Importance of Technology-Based Regulation and Supervision

The government and the House of Representatives (DPR) are discussing the Draft Law on Financial Sector Development and Strengthening (P2SK Bill). This omnibus regulation is expected to redefine the financial sector so it is in line with the current conditions. An important basis for strengthening the financial sector, the law will involve several regulations for proper implementation.

My friend, the CEO of a digital bank who recently moved from the financial technology (fintech) industry, complained about the many banking regulations and complex compliance rules that had become an added challenge.

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Several financial industry surveys estimate that the cost of meeting compliance (compliance costs) reaches 5 percent of total costs. The potential cost of noncompliance could be two to three times this figure. In this case, regulatory technology (RegTech) and supervisory technology (SupTech) can help.

RegTech is using technology so regulators and industry players can be more effective and efficient. For example, in the licensing process, businesses that apply for permits generally deal with bureaucratic red tape, and it is difficult to know how long the licensing process will take and when it might be issued.

Regulators like the Financial Services Authority (OJK) and Bank Indonesia (BI) have started to provide digital licensing or e-licensing services, which are expected to be transparent just like e-commerce, which has an order tracking system. Although it can still be improved in terms of user experience, e-licensing will help financial services companies a lot. On the other hand, the licensing process needs to be reviewed so it keeps up with industrial and technological developments.

RegTech is more than just implementing e-licensing. Rapid industry changes require rapid regulatory adjustments. At the beginning of the Covid-19 pandemic, the central bank once asked how quickly banks could change the ATM cash withdrawal limit. The answer, of course, was that this would depend on each bank’s system and capabilities.

BI can actually apply the RegTech concept by implementing machine readable regulations. The central bank can create a system of all payment system parameters, such as ATM cash withdrawal limits, maximum electronic money balances, and QRIS fee tables.

On the side of banks and fintech companies, their systems are required to periodically refer to the payment system parameters using application programming interface (API). With machine readable regulation, regulators not only issue regulations in PDF format, but also in the standard formats for documents, systems, and APIs. Thus, regulators can quickly make regulatory changes, even in real time.

In the future, the concept of machine readable regulation can be used not only for quantitative regulations, but also conceptual and qualitative regulations. For this reason, regulators must issue regulations in a text format that can be analyzed and understood by artificial intelligence and machine learning systems at businesses.

More efficient

Obligatory compliance can also be made more efficient with RegTech, such as in the know your customer (KYC) process. Before opening an account, banks and fintech firms are obliged to carry out the KYC process for all prospective customers, both manually and online using the e-KYC system. From the customer's perspective, they must undergo the KYC process every time they open a new account.

Imagine if regulators and industry built a universal e-KYC platform. Customers who have undergone the KYC process at one institution do not need to repeat the process, and only need to share access to their KYC data from one institution to another.

However, the data stored by businesses are generally first exported as a report with a certain format, and then uploaded to the online reporting system.

Apart from RegTech, regulators should also implement supervisory technology, or SupTech. SupTech can be applied to processes such as reporting, which still generally uses manual processes. Some regulators have started to implement online reporting, for example, the central bank with BI Antasena and the OJK with OJK-BOX (OBOX). However, the data stored by businesses are generally first exported as a report with a certain format, and then uploaded to the online reporting system.

At times, regulators must still conduct manualprocesses. This can be made more seamless by requiring industry players to provide their reports in a standard digital format, for example the extensible business reporting language (XBRL) for standardized reporting fields. With good standardization between regulators and business that must report to two or more regulators, reporting can be made more efficient because they do not need to use a format that is specific to certain regulators.

SupTech can also improve overall supervision. For example, banks and fintechs currently monitor existing data to combat money laundering and terrorist financing using standard algorithms and simple static parameters to generate suspicious transaction reports (LTKM). The LTKM is then sent to the Financial Transaction Reports and Analysis Centre (PPATK) for further analysis.

Imagine if the PPATK could install agent modules at every banking and fintech institution. The agent module functions as a digital supervisor that analyzes all transactional data at an institution to produce a more accurate LTKM. This will also reduce the need for a centralized database, which can create yet another risk.

In an increasingly digital and rapidly developing world, financial regulators and industry players inevitably need to start investing more intensively in RegTech and SupTech in order to more effectively and efficiently address various regulatory and compliance issues.

ARSIP PRIBADI

Rico Usthavia Frans

RICO USTHAVIA FRANS, a member of the Steering Committee of Indonesia Fintech Societ

(This article was translated by Hendarsyah Tarmizi)