Indonesia is on a serious journey to become a leading digital powerhouse in Southeast Asia, specifically in the financial technology sector.

In this interview The Legal 500 sits down with award-winning Indonesian law firm, Makes & Partners, to discuss some relevant regulations in the FinTech landscape in Indonesia.

Questions and Answers

  1. Please tell us about the firm’s Fintech practice and what separates it from your competitors?

Our law firm, Makes & Partners is an independent, innovative and creative Indonesian law firm and a leader in the Indonesian integrated corporate finance and corporate commercial legal services market. Established in 1993 by Yozua Makes, the market recognizes us as a trusted strategic leader for proposing integrated commercial business and legal solutions and for our role in advising and bringing high profile and complex corporate commercial transactions to a successful completion.

Our Startup, Venture Capital and Fintech Practice Group, is composed of a team of highly experienced lawyers who have deep expertise in the financial technology industry.  This practice group offers a comprehensive range of legal services that are designed to meet the unique needs of startups, venture capital and financial technology companies and stakeholders.

Experience-wise, we represent both longstanding and upcoming market leaders in the industry. Our portfolio of clients includes start-up founders, venture capital firms, financial technology companies, private equity firms, investment funds, and other key players in Indonesia. In particular, our Firm is known for spearheading a vast array of transactions in various stages of fundraising of financial technology companies fundraising, strengthening our position as a pioneer in promoting the rapid growth of this industry.

  1. What are the relevant laws on payment services in Indonesia?

In general, the implementation of payment services in Indonesia is under the supervision of Bank Indonesia (“BI”), the central bank of Indonesia. BI has enacted a set of rules and regulations as  implementing regulations for  payment services in Indonesia which consist of (i) BI Regulation No. 22/23/PBI/2020 of 2020 on Payment System (“BI Regulation No. 22/2020”), (ii) BI Regulation No. 23/6/PBI/2021 of 2021 on Payment Services Provider (“BI Regulation No. 23/2021”), and BI Regulation No. 14/23/PBI/2012 on Fund Transfers which was partially revoked by BI Regulation No. 23/2021. For electronic transactions in Indonesia, Law No. 11 of 2008 on Electronic Information and Transactions (“ITE Law”) as lastly amended by Law No. 19 of 2016, would also be relevant as this regulation specifically regulates the use of information technology, including in terms of implementing an electronic transaction.

In addition to the above, the newly enacted Law No. 4 of 2023 on Financial Sector Development and Reinforcement (“P2SK Law”) introduces the “Digital Rupiah” as a type of Rupiah aside from Paper Rupiah (Rupiah Kertas) and Metal Rupiah (Rupiah Logam), which will be managed by the BI in collaboration with the Indonesian government. Digital Rupiah is now a lawful currency of the Republic Indonesia and has the same functions as the Paper Rupiah and Metal Rupiah.

To date, the implementing regulations related to the Digital Rupiah have not been enacted. In this matter, any further implementing regulation of the P2SK that may be enacted by the Indonesian government in the future may also be relevant to the payment services regulations in Indonesia.

  1. Can payment services be provided by non-banks and, if so, on what conditions?

In Indonesia, any party who wishes to operate in the payment services sector should obtain a license as Payment Services Providers (Penyedia Jasa Pembayaran or “PJP”) from the BI. Further under BI Regulation No. 22/2020 and BI Regulation No. 23/2021, a non-bank institution is allowed to obtain a  PJP license. The PJP license itself is classified into 3 (three) categories of license according to the types of payment-services activities operated by such PJP. As a general note, PJP license Category 1 is considered as the license which covers the most comprehensive types of payment services activities, such as: (i) administration of the source of funds, (ii) providing information on the source of funds, (iii) payment initiation and/or acquiring services; and (iv) remittance services.

Both banks and non-bank institutions are able to act as a PJP. Specifically, a non-bank institution that wishes to obtain a license as a PJP should also comply with the following conditions:

  1. it should be in the form of a limited liability company, save for a non-bank institution who wishes to obtain a PJP license category 3, which can be in the form of any other Indonesian legal entity;
  2. it should have at least 1 (one) member of its Board of Directors domiciled within the territory of Indonesia; and
  3. its shareholding should consist of at least 15% (fifteen percent) owned by an Indonesian citizen and/or Indonesian legal entity.

4. What are the most popular payment methods and payment instruments in Indonesia?

Indonesia still faces a substantial gap in the development of its financial services sector. This is reflected by the fact that in 2022, the traditional cash method/paper money remains the most widely used payment method across the country. According to the Statista report on market share of cash, credit cards and other payment methods at points of sale (POS) in Indonesia, cash payments are used in up to 45% (forty-five percent) of all payment transactions. However, the digital payment trend in Indonesia has been on the rise. In 2022, e-wallet was the second-most used payment method in Indonesia and was used in up to 28% (twenty eight percent) of all payment transactions. This trend is particularly evident in urban areas, where many have adopted e-wallets as their primary payment method facilitated by numerous e-wallet providers. Another key feature that has helped to drive digital payments in Indonesia is the QRIS (Quick Response Code Indonesian Standard) system, which allows the users to make payments by scanning a QR code with their smartphone, without the need for additional hardware or software. The adoption of a QRIS system also simplifies the digital payment systems in Indonesia by providing an integrated system for multiple payment channels. After cash payments and digital payments, the use of the debit card and credit card was the third most used payment method in 2022 accounting for up to 11% (eleven percent) of payment transactions.[1]

  1. How do Indonesian data regulations impact the provision of financial services to consumers and businesses?

Indonesian laws and regulations broadly regulate the use of data in various fields of industry, spreading across administrative, electronic transaction and health sector regulations. The laws and regulations mainly stipulate the collection, use, and/or transmission of personal data which are included as part of personal data processing. Recently, the Indonesian government enacted Law No. 27 of 2022 on Personal Data Protection (“PDP Law”), which stipulates that personal data processing applies whether such data is obtained through electronic or non-electronic means. However, since the nature of financial services is heavily reliant on financial technology, it changes the way consumers and businesses process activities carried out in the form of electronic system (an online site, application, or platform) that are used to cater to financial services. Personal data processing activities would primarily be related to the processing of electronic data or information. With the convenience provided by information technology, awareness on protecting personal data does not always have to come from financial services providers but also from the owners of personal data. Therefore, aside from the obligation to protect the personal data of its users, financial service providers also educate the public (most importantly their respective users) about the importance of protecting their own data (e.g.  warning them to not easily provide their personal data to illegal financial service providers).

