An analysis of fintech P2P lending in Indonesia

This article is written by Kuseryansyah, Executive Director of Indonesia Fintech Lending Association (AFPI). The original article was in Bahasa Indonesia and has been translated into English by the Momentum Works team under the authorisation of Pak Kuseryansyah.

2018 was the year when fintech boomed in Indonesia. However, it was also the year where there were negative news on fintech that went viral. 

The Darkside of Fintech?

If you want to find out more, just google/ youtube articles/ videos with the hashtag “#korban pinjol” , “#korbanfintech” – and you can see news representing the victim’s experience.

If we scan through the news online or through social media, the problems caused by fintech P2P lending include the following which is not allowed by the Financial Services Authority of Indonesia (OJK):

• Harsh collection method by some debt collectors. Some of these dialogues between the borrower and debt collectors are recorded and shared on social media.
• Some debt collectors use personal data/ phone book/ photo from the borrowers to chase for debt. There have been instances of debt collectors threatening to post compromising photos of the borrowers if the debts are not paid.
• Some debt collectors harassing the borrowers family, friends or colleagues. Some illegal debt collectors even create “online loan fugitive” Whatsapp group with the borrower’s family, friends, colleagues, and other people in the borrowers’ contact list to chase for debt payment.
• Criminals using another person’s identity to apply for and obtain loans on fintech platforms.

This is the dark side of fintech in Indonesia. These are the bad apples in the Indonesia fintech peer-to-peer (P2P) lending space and highlighted how unfair and unethical P2P lending companies are conducting their businesses.

The kind of news above create concerns amongst the public that fintech in Indonesia is growing unmonitored and is not being monitored by regulators. It did not help that 2018 was also the year that we heard of hundreds of P2P lending companies in China being shut down after they were found to be taking advantage of the shadow banking loopholes or were ponzi schemes.

There are also rumors in the market that Indonesia fintech P2P lending companies have no concern for consumer protection, even though this is one of the main tasks and functions mandated by the OJK for all businesses under its purview.

This kind of negative perception is unfair to an industry that has just started growing and aims to increase financial inclusion for Indonesians. However, this is part and parcel of the fintech industry- which, similar to the finance industry, must deal with credit, technology, people and, yes, reputation risk. The fintech business, as with any other financial business, is a risky business.

I would like to give an insight into how fintech businesses in Indonesia actually work. I will also like to share my views on the fintech trend in Indonesia vs that in other countries (including China). And I would like to address the question of whether there a connection between the cases that have been viral with the rules for fintech in Indonesia.

Let’s start.

The Middle Ground for Fintech?

Compared to fintech in other countries (including China), the fintech ecosystem in Indonesia is still considered to be on the middle ground – it is not too free, nor is it too regulated.

We observed that in China, there were no specific fintech regulations to govern the P2P lending business during the industry expansion stage. Anyone with a company, technology innovation, funding, and a loan product could technically start a P2P lending business. It was also not surprising that this accelerated the growth of the industry within a very short period of time. The positive effect of this was that idle capital in the community could be channeled to stimulate consumer and productive spending – which ultimately provided economic growth and contributed to the GDP of China.

The difference between Indonesia from China is that Indonesia introduced regulation to govern the P2P lending industry much earlier. Regulation POJK 77/2016 which regulates money lending services with information technology (LPMUBTI) is instrumental in influencing the creation of fintech P2P lending startups with various business models.

The development has been rapid. As at the end of November 2018, there were 72 companies that were registered and 1 company that had obtained the P2P license. As of 24 May 2019, the number had risen to 113 and 7 respectively. In addition, there are 6 Syariah fintech platform.

The P2P lending in Indonesia has also grown aggressively, but it’s better monitored and controlled. Aside from the 113 platforms above, there are no less than 135 companies that are in going through the process of registration with the OJK DP3F (Fintech Regulations, Licensing, and Supervision Directorate). The P2P lending companies and about 30 startups are also in the process of documenting itself with the OJK Digital Financial Innovation (POJK 13/2018). That’s a lot of companies, but not as many as the 6,000 platforms/ businesses in China.

We do not have to worry that the P2P lending in Indonesia will grow wild as it did in China. Indonesia has seen what had happened in China and had a plan in place since the start. The POJK 77 can be seen as having the foresight because it encompasses the “sandbox” process which companies need to go through before they can get the full license.

By regulating the existence and operations of P2P lending companies, the regulators are pushing for the following benefits:

