonesia’s central bank, the BI, which is in charge of regulating payment system activities in Indonesia. Following the issuance of BI Regulation No. 22/23/PBI/2020 regarding Payment Systems (BI Regulation 22/23), dated 30 December 2020, the BI issued several additional regulations that contain more specific and robust provisions with respect to payment system providers (PSPs) and payment system infrastructure providers (PSIPs). These additional regulations are BI Regulation No. 23/6/PBI/2021 regarding Payment System Providers, dated 1 July 2021 (BI Regulation 23/6), and BI Regulation No. 23/7/PBI/2021 regarding Payment System Infrastructure Providers, dated 1 July 2021 (BI Regulation 23/7). PSPs are open to 85 per cent foreign share ownership (with a maximum of 49 per cent of shares with voting rights held by foreign shareholders), while PSIPs are open to 20 per cent foreign share ownership (with a 20 per cent maximum of shares with voting rights held by foreign shareholders).

Open banking

Are there any laws or regulations introduced to promote competition that require financial institutions to make customer or product data available to third parties?

In response to the evolving open banking activities within the payment system sector, BI enacted Members of the BI Board of Governors Regulation No. 23/15/PADG/2021, which parties were required to comply by 31 December 2022 at the lates. This regulation introduced the National Standard for Open Application Programming Interface (API) Payment, also known as the SNAP policy. The SNAP policy outlines a standardised approach to Open API Payment, aiming to ensure its effective and efficient operation.

One of the key objectives of the SNAP policy is to provide clarity regarding its scope and application, as well as to delineate the roles and responsibilities of various parties involved in the administration of Open API Payment connectivity. The SNAP policy also aims to ensure a level playing field among different payment service providers, including both banks and non-bank institutions, as well as other parties that collaborate in Open API Payment connectivity. This is aligned with broader efforts to foster a cohesive and integrated Open API Payment ecosystem.

Currently, the SNAP policy is utilised in the processing of payment transactions for the following:

  • administrative purposes;
  • security purposes;
  • registration purposes;
  • obtainment of balance information;
  • obtainment of transaction history;
  • credit transfer; and
  • debit transfer.

Insurance products

Do fintech companies that sell or market insurance products in your jurisdiction need to be regulated?

The selling and marketing of insurance products in Indonesia by both insurance companies and fintech companies is regulated and licensed by the OJK. In practice, licensed insurance companies in Indonesia have been selling their products over the internet, through their own platforms or by cooperating with other parties (eg, e-commerce platforms or e-money platforms) to assist in facilitating the selling and marketing of their insurance products. However, it is important to note that fintech companies involved in the selling or marketing of insurance products face certain limitations, as specific rights are exclusively reserved for insurance companies.

Credit references

Are there any restrictions on providing credit references or credit information services in your jurisdiction?

There are restrictions on providing credit information services. In Indonesia, credit reports can only be issued by a credit bureau licensed by the OJK. A credit report is defined under OJK Regulation 5/POJK.03/2022 regarding Credit Information Management Agencies, dated 28 March 2022, and OJK Circular Letter No. 27/SEOJK.03/2022 of 2022 regarding Credit Information Management Agencies, dated 22 December 2022 (together, the Credit Bureau Regulation), as a product or service generated by a credit bureau in writing, verbally or by some other method, sourced from credit data and other data owned by the credit bureau. A credit report generated by a credit bureau, among other things, contains information on:

  • statistics for planning, business development and determining policies;
  • information to measure the performance and supervise the risk profile of the debtor or customer;
  • the ability of the debtor or customer to fulfil its fund provision obligations;
  • the character of the debtor or customer; and
  • other information that may be utilised to assess the abilities of the debtor or customer.

 

Pursuant to the Credit Bureau Regulation, a credit bureau engages in the business activities of collecting credit data and other data, and processing credit data and other data to generate credit information.

The Credit Bureau Regulation also specifically mentions that a credit bureau must be in the form of an Indonesian limited liability company and is subject to applicable foreign shareholding restrictions. In addition, a credit bureau must obtain a business licence from the OJK to conduct its business activities. While the total ownership of one or more foreign parties in a credit bureau is limited to 20 per cent, if one foreign party owns more than one credit bureau that foreign party’s total ownership in all the credit bureaus combined is limited to 20 per cent.

In collecting and processing credit information, a licensed Indonesian credit bureau obtains credit data from the OJK. The credit data from the OJK consists of data submitted to it by financial institutions. A licensed Indonesian credit bureau may also cooperate with financial institutions to obtain credit data or with financial institutions and non-financial institutions for other data, or both. A credit bureau must make an effort to ensure that the source of the data informs the relevant debtor or customer of how the credit data and other data will be utilised. Credit data is defined as data regarding the condition of the funding facility of the debtor or the customer.

Other data in relation to a credit bureau is defined as data other than credit data that can be used to describe the capability of a certain party in fulfilling the party’s financial obligations including the behavioural patterns of the debtor or customer.

In addition to traditional credit bureau scores, Indonesian law also regulates alternative credit scoring mechanisms, which fall under the scope of ITSK activities under the supervision of the OJK. However, there are restrictions on the type of data that can be used to generate such credit scores. Obtaining a licence from the OJK is a prerequisite to operate in this ITSK activity.

 

Source From Lexology
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