At a forum titled “Building Optimism after the C19 Pandemic” in January 2021, Central Bank Governor Perry Warjiyo estimated digital banking transactions through 2021 could reach Rp32,206 trillion.(US$2.28 trillion)

This a month after Gojek, Southeast Asia’s leading mobile on-demand services and payments platform, announced plans to invest in Bank Jago, an Indonesia-listed technology-based bank while Singapore-based Sea, snapped up Indonesia’s PT Bank Kesejahteraan Ekonomi (Bank BKE) to partake in the rise in digital banking licenses potentially up for grab.

While Hong Kong and Singapore have gone ahead and actually issued digital banking licenses, most other parts of Asia have either launched consultations or are in the midst of issuing such licenses shortly. Indonesia meanwhile, a latecomer in the arena is treading carefully.

Recognising the inevitable however, Indonesia’s financial supervisory body, the Financial Services Authority (OJK), in mid-February 2021 belatedly disclosed plans to release the framework on how digital banks should operate in the country, including media reports for the need of a IDR10 trillion (US$700 million) in minimum capital requirement(MCR), or curiously 3x the amount required of conventional banks in Indonesia.

The unconfirmed amount is unusually large considering digital banks in the Philippines only have a US$8.2 million MCR, while Singapore is at US$11.3 million and  US$40 million in Hong Kong.

Nonetheless, the broad and vague statements are of course, indicative of how many banking regulators in Asia are grappling with how to balance stringent banking regulation with the evolving wave of technological changes, innovation and entrepreneurship.

In November 2020, Alibaba‘s outspoken chairman Jack Ma decided to express his views on the archaic banking industry at a public forum. His views not only cost him a staggering US$37 billion dollar IPO for Ant Group but a spate of regulations governing online micro lending, stricter capital controls and operational rules for some of Ant Group’s consumer credit businesses were almost immediately introduced. Two days prior to the formal listing, the Shanghai Stock Exchange suspended Ant’s listing, citing “subsequent regulatory changes”, which then led to the cancellation of the concurrent listing in Hong Kong. Needless to say, Alibaba lost at least US$100 billion in market value overnight.

In that ill-timed speech, apart from labelling the global banking Basel Accords as an “old people’s club,” Ma, arguably China’s most high profile oligarch said “systemic risk” is not the issue in China. Rather, China’s biggest risk is that it “lacks a financial ecosystem.” Chinese banks are like “pawn shops”, where collateral and guarantees are the hard currencies. As a result, some decided to go so big they are not allowed to fail.

What is most perhaps most relevant to Indonesia is what Ma had to say about banks in China, which could be just as applicable to Indonesia:

China’s bankers like their counterparts in Indonesia are averse to extending credit to smaller borrowers. In fact, it’s been so difficult for small businesses to obtain bank credit in the last decade that some have become hard wired not to invest for the future.

Interestingly, online lending was the third-most complained-about sector in Indonesia in 2018, according to statistics by the Indonesian consumer watchdog Yayasan Lembaga Konsumen Indonesia (YLKI), an indication of how the key challenges facing China-based SMEs are not that different elsewhere.

Having said that, OJK has continued to shut down well over a 1000 illegal operations in recent years but it is easy for such lenders to rebrand, create new websites, apps and social media profiles to continue attracting customers. The only viable solution therefore may lie in consumer awareness, in a country that requires over four and half hour flight time from coast to coast. Therefore, easier said than done.

Meanwhile, companies like Grab, Tokopedia, Gojek and Sea and other fintech giants continue to do well and have all the data, mechanics and technological knowhow let alone surplus capital that can be easily be set aside for loan provisions, and thus put a few Indonesian banks out of business, or least banks that are unable to operate with the increasing burden of capital buffers.

Having said that and while to some, these tech giants are growing fast organically, that is often only half the picture. In fact, these companies are among the largest investors in Indonesia’s digital economy, acquiring an ecosystem of small companies from across the country, owning an ever enlarging proportion of the country’s emerging unicorns. But how is one to use antitrust laws against a growing monopoly, a continuing dilemma facing many Western governments today, let alone Indonesia?

These challenges no doubt worries regulators in Indonesia and elsewhere more than anything else, hence the piecemeal, snail pace framework and regulations that are notably similar to US and European Union policymakers who are highly suspicious of monopolistic tech giants.

Nonetheless, from the exhaustive use of indices, prediction models and risk management strategies in order to assess collateral-free loan applications to leveraging on big data, AI-based data analytics and AI-enabled technology to increase the accessibility of financial services, tech companies can do what banks have failed to do thus far.

Levelling the playing field for banking regulators therefore does not only mean lowering the barriers to entry for fintech companies. Instead, there is a need for tech giants to raise the bar in areas such as data privacy, data portability, and data governance, an area with a patchy track record for a large number of global internet giants, while banks in Indonesia can benefit from how tech companies increase operational efficiencies, reduce costs and control risks with its centrality of data in its operations and business strategy.

To ensure Indonesia catches up in time, it needs to pace itself surely but also partner with Indonesia-based tech giants in its regulatory consultations along with traditional banks, giving each stakeholder an equal voice in the future of the evolving landscape of Indonesian banking.