Dubious practices, ‘profiteering’ taint Indonesia’s bid to regulate online lending

Update (April 24, 1:00 pm): Added comments from AFPI and OJK.

Update (May 5, 9:00 am): Added further comments from AFPI and OJK.

In Indonesia, more than a hundred online lending startups are vying for consumers who are underbanked and have little access to credit. But in the industry’s early days, government regulations had to play catch up.

Last year, incidents around unethical collection methods plagued the industry. In a high-profile case, a taxi driver hanged himself due to a “devil’s trap” of debt from illegal fintech firms.

Since then, regulatory oversight – including the process of getting a permanent online lending license – has become more stringent.


The OJK headquarters in Jakarta / Photo credit: Wikimedia

But sources Tech in Asia spoke to suggest that there’s a lack of transparency over the licensing requirements and process. They talked about the “profiteering” behavior of vendors appointed by the online lending division of Otoritas Jasa Keuangan or OJK, Indonesia’s financial services authority. They also alleged conflicts of interest between OJK and Asosiasi FinTech Pendanaan Bersama Indonesia (AFPI), the industry association for online lenders.

These issues cast doubt on OJK’s effectiveness and ability to police the peer-to-peer lending sector, which is seeing more activity from both local and foreign players, especially China-backed companies. The Covid-19 pandemic will likely bring added pressures, with more people defaulting on their loans.

However, when Tech in Asia reached out to OJK for comment, it contended that everything it does “puts forward procedural and governance aspects,” according to a spokesperson. “If there is input from the public, it can be submitted to OJK’s whistleblowing system. We will seriously follow up on accurate data and information.”

Inefficient, “profiteering” vendors

Getting registered is the first step to securing a license from OJK. The regulator closes down unregistered companies – OJK claims that 2,406 of these firms have been shuttered between 2018 and March 2020.

According to OJK regulations, a registered company has one year to gain a full license. In the meantime, it can largely operate the same way as fully licensed companies.

But here’s the rub: only 25 companies have managed to obtain that license since the first one was granted in mid-2017.

Another 136 are still registered, with 59 of them for more than one year. A company will lose its registration status after that time, according to OJK rules.

AFPI clarifies that as long as a company has submitted the application within the one-year deadline and has not been rejected, it can continue operating.

The association is currently enforcing a moratorium for new registrations, with the next batch of approvals slated to be open in the second half of the year. AFPI’s current infrastructure can’t keep up with demand and accommodate all licensed and registered players, says Adrian Gunadi, CEO of Investree and chairman of AFPI.

In conversations with Tech in Asia, founders of registered online lenders pointed out that requirements are difficult to heed. Also, several of them said that unnecessary fees are paid out to OJK-appointed vendors, with one person describing their actions as “profiteering” behavior.

Image of a document outlining a solution for a company alleged to have violated regulations.

For instance, there was one company that was found to have violated regulations. This would have jeopardized its registration status and chances for a full license.

But a law firm claiming to have inside access to OJK proposed a solution where the company’s C-suite executives would step down and be replaced, according to a document reviewed by Tech in Asia (OJK says it does not appoint any law firms to assist platforms with the licensing process). The preferred CEO candidate should be an existing chief executive of another fintech company who’s familiar with OJK’s online lending directorate.

The law firm would then be in charge of the headhunting service for both the board of directors and the board of commissioners. The fee for the proposed solution amounted to tens of thousands of US dollars.

Continuation of above document, outlining the fees involved.

Here’s another example: Every online lending app is required to ask each new borrower to submit a digital signature for future use.

According to OJK regulations, creating the digital signature can only be done through a vendor officially appointed by the Ministry of Communications and Information. There are four companies that can do so, including the MDI Ventures-backed startup PrivyID.

The source, who was from a company backed by Singaporean investors, didn’t identify the vendor they worked with but characterized its implementation process as “inefficient and very dumb.”

For instance, multiple one-time PINs (OTPs) are required for user verification. An OTP is already part of a company’s user application process, but the digital signature vendor requires a separate OTP to be done through its own channels, the source says.

This means that companies would need to pay for the additional OTP text message, on top of other fees for the digital signature sign-up process and implementation.

