Ready for take off | Asian Legal Affairs
This year promises to be an exciting one for the Indonesian fintech sector. Although it still focuses on two main verticals – electronic payment and peer-to-peer (P2P) lending, the Indonesian fintech sector has grown to cover other verticals, such as aggregators, credit rating innovative, financial planning and project financing. Lawyers talk about what’s on the horizon for this booming industry.
Indonesia offers fertile ground for innovation in the FinTech sector. In addition to having the 16th largest economy in the world, it is also the fourth most populous country with 274 million inhabitants, 84% of whom are under 54 years old. More importantly, internet penetration stands at 67%, while financial inclusion is far from optimal.
To address this, the government has introduced rules in areas such as peer-to-peer lending (P2P), digital payments and, more recently, open banking, in hopes of spurring innovation and improving performance. financial inclusion. The efforts have paid off, and Indonesia is home to 322 fintech companies, in addition to 125 registered but unlicensed online lenders, according to the December 2020 report from Fintech News Singapore.
According to Thomas Choo, a Singapore-based TMT partner at Clyde & Co, the Indonesian fintech startup landscape remains heavily concentrated in the online lending space, which accounts for half of all fintech startups in the country. “Online lending is followed by electronic payments, blockchain and cryptocurrency, and investment / personal finance. Other segments represented include insurtech, crowdfunding, point of sale (POS) services and financial comparison, ”he notes.
Choo points out that the last few years have seen the first signs of consolidation and several M&A deals. “These include GoJek’s $ 130 million acquisition of point-of-sale service provider Moka and Ovo’s purchase of local startup Taralite to enter the online lending space,” he said. “GoJek has also aggressively expanded into Southeast Asia in 2020 in its bid to become another regional super app, with merger and acquisition activity in Vietnam and an imminent merger with the e-commerce provider. Tokopedia. “
Meanwhile, in the online lending industry, there has been a slight increase in downstream services, such as artificial intelligence for credit scoring and alternative lending solutions, Choo explains. “In addition, the volume of P2P loans has continued to grow in Indonesia. This trend can be expected to continue, given the online credit market share. But a few interesting areas to watch out for, including online trading and cryptocurrencies, which are expected to experience tremendous growth in the region, ”he adds.
Elsie Hakim, banking and finance partner of Jakarta-based ABNR, agrees that the FinTech industry continues to grow in Indonesia, especially in terms of number of players. “The Indonesian FinTech Association (AFTECH) saw an increase in the number of companies engaged in the digital financial innovation (DFI) sector last year, especially DFIs in aggregator clusters, rating innovative credit and financial planner, ”Hakim said. “Other sectors that have also emerged are insurtech, fundraisers and e-KYC. Overall, however, the greatest growth and trend is still held by the aggregator industry. “
Lawyers believe that Indonesian authorities and / or regulators have made a major contribution to the fintech industry by enacting laws and regulations on fintech and other sectors related to fintech. “The existence of laws and regulations has brought legal certainty to all fintech players and stakeholders,” says Hakim. “Fintech laws and regulations have legitimized the implementation of the business activities of the fintech industry and created a barrier that separates the financial services provided by fintech companies and those provided by mainstream financial services companies. “
“Existing fintech laws and regulations are far from perfect, given that the industry in Indonesia is still in its infancy. We believe that the Indonesian authorities and regulators are aware of this fact and that they will probably flesh out the laws and regulations. “
– Elsie Hakim, ABNR
However, there is still work to be done. “Existing fintech laws and regulations are far from perfect, given that the industry in Indonesia is still in its infancy. We believe that the Indonesian authorities and regulators are aware of this fact and that they will probably flesh out the laws and regulations, ”Hakim said.
Choo agrees. “The rhetoric of Indonesian fintech startups often understands that the regulatory process in Indonesia is too slow and too ambiguous,” he says. “The government still needs to take steps to ensure clearer regulatory requirements and a better environment for fintech startups, to build the confidence of founders and investors of fintech startups in Indonesia. Overall, starting a fintech business in Indonesia requires patience, mainly due to the licensing process from the Financial Services Authority (OJK) of Indonesia and the Central Bank of Indonesia.
He further points out that, as Indonesia remains one of the highest unbanked populations in the world, very few Indonesian SMEs have access to credit due to insufficient credit history, statements or guarantees. “And yet, these same SMEs represent a significant share of total GDP in Indonesia. The government should support the expansion of FinTech so that it can help more SMEs access loans and grow their businesses. Supporting SMEs is important for the Indonesian economy given their massive contribution, ”says Choo.
ABNR’s Hakim says there are a number of areas his company has worked on relating to the fintech industry.
“Lately, we have helped one of the largest consumer electronics and mobile communications companies with interesting transactions and types of work, including: (i) the acquisition of an Indonesian peer-to lending company -peer, and (ii) advice on business models or peer-to-peer lending structures, aggregator, supply chain finance, payment gateway, prepaid cards, ”she says.
Choo at Clyde notes that the Indonesian fintech market has been quite dynamic over the past two years.
“We have seen (and participated in) a wide range of work in this sector, from early stage tech venture capital funds that focus their investments on strategic digital disruptors in Indonesia to Indonesian start-ups (in P2P, robo-advisory and electronic payments) seeking access to capital, ”he says. “In a large majority of the deals I have done, the tendency is for Indonesian startups to have a holding company in Singapore to gain access to capital and be ready for regional expansion.”
And 2021 also promises to be very eventful. “The fintech industry, especially the fintech lending industry, could face a bigger challenge in 2021,” Hakim said. “The OJK is currently preparing a new regulation on fintech loans which will replace the OJK regulation No. 77 of 2016 on information technology-based money lending services. From our understanding, the draft regulation is more comprehensive than the OJK Reg. 77 and incorporate major changes, such as an increase in the minimum issued and paid-up capital of a peer-to-peer loan provider from 2.5 billion rupees ($ 175 million) to 15 billion rupees; foreign ownership requirements for new peer-to-peer loan providers: a foreign ownership entity must be engaged in financial services, while individuals can only acquire shares of a peer-to-peer loan company through capital market transactions; simplification of license authorization from two phases to one; and compulsory financing of productive sectors. She adds that once the OJK promulgates the draft regulation, these requirements must be met by existing and new players, “assuming the provisions survive”.
Choo expects to see a significant increase in the valuation of Indonesian startups in this space this year, with a few heavily supported ones going to be released this year in the United States or Indonesia. “We should also see more clarity from the Indonesian government on the legality of cryptocurrency, in particular the trading of these assets and the associated investment platforms, which in turn could trigger wider adoption of the cryptocurrency. cryptocurrencies in the region, ”he notes.
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