Law firms interviewed:  ABNR Counsellors at Law, HHP Law Firm 

Indonesia's fintech revolution is transforming banking, with startups and traditional lenders driving innovation while navigating regulatory hurdles and global expansion. 

• Indonesia's fintech sector thrives despite global funding challenges.
• Traditional banks partner with startups for digital transformation.
• Regulatory compliance crucial as fintech expands domestically and internationally.

In the age of digitalisation, the fear of lagging behind in technology is what has kept traditional financial institutions up at night. But top lenders in Indonesia seem to have cracked the code, pioneering digitalisation of banking services at the forefront of the country’s fintech revolution.  

Indeed, a notable trend in Indonesia’s robust fintech landscape features daring innovation of traditional banking, leading to digital transformation and partnerships between banks and fintech startups. 

In recent years, the largest ASEAN economy has witnessed substantial year-over-year increases in digital banking adoption, with the COVID-19 pandemic further boosting this trend. Looking ahead to the coming year, the country’s central bank Bank Indonesia anticipates a 23 percent surge in the value of digital banking transactions, projecting a total of $4.5 trillion.

This growth is particularly impressive given how much competition there is in the fintech space now, with the sector seeing a rising number of innovative startup companies. These firms operate across various sectors, including payments, retail investments, lending, financial planning, crowdfunding, remittances, and financial research. Among the fast-growing Indonesian fintech companies are Ajaib (digital mutual funds), Kredivo (e-commerce and digital financial technology), Modalku (P2P lending), OnlinePajak (online tax filing), and popular e-wallets such as OVO, GO-PAY, and DANA.

According to data from Indonesia's Minister of Communications and Informatics (KOMINFO) in December 2022, despite a 60 percent year-on-year drop in funding into Asia's digital start-ups, transaction values in Indonesia's fintech sector grew by 39 percent year-on-year. This represents the second-highest growth rate among G20 countries during the COVID-19 pandemic, underscoring the resilience and dynamism of Indonesia's fintech ecosystem.

“The rise of fintech in Indonesia has significantly disrupted traditional banking and financial services, prompting transformative shifts across the industry,” say Chandrawati Dewi, partner, and Meitiara Bakrie, senior associate at Jakarta-based law firm ABNR Counsellors at Law. 

One of the disruptors is the rapid growth of digital banks, which are banked by regional tech giants including Indonesia’s GoTo. Additionally, traditional lenders have long wanted to tap into the country’s vast unbanked or underbanked population with high mobile penetration. Consequently, many traditional banks have evolved into digital banks or have incorporated digital banking products to remain competitive.

Erwandi Hendarta, senior partner at HHP Law Firm, the member firm of Baker McKenzie in Indonesia, has noted the introduction of more “efficient digital solutions” including online payments and peer-to-peer lending into traditional banking services.

Nonetheless, Hendarta points out that while fintech has improved financial access and inclusion, it has also challenged traditional banks’ revenue models and regulations. 

DOUBLE-EDGED SWORD 

The continued growth of fintech has sufficiently complemented traditional banking by enhancing services and processes, and the most notable trend arising from Indonesia’s vast underbanked population is peer-to-peer (P2P) lending, which provides credit access to individuals and small businesses that are underserved by traditional banks.  

However, the sector is also facing challenges related to regulation and risk management. The rise in prominence of P2P lending, digital payments, and e-wallets has prompted regulatory amendments primarily focused on consumer protection, especially for P2P lending providers. 

“These amendments impose stringent compliance requirements concerning consumer rights, data privacy, and cybersecurity standards, with oversight by the Financial Services Authority or OJK for P2P lending providers, and Bank Indonesia for digital payment providers,” explain Dewi and Bakrie of ABNR.

Additionally, ensuring compliance with data privacy regulations and following cybersecurity protocols is crucial for reducing the risks of data breaches. Fintech companies also need to meet capital adequacy standards and establish consumer protection strategies, which require comprehensive risk management practices to uphold consumer confidence and ensure stable operations.

Lawyers acknowledge that ensuring compliance while maintaining a smooth user experience can be tough, but there’s also opportunity for fintech companies to help shape and influence future regulations. “While there is some lack of clarity in the regulatory framework, we have seen our regulators getting more accepting, embracing and advanced in keeping up with the fast-paced fintech industry,” says Hendarta. 

Moreover, the adoption of emerging technologies including artificial intelligence (AI) and machine learning has added another layer of complexities to Indonesia’s fintech dialogue. One major area of concern surrounds the ethical use of these technologies and ensuring consumer trust. 

Dewi and Bakrie point out that both the OJK and the Ministry of Communication and Informatics have issued guidelines emphasising transparency, accountability, and responsible AI practices for fintech companies to take note of. 

“These guidelines require fintech firms to ensure data accuracy, safeguard consumer privacy, and maintain traceable decision-making processes,” they add. 

Hendarta also notes that with AI thrown into the mix of fintech, compliance obligations have risen significantly with data privacy law. That has also created uncertainty for fintech companies. 

“AI systems handle a lot of personal data. Issues of accountability and liability arise when AI makes automated decisions,” says Hendarta. “Ethical guidelines focus on transparency and consumer protection. Fintech companies must stay updated on regulations and ensure their AI practices meet legal and ethical standards.”

ONWARDS, UPWARDS, OUTWARDS

Consequently, the shifting dynamics of Indonesia’s fintech scene has led law firms to not only keep up with the technological trends but also develop specialised expertise accordingly to guide clients through compliance and licensing processes.

“This evolving regulatory landscape has prompted law firms to deepen their fintech expertise, guiding clients through licensing, risk management, and rigorous consumer protection protocols effectively, as well as ensuring their contractual relationships are in compliance with applicable laws and regulations.”

• Chandrawati Dewi and Meitiara Bakrie, ABNR Counsellors at Law 

Notably, law firms in Indonesia are now adapting their services by creating specialised fintech practices, combining expertise in financial regulation, technology law, and data privacy. As a result, lawyers now require in-depth knowledge of technology-related legal issues, cross-border transactions, and regulatory compliance across multiple jurisdictions to effectively serve clients in the fintech sector.

“This evolving regulatory landscape has prompted law firms to deepen their fintech expertise, guiding clients through licensing, risk management, and rigorous consumer protection protocols effectively, as well as ensuring their contractual relationships are in compliance with applicable laws and regulations,” add Dewi and Bakrie. 

In recent years, there has also been significant interest from not only domestic but international investors in the Indonesian fintech market. Many startups are receiving funding to expand their operations and develop new products.

As Indonesian fintech companies expand internationally, law firms in response are developing cross-border expertise by collaborating with foreign firms, investing in training, and building teams with knowledge of international and local laws.

“Actively monitoring regulatory changes in key jurisdictions, and ensuring compliance with global standards, such as data privacy (e.g., GDPR in Europe) and anti-money laundering regulations, we believe are essential for fintech companies aiming to scale beyond Indonesia,” say Dewi and Bakrie of ABNR. 

Apart from upskilling internally by building teams with knowledge of international and local laws, they also partner with foreign law firms aimed at providing seamless support for clients operating in multiple jurisdictions. 

“This helps them handle complex cross-border transactions and ensure clients meet all regulations. By using technology and global networks, they offer comprehensive services to Indonesian fintech companies expanding internationally,” notes Hendarta of HHP.  “These strategies enable law firms to effectively support their clients’ international growth.”