In line with the development of technology, consumers’ behavior in using financial services has shifted. Nowadays, consumers demand fast, easy, and reliable services. These needs play a big part in the rise of financial technology (fintech) companies whose services cross paths with the services offered by banks. To survive the competition against the fast-paced fintech companies, banks are required to adapt and provide better services, especially in connection to the information technology services.

The Indonesian Financial Authority Services (Otoritas Jasa Keuangan or OJK) is quick to notice the urgency for banks to adapt to the current needs of customers. They fully understand that as part of heavily regulated industries, banks cannot wiggle easily without the backup of OJK as the regulator. Due to this, the OJK recently issued two new regulations concerning banks, i.e., OJK Regulation number 12/POJK.03/2021 on Commercial Banks (Reg 12) and OJK Regulation number 13/POJK.03/2021 on the Administration of Commercial Banks’ Activities (Reg 13). These two new regulations open new opportunities for commercial banks to develop their business model and offer the same services as fintech companies.

This article will focus on the digital aspects of commercial banks’ activities according to the newly issued regulations.

A. Digital Bank
Prior to the issuance of Reg 12, there is no regulation concerning banks that carry out their activities without a physical office. Reg 12 opens a new era for commercial banks by introducing the concept of ‘Digital Bank’. The digital bank as referred to in Reg 12 is a bank who carry out their activities through the electronic system without physical offices other than the head office.

To be qualified as a digital bank, the bank must fulfill the following criteria:


1. Has a business model that uses innovative and safe technology in serving its customers,
2. Has the ability to manage a prudent and sustainable business model of digital banks,
3. Has adequate risk management,
4. Fulfills the governance aspect, including having a board of directors who have information technology competency or other competencies as required by the OJK under the fit and proper test requirement,
5. Carries out data security protection for its customers’ data, and
6. Contributes to the development of the digital finance ecosystem and/or financial inclusion.


The digital bank can either be a newly established bank or an existing bank that applies to be converted as a digital bank. For the newly established banks, the following requirement will apply for the establishment:

B. Banks’ Activities
Before the issuance of Reg 13, banking products were regulated in OJK Regulation No. 18/POJK.03/2016 on Implementation of Risk Management for Commercial Banks (Reg 18). Different from the regulation in Reg 18 that differentiates banking products as financial instruments issued by the banks and banking activities as services provided by the bank for the customers, e.g., agency and/or custodian services, Reg 13 does not differentiate banking products and banking activities anymore. By eliminating “activities”, Reg 18 combines all financial instruments and services provided by the bank as “products” only. The OJK stipulates that the approach used in Reg 13 is once the activities are carried out by the banks for their customers’ interests, then they will be categorized as banking products. There are two types of banking products according to Reg 13, namely (i) basic products and (ii) advanced products. Reg 13 requires the banks to submit an implementation plan for a new bank product in the Bank Product Implementation Plan (RPPB) that must be submitted at the end of November before the planned launch year of the products. If there is no new product to be launched by the banks, Reg 18 still requires submitting a nil RPPB.


1. Basic Products
Reg 13 categorizes Basic Products as products and/or services that cover:


(i) fund collection activities, e.g., a demand deposit (giro), saving, and time savings (deposito),
(ii) fund distribution activities, e.g., credit, factoring, issuance of a guarantee, and trade finance,
(iii) other basic activities stipulated by OJK, e.g., fund transfer provider, electronic money, safe deposit box, sale and purchase of foreign exchange banknotes, derivatives transaction in the form of plain vanilla, Sovereign Securities (Surat Berharga Negara or SBN) selling agent, prime customer services, card payment instrument, digital financial services, issuance of traveler’s cheque, cash management, and cooperation for marketing of bancassurance.


If the banks intend to provide new Basic Products services, Reg 13 only requires them to submit a realization report to OJK by at least five business days after the launching of the new products. Failing to submit this report may result in fines in the range of IDR 1 million (approx. USD 70) to IDR 50 million (approx. USD 3,400).

2. Advance Products
Reg 13 categorizes Advance Products as products and/or services that are not covered as basic products and fulfill the following criterion:


(i) is an information technology-based products/services,
(ii) relate to the implementation of other financial services institutions’ products,
(iii) require approval or permit from other institutions, and/or
(iv) has a complex nature.


While Reg 13 only requires banks to submit a realization report for providing new Basic Products, it is a little bit different for providing new Advance Products. Reg 13 requires Banks to (i) conduct piloting review; and (iii) obtain a license from OJK first before the launch of new Advance Products. Failing to comply with this requirement may result in the imposition of a written warning and fines in the amount of IDR 100 million (approx. USD 6,900) per product. The banks can also apply for a permit to not conduct the piloting review to OJK. The piloting review obligation could be exempted if the basis of the products is information technology, and it fulfills the following criterion:


a. the bank has a first or second rank of quality in the implementation of risk management in the last bank health assessment,
b. the bank has a good corporate governance rating (first or second rank) in the last bank health assessment, and
c. the bank as adequate infrastructure and management of information technology.


This exemption method is also called instant approval from the OJK. The banks that fulfill these criteria first need to submit a notification to OJK. If the OJK does not respond to the notification within 10 days as of the complete submission, then the license for the new advanced products will be deemed effective.

Effective Date of the Regulations
Both Reg 12 and Reg 13 will be effective within three months as of the promulgation date. Both regulations will be effective on 30 October 2021. The OJK states that the consideration for this effective date is to provide an opportunity for the banks to prepare for their internal mechanism to comply with the new regulations.

Author Commentary
The author believes that the issuance of Reg 12 and Reg 13 will create more opportunities for commercial banks to compete with the other financial technology companies. This will create a more interesting market for the customers as there will be plenty of options to fulfill their banking-related activities.

For further information, please contact:


Freddy Karyadi, Partner, ABNR
+62 818 103 949
fkaryadi@abnrlaw.com


Anastasia Irawati, Senior Associate, ABNR
airawati@abnrlaw.com

*Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect and/or represent the views, opinions, or positions of Ali Budiardjo Nugroho Reksodiputro (ABNR) whatsoever.