Financial Technology Vulnerable to Risks

There are still many potential risks that are stored in the business of financial technology companies. How do we ward off such potential risks? To what extent is the development of fintech companies from the lending side, the number of borrowers and the amount of the loans?

KOMPAS/DIDIE SW

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The Investment Alert Task Force of the Financial Services Authority (OJK) found 227 applications for lending and borrowing based on unregistered information technology. The majority of them are foreign products and from China (Kompas, July 28).

The finding constitutes the tip of the iceberg. It means there are still many potential risks that are stored in the business of financial technology (fintech) companies. How do we ward off such potential risks?

To what extent is the development of fintech companies from the lending side, the number of borrowers and the amount of the loans? The accumulated number of lenders reaches 123,633 entities or an increase of 22.48 percent as of June 2018 from the beginning of 2018. Meanwhile, the accumulated number of borrowers reaches 1,099,306 entities or skyrocketing by 319.94 percent, while the accumulated amount of loans reaches Rp 7.64 trillion (US$511 million) or jumping by 197.80 percent in the same period (ibid).

When compared to bank credit, which reached Rp 4,784.44 trillion in June 2018, of course the amount of loans for fintech companies is still very small.

However, according to the prediction of the writer, the amount of loans of fintech companies will increase even faster in the future, because Indonesia, with a population of around 262 million at the end of 2017, is a great business opportunity for any investor. Therefore, it is not surprising when foreign fintech companies expand their business wings to the archipelago. Unfortunately, many of them are not registered with the OJK, which is the financial service sector regulator.

Various strategic steps

So, what are the potential risks inherent in fintech company business? In order to get rid of them, what strategic steps need to be taken to overcome these potential risks?

First, the question is, why are fintech companies selling well in the eyes of micro, small and medium enterprises (MSMEs)? Because fintech companies present services faster and easier as they do not require meetings or even collateral. On the contrary, the process of applying for bank credits is considered longer and more complicated and requires collateral.

There\'s more. MSMEs find access to capital not able to be obtained in national banks. On the contrary, fintech companies find green fields to develop their business. How come? Indonesia had 58 million MSMEs capable of absorbing 100 million workers at the end of 2013 (the latest data from the Cooperatives and Small and Medium Enterprises Ministry). That\'s unbelievable.

Therefore, it can be said that the birth of fintech companies is like the adage of tumbu ketemu tutup, which means that one\'s interest meets with another\'s suitable interests. In clearer language, fintech companies are an oasis for most MSME players who do not have access to banking financing.

Second, fintech companies also target millennial-generation business operators. Actually, who are they? Millennials, which are also called Generation Y, are those born after Generation X, those who were born in 1980 to 2000s. Strictly speaking, the millennial generation comprises those aged 17 to 38 years. This generation is considered to be very different from previous generations because when they were born, technology and information were already developed, like the internet, cell phones and social media. Indonesia has around 80 million millennials. That number is certainly a separate magnet for fintech companies.

When lending and borrowing offers are more exciting, where vigilance can be lost, fintech companies appear without permission.

Third, thus far, the prominent business of fintech companies is peer-to-peer lending and crowdfunding. Peer-to-peer lending is a digital financial service to bring together parties that need loans and those who provide loans. Crowdfunding is financing through mutual cooperation or joint venture capital funds for investment.

The emergence of so many non-licensed or illegal fintech companies certainly brings potential risks. Say, the lenders (investors) can face the default risk. As a result, instead of making profit, the investors suffer losses. In more straightforward language, the enormous potential of funding to develop a business can even vanish without trace.

Fourth, now who dares to guarantee that in the lending and borrowing business it does not contain traces of money laundering? No one. In relation to this, like commercial banks, it is appropriate for fintech companies to also be required to report suspicious transactions to the Financial Transaction Reports and Analysis Centre (PPATK) periodically. It aims to prevent fintech companies from becoming a place for money laundering and other economic crimes as well as financing terrorism.

