Bank Indonesia's new rules for digital payment not expected to deter foreign investors

Jakarta

FOREIGN investor interest in Indonesia's red-hot digital economy is unlikely to be impacted by the latest regulations by Bank Indonesia (BI) surrounding ownership limits in the country's online payment sector, say industry players.

Given the rapid growth of the non-bank online payments industry, Bank Indonesia last week announced new regulations to consolidate the sector, which currently has some 53 online payment brands licensed by the central bank.

Under the new regulations, online payment service providers must have a minimum of 15 per cent Indonesian owners and at least 51 per cent of shares with voting rights must be owned by Indonesian individuals or entities.

Head of the BI payment system policy department, Filianingsih Hendarta, told The Business Times that electronic money transactions have surged by nearly five times over the past three years.

In 2018, e-money transactions were valued at 33.67 trillion rupiah (S$3.2 billion), but surged to 144.6 trillion rupiah in the first nine months of 2020.

"This innovation has been positive for the economy but it has also brought systemic risks such as potential cyber attacks, scattered data, and others," he noted. "That is why we have reformed the regulations to strengthen the industry and make it more streamlined."

"We need to maintain a balance between efforts to optimise digital innovation opportunities with efforts to maintain financial system stability and payment systems in order to create a payment system that is fast, easy, cheap, safe and reliable, while taking into account the expansion of access and consumer protection," said Mr Filianingsih.

Sampath Sharma Nariyanuri, fintech analyst at S&P Global Market Intelligence noted that investor interest is being driven by the tremendous growth in the sector and that he expects that it is unlikely to diminish in the near future.

"Investor interest in Indonesia will continue to remain strong as the archipelago is one of the fastest growing digital economies in the region. E-money payments, which are a proxy for fintech payments, grew at a compound annual rate of 174 per cent from 2016 to 2019 to US$10 billion in Indonesia, making it the largest fintech payment market in the region."

The new restrictions, however, could force the industry to consolidate and encourage mergers among the large players.

"Foreign ownership restrictions make it difficult for the direct entry of foreign companies into the Indonesian landscape," he added. "This could lead to more collaboration between tech firms, driving dependence on domestic companies with payment licences."

One new trend that he sees emerging is tech firms with deep interest in financial services buying stakes in traditional financial institutions as the new ownership limit rule does not apply to banks.

Even before the new ownership rules come into effect on July 1, Indonesia already has relatively higher restrictions on direct foreign investments into e-money companies compared to other Asean countries such as Singapore, Malaysia and the Philippines.

Jesayas Ferdinandus, founder and chief executive officer of OY!, a payment infrastructure start-up is confident that the new ownership regulations will not disrupt his plans to raise US$30 million in Series A round this year. The Singapore entity with an Indonesian partner has already raised US$9 million in seed funding from investors including Singapore investor Temasek Holdings, Bank Central Asia, Bank Mandiri, Telkom Indonesia and AC Ventures, an Indonesian venture capital firm.

"I believe the appetite from investors will not slow down as a result of the new regulations," he said. "Business is business and as long as Indonesia can offer investors growth and returns, investors will come."

In the light of the ongoing merger discussions between Gojek and Tokopedia, Mr Ferdinandus agreed that he expects the big players to consolidate for greater economies of scale. "The market in Indonesia has changed significantly from 10 years ago when Gojek was founded. Today the better funded tech players will be the ones who will succeed."

Vincent Iswara, co-founder and CEO of Dana, one of Indonesia's earliest and largest online payment platforms, said that the industry welcomed the new regulations on ownership but added that he was still monitoring the situation. Dana has Indonesia's Emtek Group and China's Ant Group as its major shareholders.

"We believe that the financial technology industry will continue to expand in the next five years by offering more technological advancement and developing innovative solutions," Mr Iswara noted.

"Contactless transactions are no longer options but solutions that are being adopted by Indonesians as a means of payment. Thus online payment services such as Dana are very keen to develop new products to accommodate this growing demand."

On whether the new BI regulations would deter foreign investors from funding online payment service providers, Mr Iswara said he hoped that would not be the case. "Foreign investors are important as their support will help accelerate the development of new industries and our overall economy. We see their interest as a reflection of Indonesia's great potential."

Tan Yong Han Johan, a Jakarta-based IT systems entrepreneur also noted that the new regulations should not dissuade foreign investors from participating in Indonesia's fast growing digital economy. Instead of backing off, serious online payment players should up their game and dedicate resources to work with the authorities to put in place sustainable policies for the economy, operators and consumers.

"Digital payment is a must for today's consumers, both online and offline. Global knowhow and capital is necessary to drive digital growth in Indonesia," he said. "Indonesia has always rewarded the bold and the patient and will continue to do so."

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