Financial Crime World

Indonesia Paves the Way for Fintech Innovation with Regulatory Sandbox

Bridging the Gap between Formal and Informal Financial Sectors

Jakarta, Indonesia - In an effort to bridge the gap between the formal and informal financial sectors, Indonesia has introduced a regulatory sandbox for Digital Financial Innovations (DFI), allowing fintech companies to experiment with innovative financial products or services while ensuring customer protection.

Background

The Financial Services Authority (OJK) issued Regulation No. 13/POJK.02/2018 on Digital Financial Innovation for Financial Services Sector (POJK 13), which came into effect on August 16, 2018. The regulation categorizes all new digital-based financial activities beyond the already regulated industry as DFI and places them into a regulatory sandbox.

Key Drivers

The key driver behind this move is the boom in online lending, which had previously been plagued by unethical business practices such as aggressive debt collection, predatory interest rates, and data privacy violations. To address these issues, a new wave of fintech companies emerged to fill the gap in online lending, covering peer-to-peer (P2P) lending and traditional consumer financing.

Regulatory Sandbox Framework

Under the regulatory sandbox framework, DFI players can experiment with innovative financial products or services as long as they comply with certain regulations set by OJK. The objectives of POJK 13 include:

  • Promoting a single mechanism for better communication with OJK
  • Improving the application process for firms
  • Enabling flexible adaptation to legislative solutions in the new and fast-changing digital economy

Implementation

To achieve these objectives, OJK issued three Circular Letters in 2019, including:

  • SEOJK No. 20/SEOJK.02/2019 on the Recordation (Pencatatan) Mechanism for DFI
  • SEOJK No. 21/SEOJK.02/2019 on Regulatory Sandbox
  • SEOJK No. 22/SEOJK.02/2019 on Appointment of DFI Organizing Association

Before entering the sandbox, each DFI must submit an application for recording their innovation or business model as stipulated in SEOJK 20/2019. The assigned person-in-charge (PIC) from OJK presents the company’s innovation or business model to the regulator, ensuring that the company has gained understanding of the company’s business model, challenges, and innovation based on documents submitted.

Expected Outcomes

The regulatory sandbox is expected to:

  • Promote a single mechanism for better communication with OJK
  • Share information about testing more effectively
  • Improve the application process for firms
  • Enable flexible adaptation to legislative solutions in the new and fast-changing digital economy while ensuring customer protection

Quotes

“We believe that this regulatory sandbox will help to promote innovation in the fintech sector, while also protecting consumers,” said a spokesperson for OJK. “We are committed to creating a supportive environment that encourages financial inclusion and promotes economic growth.”

Conclusion

The introduction of the regulatory sandbox is expected to have a positive impact on Indonesia’s fintech industry, promoting a more sustainable and inclusive financial ecosystem.