The rapid development of technology-based financial (fintech) companies in Indonesia is being overshadowed by the invasion of illegal foreign fintech firms, particularly in the peer-to-peer (P2P) lending sector. The firms are targeting Indonesia’s huge P2P lending market potential, also triggered by the tightening of regulations in their own countries.
Financial Services Authority (OJK) Head of Investment Alert Task Force Tongam Lumban Tobing said the task force found 182 illegal fintech firms operating in Indonesia. Most of them from China, but there were also those from Malaysia, Thailand, and the US.
When coupled with 227 illegal fintech firms whose operations were closed by the task force in July, only two months later 407 illegal firms emerged in Indonesia.
In accordance with OJK Regulation No. 77/2016 concerning Technology-Based Lending, fintech firms operating in Indonesia must be registered with the OJK. “Unregistered fintech P2P lending firms must stop their activities. All forms of apps in Google Playstore, iStore, and other social media must be removed,” Tongam said last week.
The OJK is also collaborating with the Ministry of Communications and Information to curb sites and apps belonging to illegal fintech firms. The task force has demanded illegal P2P fintech firms to immediately settle obligations to their users (customers). The authority has provided an opportunity for these firms to apply for registration with the OJK.
Illegal fintech firms are harming the public as it is feared they are being used for money laundering or terrorism financing, misuse of consumer data and information, not providing consumer protection, and creating a potential loss of tax revenue. The operation of illegal firms can also reduce public trust toward registered P2P lending fintech firms in the OJK and erode the legal market share of P2P fintech.
Tongam said illegal P2P fintech firms often operate by offering loans without short-term collateral, but they apply high interest that exceeds the loan principal.
In the case of bad loans, illegal firms use all means in collecting debts, including humiliating their consumers. As a consequence, some consumers were fired from their jobs and even contemplated suicide due to the humiliation.
These illegal P2P lending firms are also good at hiding. The task force found indications that some have reappeared by changing their company name and app.
The OJK will punish illegal fintech firms with bad records. It has data on the names of shareholders, management, and founders. When they try to register, it will not grant the registration.
Fintech firms applying for registration must have legal status in Indonesia and minimum capital of Rp 1 billion. They must also submit reports periodically regarding business development.
The firms must also carry out certification for ISO 27001, which is issued by the appointed certification agency, to ensure the reliability of electronic systems they own in order to protect the security of user data. After operating for one year and passing the trial, the fintech firms can apply for a business license from the OJK.
Targeting Market Potential
Indonesia is an easy target for foreign fintech P2P lending firms, given the low penetration of banking services, which account for 36 percent of the population. This means there are still 64 percent (around 160 million people) who need access to funding. According to the OJK, financing needs unfulfilled by banks have hit Rp 1,000 trillion.
The invasion of illegal fintech lending firms, especially from China, began when the country tightened its P2P lending regulations to overcome risks in the financial sector. P2P lending practices became part of shadow banking that implements high interest rates and misuses customer funds and enlarges corporate profits.
Based on data from Yingcan Group, 118 fintech P2P lending firms failed to fulfil obligations to their users. There are thousands of P2P lending platforms in China with 50 million users and disbursed loans of US$ 192 billion (Rp 2.745 trillion). It is the largest P2P lending market in Asia.
Eight P2P lending fintech firms were closed due to Ponzi scheme indications with estimated losses of US$ 9 billion. This discouraged trust from investors or lenders. As a consequence, dozens of Chinese P2P lending firms face liquidity difficulties and are unable to fulfil obligations to investors and continue their operations.
Indonesia Fintech Association Public Policy Director M Ajisatria Sulaeman said the rise of foreign P2P fintech firms was also triggered by the ease of making apps. “Today they were closed, but then they immediately change names and operate again tomorrow,” he told D-Inside.
Fintech regulation in Indonesia has been tightened, and what is needed is government assertiveness to enforce the prevailing laws and regulations. “The association is ready to help the government in monitoring the emergence of these illegal fintech firms,” he said.
Indonesian Fintech Association Chairman Adrian Gunadi said Indonesia’s high market potential is a major attraction for foreign fintech firms. “OJK, the communications and information ministry, and the Fintech Indonesia Association already have clear rules. Fintech firms that can operate are those that are legally registered to the OJK and become members of the association, where they must go through a verification process,” he said.
OJK Fintech Licensing and Supervision Director Hendrikus Passagi said the OJK tightened regulations because it did not want to deteriorate fintech development in Indonesia, as happened in China. He added that the authority must be vigilant because turmoil in the financial sector can affect economic conditions.
This is why the OJK demanded fintech firms to provide a complete report, including data about their shareholders and controlling shareholders. “Do not let the 1998 crisis happen again because corporate management are inconsiderate. There must be clarity about the business risks, ecosystems, and recipients of loans they seek,” Hendrikus said.
To improve consumer protection, the OJK has also asked fintech firms to have standard operating procedures (SOP) for handling consumer complaints.
OJK can review the business model of fintech firms and prohibit any changes in shareholders without its permission. Their financial reports will also be closely monitored, and if there are deviations in financial liabilities that are not recorded in the report (off balance sheet) or operating costs that are larger than fee-based income, the OJK can revoke their license or cancel their registration.