PAYMENTS AND LENDING: TRENDS TO CONVERGENCE IN FINTECH
FOREIGN INVESTMENT IN THE FINTECH SPACE IN INDONESIA
An under-developed logistics infrastructure, a reliance on cash-on-delivery and foreign ownership and other regulatory restrictions have historically limited international expansion into the Indonesian eCommerce and FinTech sectors. Despite being the largest economy in Southeast Asia, the share of foreign investment in these sectors in Indonesia still remains relatively low in comparison to its neighboring countries.1 Since 2016, however, foreign ownership restrictions have been relaxed and more sophisticated regulatory infrastructure has been introduced. Today, for example, foreign investors are permitted to acquire up to 85 per cent ownership stakes in Indonesian peer to peer ("P2P") credit providers2 or 100 per cent in eCommerce sector businesses, provided that the minimum investment value of the eCommerce business is at least 100 billion Rupiah (~US $7.5 million). This has led to renewed interest from larger technology and financial institution groups who are looking to capitalize on the significant population, growing middle class and extensive use of mobile technology in Indonesia by either rolling out their own product offerings or taking stakes in existing local startups which are in need of foreign capital, technological knowhow and synergies in order to expand their businesses. In this briefing, we focus on payments and lending two sectors which have caught the attention of foreign investors due to their rapid expansion over the last few years.
Despite having one of the narrowest credit gaps in Southeast Asia, the demand for consumer credit solutions continues to outstrip supply in Indonesia. With an estimated financial shortfall of over US $70 billion, a number of non-bank financial institutions such as KoinWorks and Investree have sought to take advantage of the lack of traditional financial channels through the facilitation of P2P consumer lending.3 This has led to the enactment of new regulations for "FinTech Companies"4 to bring greater clarity and governance to the P2P lending sector (the "OJK Regulation"). One year on from the issuing of the OJK Regulation, there are now more than 165 known FinTech companies operating in Indonesia. However, to date, only one of approximately 22 FinTech companies registered with the financial services regulator of Indonesia, Otoritas Jasa Keuangan (the "OJK"), have successfully obtained a full FinTech license.
RESTRICTIONS FACED BY FOREIGN ENTRANTS
Under the OJK Regulation, direct or indirect foreign ownership in P2P companies is limited to 85 per cent of the relevant company's share capital. Foreign-invested P2P lenders in Indonesia must take the form of a "PMA Company", for which approval would normally be needed from the OJK. A PMA Company seeking a full FinTech license would be required to file an investment plan with the OJK under which it must commit to invest at least Rp 10 billion (~US $750,000), excluding land and buildings. In addition, the PMA Company's issued and
1 Asian Development Bank https://www.adb.org/countries/indonesia/economy last accessed: February 1, 2018 2 Foreign ownership in eCommerce businesses is limited to a maximum of 49 per cent if the investment value is less than Rp.100 billion.
3 https://www.reuters.com/article/us-indonesia-fintech/indonesiasfintech-lending-boom-exploits-shortfall-in-bank-loans-idUSKBN1FJ0F4 last accessed: February 2, 2018 4 OJK Regulation No. 77/POJK.01/2016
INDONESIA FINTECH BRIEFING // May 2018
paid-up capital must be at least Rp. 2.5 billion (~US $185,500) and each shareholder must hold shares having an aggregate value of at least Rp. 10 million (~US $75,000). OJK registration and approval of a P2P platform is often a lengthy process and requires a business plan and revenue model to be presented to the Indonesian FinTech Association. There are also other restrictions that may impact upon the investment structure, which in turn have often required new entrants to explore joint venture models with local financial institutions as a quicker means of entry into the Indonesian market. These restrictions include: any change in the shareholding of the P2P Company
will need prior approval from the OJK and all shareholders must be certified as being "fit and proper" this may pose a challenge to venture capital funded companies whose shareholdings will often vary on a regular basis; data from customers must be stored in Indonesia unless the P2P Company has submitted a detailed report on the plan to transfer the data offshore to the Minister of Communication and Informatics and the customer provides their prior consent to such transfer this presents an initial but surmountable challenge for large platform data aggregators; monthly, quarterly and annual reporting requirements this can be resource intensive, particularly when scaling up the business; and the FinTech company is restricted from engaging in any other business activities.