1. All P2P lending companies operate by using the bank as the main infrastructure. All money transactions will go through virtual bank/bank’s escrow accounts. This minimizes concerns about the emergence of shadow banking because the OJK regulates that funds settling on the platform’s escrow account may not exceed 2 days. Customer security is also more guaranteed because lender funds do not enter the P2P lending company account but directly to the customer’s virtual account. Likewise, the payment of installments by the borrower is not directly to the P2P lending account but through the virtual account, the borrower is transferred to the lender account. In this aspect, the P2P lending platform is more of a channel and gets a management fee. It does not get involved in the transactions between lenders and borrowers.
2. P2P lending companies must be members of the Fintech Indonesia Joint Funding Association (AFPI). Through the AFPI, all members are subject to the code of conduct as fellow P2P lending participants – including a commitment to good corporate governance, have in place adequate risk management, avoiding excessive lending, ethical and professional debt collection, as well as commitment to protect the personal data and business of consumers.
3. With a regulatory structure in place where P2P Lending companies are members of AFPI and are supervised by the OJK, it is possible to impose sanctions when there are violations. AFPI has made breakthrough regarding the imposition of sanctions through the Ethic Assembly. AFPI through the Ethics Council can impose sanctions on members who violate the Code of Conduct with 4 (four) levels: 1. Written warning, 2. Publication of member names and provisions violated to the OJK and to the community, 3. Temporary dismissal from association membership, and or 4. Permanent dismissal from association membership. With a mechanism like this, the APFI and OJK can work closely to implement sanctions. For example, if the AFPI revokes the membership of one of its member, it is very likely that the OJK will respond with sanctions of the same severity set out in POJK 77/2016 (e.g.written warning, restrictions on business activities, freezing of business activities, revocation of licenses).
4. Changes to shareholders commissioners and directors must go through OJK approval. With this procedure, the OJK can make sure that only people with good standing can lead P2P lending business in Indonesia.
5. Monthly reports from business allow the regulators to review and follow up in a more timely manner.
6. The P2P lending business needs to be a neutral platform that brings together lenders with borrowers. As such there are regulations to disallow the P2P lending company from being a lender, being a borrower, giving recommendations to borrowers, or guaranteeing a loan.
7. One important message from POJK 77/2016 is business transparency. P2P lending companies are encouraged to encompass transparency in their business process and culture – through providing transparency about the imposition of fees, openness about the rights and obligations of users, openness about portfolio quality and risk by informing us of the success rate of 90 days (TKB90) every day.

Quo Vadis Fintech P2P Lending?

Optimism

Based on OJK information, on the supply side, there are more than 250 P2P lending platforms (registered and in the pipeline), and this indicates high interest from many groups, both domestic and international, to enter the Indonesia fintech lending industry. In particular, OJK has just issued a full business license to 6 P2P Lending platforms which of course further enhances trust and credibility towards the fintech lending industry. The 113 registered/licensed P2P lending can be categorized into several categories defined by the type of funding: Pure Productive (20%), Consumptive (27%); Productive and consumptive (43%), Sharia (5%) – most of which are pure syariah and others (5%).

In the early days, most P2P lending platforms were funded by venture capital. Nowadays, many P2P lending platforms are funded through many other sources, including Indonesian conglomerates. For example, Astra Group owns Maucash platform; Sinarmas Group owns both Danamas and Finmas platforms; Lippo Group owns Adakita platform; Djarum / BCA Group have the KlikAcc and Julo platforms. And more and larger fintech companies in the region (Asia Pacific) are entering the fintech Indonesia market.

The enthusiasm for the fintech P2P lending business is justified. At the end of 2016, the World Bank/ IFC reported that “traditional” financial institutions ( bank and multi-finance) could only fill 600 trillion rupiahs of the 1600 trillion rupiahs credit needs of MSME. The credit gap of around 1000 trillion can be categorized as an unbank or underserved segment – where is actually the main market target of fintech P2P lending, which operates using innovation and platform reliability from speed, simplicity, alternative data usage, and personalized report. If referring to the OJK data, that until April 2019 the total loans disbursed reached 37 trillion rupiah, which is certainly still far from the requirement of 1000 trillion per year.

Next Challenges

Whilst the outlook for fintech P2P lending is optimistic, there are still some negative issues that all the stakeholders have an obligation to resolve collectively:

1. There are still public unrest relating to the rough and unethical debt collection methods;
2. Illegal access and usage of personal data,
3. Unreasonably high interest rate
4. The social trend where borrowers are “trapped” when they borrow from multiple platforms to repay other P2P lending platforms – a phenomenon called “dig a hole to fill a hole”. This has social implications for a borrower’s personal life and has implications for business activities/work;
5. And relating to all of the above – there are still many illegal fintech operations that are operating without the permission of the OJK.

OJK has taken steps to some of the above issues. For example, OJK is limiting platforms to only have access to a borrower’s camera, microphone, location, and any other information that the AFPI has reviewed to align to its’ high operating standards as contained in the code of conduct These measures reduces the negative excesses as well as consumer protection efforts. However, there are some future agendas below that should deserve attention as well:

1. Enact the Personal Data Protection Regulation;
2. Enact the Fintech Regulations to not only increase the trust of the platforms but to protect the investors, borrowers, platforms, as well as uphold national interest and ensure fintech businesses are fairly taxed;
3. Increase public financial literacy and education;
4. Connect fintech companies with national databases so that population data (dukcapil) can be used to strengthen the E-KYC process, and make the onboarding process more effective and efficient;
5. Work with the governments to improve talent in the field of technology, data science, analytics, software developer, business manager, blockchain, etc.
6. Have in place a national Online Dispute Resolution (ODR) to handle complaints and cases related to lenders, platforms, and borrowers.
7. Maintain the consistency and increase the quality of the certification of activities for all stakeholders in the fintech lending industry. The quality that AFPI has bought to the industry must be further enhanced and be replicated in other themes related to risk management, alternative credit scoring, artificially intelligent, etc.

Building a financial industry is certainly the same and in line with building a financial civilization in society. It is like Rome – it is not built in one day (Or in Indonesia context, not a job like Loro Jonggrang asking Bandung Bondowoso to build 1000 temples overnight as a condition of marriage). The foundation takes time to build as in the end the fintech lending industry that we are going to build is aimed at the maximum for prosperity and justice for the people of Indonesia.

Originally written by Kuseryansyah, Direktur Eksekutif Asosiasi Fintech Pendanaan Bersama Indonesia (AFPI) and translated by Yorlin Ng