Apart from  the PDP Law, financial technology businesses would  be subject to the following main regulations: (i) ITE Law; (ii) Government Regulation No. 71 of 2019 on the Implementation of Electronic Systems and Transactions; (iii) Minister of Communication and Informatics Regulation No. 20 of 2016 on the Protection of Personal Data in Electronic Systems; (iv) Minister of Communication and Informatics Regulation No. 5 of 2020, as amended by Minister of Communication and Informatics Regulation No. 10 of 2021, on Electronic System Providers in the Private Sector and Financial Services Authority Regulations No. 4/POJK.05/2021 of 2021 on Application of Risk Management During The Use Of Information Technology by Non-Bank Financial Service Institutions.

  1. What are Indonesian regulators doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions in Fintech?

Financial Services Authority (Otoritas Jasa Keuangan or “OJK”) has established OJK Regulation No. 13/POJK.02/2018 on Digital Financial Innovations Within the Financial Services Sector (“POJK No. 13/2018”) to support innovative, fast, cheap, easy, and broad financial services and to increase financial inclusion, investment, financing and other financial services. POJK No. 13/2018 is the legal basis for digital financial innovation (Inovasi Keuangan Digitial or “IKD”) which include financial technology. Under POJK No. 13/2018, any activity for updating business processes, business models and financial instruments that provide new added value within the financial services sector while involving the digital ecosystem is called an IKD and should obtain licenses from the OJK. Any startup company and Financial Services Institution (Lembaga Jasa Keuangan or “LJK”) can register to obtain licenses from the OJK to carry out IKD activities. In addition, prior to applying for a permit these startups and LJK would have to go through 3 stages as follows:

  1. Registration with the OJK for startup/non-LJK companies. Logging requests automatically include Regulatory Sandbox testing requests. As a LJK, sandbox applications are submitted to the supervisors of each sector (Banking, Capital Markets, Non-Bank Financial Institutions);
  2. The Regulatory Sandbox process has a maximum period of one year and can be extended for another 6 months, if necessary. An IKD Operator who has undergone the Regulatory Sandbox and have a “recommended” status may apply for registration to the OJK;
  3. Registration/licensing with the OJK.

 Moreover, the enactment of the P2SK Law also marks a significant milestone for Indonesia’s financial sector. One of the initiatives of the P2SK Law is the establishment of the Technology Innovation in the Financial Sector (Inovasi Teknologi Sektor Keuangan or “ITSK”) which will be the main institution that would regulate and supervise the fintech matters of the BI and OJK. The scope of authorities related to the ITSK includes the provision of space and/or facilitation of trials/innovation development (sandbox), licensing, monitoring and evaluation, financial education, consumer protection, consumer personal data protection and institutional aspects.

  1. Do you foresee any hurdles to the growth of Indonesia’s Fintech market?
  •  Similar to banks, a company engaged in the financial technology industry (such as a peer-to-peer lending (“P2P”) company) is also prone to being used for money laundering or terrorism funding activities which leads to the public’s distrust and negative perception of financial technology companies.
  • Misuse of consumer data by illegal financial technology companies which is broadly reported in the media can lead to customers’ hesitation to use financial technology services.
  •   Massive and demeaning collection by “debt-collectors” to the debtors of P2P company users  may hinder public interest in using financial technology as a source of funding.
  •   Uneven distribution of information technology to society and lack of literacy related to financial technology can also hinder the growth of the financial technology sector.
  1. Why is Indonesia a good choice for Fintech entrepreneurs? ?

Despite the aforementioned hurdles, there are many reasons why financial technology entrepreneurs should choose Indonesia as its area of operations, such as:

  1. Users of financial technology in Indonesia increases every year. Based on the OJK’s data, active loan recipient account pertaining to financial technology lending activities increased from 12.837.659 (March 2022) into 17.594.551 (March 2023). Further, AC Ventures (ACV) together with Boston Consulting Group (BCG) established a report entitled “Indonesia Fintech Industry Is a Sleeping Giant Ready to Rise” and estimated that the Compounded Annual Growth Grade (CAGR) of financial technology in Indonesia in the payment services sector  could grow by 26% (twenty six percent) until 2025, from the active user based in 2020 of around 60 million users.
  2. There is a strong support in the financial technology sector from the Indonesian government through the BI and OJK. In addition to providing an ever-evolving regulatory support for financial technology companies to further grow and develop, education on financial technology is also consistently and continuously extended to the public.

Capital requirement for establishing some financial technology companies is not as high and is more flexible compared to the capital requirement for companies in other industries. For example, to carry out business activities as a PJP, the minimum paid-up and issued capital can range from just Rp500 million (approx. USD33,150 as of 31 July 2023 up to Rp15 billion (approx USD994,000). On the other hand, the minimum paid-up and issued capital for an insurance company is Rp150 billion (approx. USD9,940,000 as of 31 July 2023).



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