Companies are also unable to share the digital signature of the same user, even if they use the same vendor. This means that each company has to pay for the entire digital signature process whenever a new borrower applies for a loan – even though that digital signature already exists in the system.

The source adds that while they are unable to recall the exact cost per unit for digital signatures, it was “very expensive.” They have raised the issue repeatedly with both OJK and the vendors, but no action has been taken.

“It doesn’t follow what I would call global standards or industry practices on digital signatures,” the source observes. “It’s profiteering, in my opinion.”

Another example is debt collection. According to regulation, online lenders are not allowed to send their own employees to collect outstanding loans after 90 days. Instead, they have to hire – and therefore pay – one of six collection agencies certified by AFPI.

The rationale for this appears to be a desire to avoid unethical collection practices that plagued the industry last year. However, sources challenge whether this is necessary when their in-house collectors already undergo OJK-sanctioned training.

The training isn’t free, says one source. OJK and AFPI routinely hold seminars and workshops on topics such as training and certification for customer service or for debt collection. Companies are required to join these events, and they have to pay a fee.

OJK and AFPI also hold roadshows around the country. Attendance to these events isn’t compulsory, says one source, but even if a company doesn’t attend, they are still expected to pay a participation fee.

The fees for these sessions don’t appear to be high, but the source says that there’s no transparency over what the fees are for.

AFPI says that the pricing for digital signatures are determined by commercial agreements between companies and providers, putting it outside the jurisdiction of AFPI or OJK. An OTP is not the only authentication method available, depending on the digital signature providers.

The workshops and roadshows, on the other hand, are geared towards educating new players or improving financial literacy among potential borrowers.

“There are fintech lenders from China whose business practices may not be aligned with what we have agreed and standardized here,” explains Gunadi. “These events set the tone for whoever is entering the industry.”

The fees involved are used to cover training costs. For roadshows, a typical price for a booth starts from 3 million rupiah (US$192), which AFPI says is cheaper compared to what companies that organize such events charge.

Conflicts of interest

Cultivating relationships is also an important part of the licensing process, the sources note, which is par for course when doing business in Indonesia. For online lenders, that starts with being a member of AFPI. Like most industry associations, AFPI’s executive committee primarily consists of CEOs and other representatives from licensed companies. For instance, the CEOs from six of the first seven companies to get the license are all on the committee.

But AFPI is different in that it was appointed by OJK. Its main role is to help the regulator monitor companies, especially by setting out a code of conduct dealing with matters not addressed by OJK rules.

This raises questions around conflicts of interest, says one source, as the boundary between OJK and AFPI is blurred. It seems as if the fate of many online lending players in Indonesia is determined by their competitors, who were able to enter the industry and acquire that elusive license earlier.

AFPI says that this is common practice in other parts of the finance industry, such as banking and multifinance, where an industry association sets out market conduct while enforcing market discipline.

The standing of AFPI’s code of conduct is on par with OJK regulations. If a company commits a violation, the consequences can go as far as having its AFPI membership revoked – this is the same as losing its registered status with OJK.

AFPI says that the code of conduct references other countries’ fintech lending associations, including that of the US. The code of conduct was prepared by a task force consisting of over 20 AFPI members. All members are welcome to join this task force, adds AFPI.

Sources claim, however, that the code of conduct is enforced unevenly.

One person who worked at a company that violated a rule says that when they arrived at the initial meeting with OJK representatives to discuss the violation, it was as if the punishment had already been decided.

“There was no due process,” points out the source.

Aside from formal punishment, companies that breach regulations also get publicly scolded in front of other industry players during meetings or gatherings, which one source deems “unprofessional.”

Sources Tech in Asia spoke to have witnessed such incidents and have been on the receiving end of such humiliating rebuke. They say that the person who routinely does the reprimanding is Hendrikus Passagi, director of OJK’s online lending division.

In the event of a violation, AFPI’s first step is to act as a mediator between the company and the affected customer. But if the parties are unable to reach an agreement or if the violations are repetitive, then the case will go into AFPI’s legal and ethics committee.

