Opinion: What regulators in Indonesia should do as fintech flourishes

Photo credit: Daniel Giovanni

Aidil is a TIA Star Contributor and publishes high-value content that serves the Asian tech community. Read more from TIA Star Contributors here.

The growth of fintech in Indonesia has been strong and encouraging. However, fintech startups are slowly growing into “adult fintech companies” that submit to regulatory and compliance policies. The need to quickly regulate fintech companies is also dawning upon the regulators. However, trying to catch up with the industry’s rapid development can result in over-regulation, irrelevant regulations, and even under-regulation.

The obvious advantage of fintech development in an emerging market like Indonesia is that it plays to a national, political, and economic agenda, that is financial inclusion. It has quickly become the anthem of not only all fintech players but also of wider stakeholders such as politicians.

But financial inclusion is more important from a regulatory perspective than as a rallying cry, as it sets the political and legislative context in which any regulatory framework is meant to serve.

This article aims not to pinpoint any fault or deficiency in the regulatory environment but to lead us to the fundamentals of regulations and their “whys.” Rightfully, the “hows” should be left to the regulatory bodies such as Indonesia Financial Service Authority (Otoritas Jasa Keuangan or OJK) and Bank Indonesia (BI).

Consumer protection

By most credible theories of government, the main (and sometimes the only) role of the government is to protect its citizens. Anything more than that might be regarded as government overreach. Such responsibility obviously includes ensuring that citizens can participate in an economic environment where it is not (too) disadvantaged by the power of other participants such as banks and corporates. Therefore, consumer protection laws is nothing new for financial services.

Consumer protection must be and has always been one of the fundamental bedrocks of any financial services regulation. This must be counterbalanced with various considerations such as allowing businesses to innovate and grow. But with many competing interests in any debate, the clear winner ought to be consumer protection. Obviously, this is easier said than done.

For example, while I think interest rates for unsecured loans ought to be regulated and capped in the interest of consumer protection, such premature capping in an emerging market like Indonesia (which has a huge unbanked and underbanked population) would have the following effects:

• Participants would be forced into the black market where government protection is non-existent
• Microfinance institutions and responsible bottom-of-pyramid lenders would no longer be sustainable

If there are strong competing consumer protection interests (protecting consumers from black market forces is also a consumer protection issue), it is incumbent on the regulators to serve and balance such competing interests. As the title of one World Bank paper puts it, interest rate caps are a “popular but blunt instrument.” For example, it might be better to regulate the conduct of participants (i.e. business practices) instead of their economics (i.e. pricing). It would also be a more effective long-term solution to look into creating an environment where low-cost capital and funding are assured for online lenders.

Fortunately, regulation and consumer protection are not a zero-sum game.

Free market forces: Avoiding over-regulation

All stakeholders in Indonesia have contributed to the rapid development of fintech. However, virtually all developments (e.g. payments companies like Kartuku and Midtrans, and lending companies like our UangTeman, Modalku, and Investree) have started when there was no or very little regulation.

At the current stage of development today, the regulators have rightfully asserted their sovereignty to regulate the fintech industry. They have understood that their primary role is to protect consumers in the context of strong industry development.

Over-regulation and its effect on the government’s financial inclusion push

Conclusion