COLLABORATION WITH LOCAL PARTNERS
Working with a local partner through a joint venture is a tried and tested path to market entry in many sectors in Indonesia. In P2P lending, the 85 per cent foreign ownership restriction makes this a necessity. Structuring to take into account the partner's involvement from the outset can also help to speed up the establishment process: if the local financial institution partner establishes a
domestic limited company (a PT Biasa), this company can start business activities in Indonesia before later converting into a PMA Company. A strong framework agreement and parameters around investment and governance will be essential to help preserve a foreign investor's rights during this establishment phase; if a suitable local financial institution partner is chosen, they may be able to assist with engaging
with the OJK during the licensing process which is likely to simplify and speed up the application; and
the joint venture company may be able to rely on the financial services license of its financial institution partner to provide add-on services to its customers which it would not ordinarily be able to provide acting alone under a FinTech license.
NON-BANK E-MONEY ISSUERS, E-WALLET OPERATORS OR FUND TRANSFER OPERATORS CAN BE ESTABLISHED WITH 100 PER CENT FOREIGN OWNERSHIP BUT WILL REQUIRE THE RELEVANT BI LICENSES BEFORE COMMENCING OPERATIONS.
E-Money and e-Wallet businesses in Indonesia have grown rapidly in the past years. In 2017, the Government has required cashless transactions for all toll road payments and has increased the ceiling on e-Money top-up fees. Traditionally, only fund transfer operators, card payments, clearing services and e-money operators were covered by the payment regulations of the central bank of the Republic of Indonesia, Bank Indonesia ("BI"). However, due to the increasing adoption of FinTech in Indonesia, BI has widened its regulatory scope to cover e-payment gateways and e-Wallets.
NO FOREIGN OWNERSHIP LIMITS
There is no foreign ownership limit for a non-bank company to act as an e-Wallet provider, e-Money issuer or fund transfer operator. Foreign investments in these sectors, however, must be made through a PMA Company meeting the criteria outlined earlier in this note. The relevant regulator will be BI, and so provided the application formalities have been satisfied, the process of licensing a PMA Company for e-Money and e-Wallet functions should be much quicker as compared to the P2P lending license application process. Non-bank e-Money issuers, e-Wallet operators or fund transfer operators can be established with 100 per cent foreign ownership but will require the relevant BI licenses before commencing operations. The application process generally takes between four and six months.
Payments and Lending // 2
INDONESIA FINTECH BRIEFING // May 2018
A low level exemption from licensing is available where the value of the cash float is less than Rp. 1 billion (~USD 75,000). If there is any fund transfer facility associated with the e-Money solution (e.g. either P2P transfers between users or to companies other than the issuer), BI licensing will be required from the outset.
COLLABORATION WITH LOCAL PARTNERS
Although not strictly required, as there is no foreign ownership restriction in the payments sector, outsourcing or collaborating with other e-Money system operators in Indonesia may provide a means of facilitating market entry. BI's regulations envisage that the following functions in an e-Money system can each be subject to their own license, and therefore it may be possible to enter into a collaboration to "white label" certain functions from existing license holders if a foreign e-Money issuer is seeking a faster means of entry in the market. Such functions include the following: Principal (i.e. the supervisor of the e-Money system
which can comprise multiple issuers) Issuer (i.e. the entity issuing the e-Money and
management of the float); Acquirer (i.e. merchant cooperation); Clearing Processor (i.e. settlement between issuer
and acquirer); and End Settlement (i.e. physical settlement based on
the clearing processor's statements).
OTHER REGULATORY REQUIREMENTS
Providers of e-money are also required to: restrict the business activity of the entity to
e-money or any other related activity; maintain complete and accurate records of each
emoney holder (including their identities), transaction history and such other pertinent information; provide suitable notification systems to evidence agreement in relation to the provision of e-money services and changes in the facility; demonstrate sound, secure and adequate systems to carry out e-money operations; and submit financial statements and any other information requested by the BI to allow the activity of the e-money provider to be monitored.
International investors who are able to adapt and develop long-term plans around regulatory requirements and who may be willing to partner with other providers are likely to be able to achieve scale. We recommend that strategies be explored with experienced international and local legal counsel in order to help fine-tune market entry strategies and secure long-term investor protections. At Morrison & Foerster we have significant experience advising clients on FinTech related matters (including investments by Financial Institutions, Tech and VC investors as well as roll outs of products regionally) and we would be delighted to discuss any matters touching on this sector with you. This briefing has been prepared with the kind input of Adnan Kelana Haryanto & Hermanto, a corporate counsel in Indonesia. Because of the generality of the briefing, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations. For any enquiries, please contact:
Jake M. Robson +65 6922 2026 JRobson@mofo.com
Nick Davies +65 6922 2029 NDavies@mofo.com The information contained in this document does not constitute legal advice and is accurate as at April 2018.
2018 Morrison & Foerster LLP | Attorney Advertising
Payments and Lending // 3