According to Akseleran CEO Ivan Tambunan, who serves as vice chair of the legal and ethics committee, the group is made up of lawyers who are not involved with any fintech lending platform.

China as a cautionary tale

For now, registered online lending companies in Indonesia can operate the same way as licensed ones. But it still means operating in limbo since technically, regulations can be enforced at a moment’s notice.

A license also removes regulatory risk, which in turn can help bring in investors, as at least one company has found. With firms aiming to supercharge their market shares, funding can make an important difference.

Ultimately, the fees and the grey area surrounding regulations make running a sustainable business difficult, says a source.

Table: Licensed fintech companies with venture capital or conglomerate backing. Story continues below.

CompanyBacker TypeBacker/Links
DanamasConglomerateSinar Mas Group
InvestreeVCKejora Ventures, Mandiri Capital Indonesia
AmarthaVCUOB Venture Management, Line Ventures
UangTemanVCAlpha JWC Ventures
Modalku (Funding Societies)VCSequoia Capital, SoftBank
Finmas (Oriente)VCSinar Mas Digital Ventures
KoinWorksVCEV Growth, Convergence Ventures
Pohon DanaConglomerateMayapada Group
MaucashConglomerateAstra Financial
PinjamanGoConglomerateSinar Mas Group
MekarConglomeratePutera Sampoerna Foundation
AkseleranVC, bankAgaeti Venture Capital, Beenext, Access Ventures, Bank Central Asia

A more macro implication is the rate of nonperforming loans (NPLs) or defaults, which is an important barometer for the industry’s health – the lower the number, the better it is. Indonesia’s official NPL ratio as of February 2020 is about 4%, but that’s too low for a developing market, says one source.

Another person says that the 90-day default rate is low because there was never strong governance on what companies did with bad debt. This is because the regulations on how to calculate that number are “loose” enough to be open for interpretation, making it “easily massageable.”

The source adds it’s possible that bad debt is transferred to other companies, either locally or abroad.

According to one source, the real NPL was 7% to over 20% depending on the loan’s vintage, with the poorer performing players at over 30%. Another source claims it could even reach 40%.

One source hopes that the Indonesian scene does not go the way of China, where online lending went through a boom before undergoing a painful course correction as regulators stepped in to limit risky financial practices.

The Chinese government’s clampdown meant many fintech founders ended up in prison for running what essentially were Ponzi schemes. Others set sail for neighboring – and less mature – markets like India, Vietnam, and of course, Indonesia.

Table: A non-exhaustive list of registered (but unlicensed) companies with VC backing or links to other companies. Story continues below.

CompanyBacker TypeBacker/Links
TaraliteVC, otherOvo
KredivoVC500 Startups, Openspace Ventures
TaniFundVC, otherTaniHub, Openspace Ventures, Bill and Melinda Gates Foundation
AwanTunaiVCFenox Venture Capital, Insignia Venture Partners
CicilVCEast Ventures, Vertex Ventures
iGrowVCEast Ventures, 500 Startups
JuloVCEast Ventures, Skystar Capital, Gobi Partners, Convergence Ventures
Dana CitaVCY Combinator, Monk’s Hill Ventures, Patamar Capital
Shopee PayLaterOtherShopee
AsetkuVC, OtherAkulaku

Indeed, some of Indonesia’s online lending companies are said to have links with businesses from China, either directly or through having a Chinese national as a founder. To be sure, foreign ownership is allowed per OJK regulations.

Case in point: fintech companies RupiahPlus and Akulaku were both established by Chinese nationals. RupiahPlus had been registered with OJK while it was operating (it has since pivoted to credit scoring under the Pyxis brand), while Akulaku is still registered through its peer-to-peer brand Asetku.

Both also happened to be among the five online lenders that received the most customer complaints, according to a 2019 report by consumer watchdog Indonesian Consumers Foundation.

But an even bigger issue may be illustrated by another China-linked online lender, which was not OJK-registered (and therefore illegal) but was still able to operate anyway. Called TokoTunai, authorities got wind of the company in December 2019, when the police raided and closed its office as well as arrested its founders.

But by then, TokoTunai had already disbursed 70 billion rupiah (US$4.4 million) in loans to 85,000 people.