Consumer interest and demand for financial services are moving in step with developments in technology. Today’s consumer demand for fast, easy, and reliable services has been a significant stimulus to the rise of financial technology (fintech) companies, which bring together the worlds of banking and IT: Banks have had no alternative but to up their game and ability to adapt in the rush to survive and prosper in the highly competitive, contemporary fintech landscape.
The Financial Services Authority (“OJK”) has responded quickly to this need by issuing two regulations: 12/POJK.03/2021 on Commercial Banks (“Reg. 12”),[i] and 13/POJK.03/2021 on the Administration of Commercial Bank Activities (Reg. 13”).[ii] These open up new opportunities for commercial banks to offer services similar to those of fintech companies.
This article will focus on the digital aspects of commercial bank operations from the perspective of these regulations.
A. Digital Banks
Prior to the issuance of Reg. 12, regulatory control of banking operations beyond bricks-and-mortar premises did not really exist. The regulation has introduced the concept of ‘digital banks’, which can operate completely in cyberspace without the need for conventional premises (apart from a head office).
A digital bank must:
- Operate a business model that utilizes innovative and safe technology to serve its customers;
- Have the ability to manage a prudent and sustainable digital banking business;
- Competently manage risk;
- Be governed with integrity, including a board of IT-competent directors, with other competencies assessed by the OJK in fit and proper tests;
- Maintain the security of customer data; and
- Contribute to development of a digital finance ecosystem and to financial inclusion.
A digital bank can either be newly established or an existing bank that applies for digital bank status. For a newly established bank, the following requirements apply:
B. Banking operations
Before Reg. 13 was issued, banking products fell within the ambit of OJK Regulation No. 18/POJK.03/2016 on Risk Management in Commercial Banks (“Reg. 18”).[iii] Unlike its predecessor, Reg. 13 no longer makes a distinction between banking products and operations, but views both as “products” that are provided in the interests of bank customers.
Under Reg. 13, two types of banking product are specified: basic, and advanced. Reg. 13 requires banks to include new banking products in its Banking Product Implementation Plan (“RPPB”), which must be submitted by the end of the November of each year (before any planned launch). Even if no new products are planned, Reg. 13 still requires submission of an RPPB stating this.
1. Basic Products
Reg. 13 categorizes Basic Products as products and/or services that cover:
- fund collection: on-demand deposits (giro), savings accounts and time deposits (deposito);
- fund distribution: lending, factoring, issuance of guarantees, and trade finance; and
- other basic operations stipulated by the OJK: fund transfer, electronic money, safe deposit boxes, sale-and-purchase of foreign exchange banknotes, “vanilla” derivative transactions, sale of sovereign securities (Surat Berharga Negara, SBN), prime customer services, card payment instruments, digital financial services, traveler’s cheque issuance, cash management, and bancassurance.
If a bank plans to provide a new basic product, Reg. 13 simply requires it to submit an OJK realization report within 5 business days of product launch. Failure to submit may result in liability to a fine of between IDR 1 million (approx. USD 70) and IDR 50 million (approx. USD 3,500).
2. Advanced Products
Advanced Products are defined as those that fall outside the basic product definition, and:
a. are IT-based products/services;
b. are related to the products of another financial services institution;
c. require approval or permission from another institution; and/or
d. are complex in nature.
While Reg. 13 only stipulates submission of a realization report for new Basic Products, the requirements for Advanced Products are more stringent: (i) a pilot review; and (ii) OJK licensing before launch.
Failure to comply may result in a written warning or a fine of IDR 100 million (approx. USD 6,900) per product.
A bank may apply for an exemption from the pilot review requirement if the product is IT-based, provided that the bank has:
- a tier 1 or tier 2 ranking for the quality of its risk management in the most recent assessment;
- a tier 1 or tier 2 ranking for the quality of its corporate governance in the most recent assessment; and
- good IT infrastructure and management capabilities.
This exemption is termed “instant OJK approval”, and can be applied for upon prior notification to the OJK. If the OJK does not respond within 10 days of the submission of complete documentation, an Advanced Products license will be deemed effective.
C. Effective Date
Reg. 12 and Reg. 13 enter into force on 30 October 2021. According to the OJK, the delay is intended to give banks time to prepare for and adjust to the new regulations.
D. ABNR Commentary
The heavily regulated commercial banking industry has found itself at a significant disadvantage compared with the more lightly regulated and flexible fintech sector. Reg. 12 and Reg. 13 should now help to create a more even playing field on which commercial banks can compete with Indonesia’s ever-growing list of fintech providers. This should result in a more competitive market that will ultimately produce tangible benefits through the widening of choice and improvements to the quality of banking services for Indonesia’s IT-savvy consumers.