Moreover, thus far, the OJK has not set the interest rate for loans in the lending and borrowing business. Let us first examine how high the interest rate for commercial banks is as a representation of all business groups (BUKU). An Indonesian Banking Statistics (SPI) report published on Aug. 16 shows that the average interest rate for commercial banks (in rupiah) has dropped from 11.14 percent in June 2017 to 10.53 percent in June 2018 for working capital loans. For investment credit, the average interest rate for commercial banks also fell from 10.98 percent to 10.35 percent, while consumption credit fell from 13.21 percent to 12.30 percent. In essence, the average interest rates for commercial banks ranged from 10.35 percent and 12.30 percent in June 2018.

Also compare the average interest rate of rural bank credit (BPR), which is 26.25 percent for working capital loans. Meanwhile, the average interest rates of BPR loans are 23.84 percent and 23.61 percent respectively for investment credits and consumption credits in the same period. Therefore, the interest rate of credits from fintech companies is far exceeding those of commercial banks and even BPR, so their consumers can become "victims". Indeed, the MSME segment can be said to be insensitive to credit interest rates. In essence, whatever the interest rate, credit will be taken.

This is what makes many banks more excited and diligent in working out on the promising MSME segment loans. The result is that the net interest margin (NIM) is getting stronger. Just look at the NIM of Bank Rakyat Indonesia (BRI) as the market leader in the MSME segment, which had the highest NIM of 7.64 percent in June 2018, far above its competitors, Bank Danamon was 6.38 percent, Bank Central Asia (BCA) 6 percent, Bank Mandiri 5.51 percent, BNI 5.40 percent and Bank Tabungan Negara (BTN) 4.17 percent.

Fifth, therefore, the OJK needs to establish a capping of the credit interest rates of fintech companies. Thus, SMEs will not become cash cows.

Further arrangements

Moreover, there are several things that the OJK must regulate further. Investors need to fully understand that the funds lent by fintech companies are not guaranteed by the Deposit Insurance Corporation (LPS) as customer deposits in the banks. Therefore, fintech companies should be obliged to cooperate with state-owned credit insurer Perum Jamkrindo to guarantee potential credit risks. So far, this has not been an obligation, but is simply still a recommendation.

Sixth, moreover, fintech companies should be in the form of a limited liability company so that the government gets income from taxes. This is in line with the government\'s determination to boost state revenue from taxes. Therefore, fintech companies must also be subject to Law No. 40/2007 on limited liability companies (PT).

Seventh, the OJK should limit the majority share ownership of domestic fintech companies by foreign investors to a maximum of 40 percent. Thus, the government will still be in control of the major companies that will continue to advance to ensure the stability of the national financial services sector.

Eighth, surely the presence of fintech companies is a separate challenge for commercial banks. Therefore, banks must continually explore various digital-based services as the main strategy in dealing with technological disruption.

In adding offices, commercial banks should add more service networks online than physical branches. This is an effort to increase the level of efficiency. What is the efficiency level of commercial banks? SPI data shows that the efficiency level of commercial banks, which are expressed in the ratio of operating expenses to operating incomes (BOPO), has now deteriorated slightly (up) from 79.00 to 79.46 percent. Even though the ratio is in the middle of the 70 to 80 percent threshold, the figure is still higher than the BOPO of banks in ASEAN countries of 40 to 60 percent.

What is an alternative solution? The OJK needs to set a BOPO threshold from 70 to 80 percent to be even lower. Suppose it becomes 60 to 70 percent in the first semester of 2019 and 50to 60 percent in the second semester of 2019. This can encourage banks to continue to increase the level of efficiency in the face of the global economic downturn. Don\'t forget that high efficiency is the key to success in winning increasingly fierce competition in the middle of the digital banking era.

Armed with this strategic step, fintech companies can become a more professional source of financing outside the banks and capital market. Consumer protection is even increasingly guaranteed.

Paul Sutaryono, Expert staffer of the Center for State-Owned Enterprises Studies, banking observer and former assistant vice president of Bank Negara Indonesia (BNI)