The development of information technology in the digital era has brought changes in the management and operations of banks. The shifting from the traditional bank concept to the bank of the future is to encourage banking digitalization, among others, by setting-up a digital bank through the new establishment or transformation of an existing bank. This banking digitalization includes the act of encouraging the digitization of operational activities and services to customers by providing banking transactions through digital channels (mobile and internet) and the use of devices of the latest electronic banking, in an effort to increase customers experience (end-to-end digital solutions), and other services.
To support the development in banking digitalization, Indonesia Financial Services Authority/Otoritas Jasa Keuangan (“OJK”) has issued (i) OJK Regulation No. 12/POJK.03/2021 on Commercial Banks (“POJK 12/2021”), regulating the business process and establishment of the digital bank and (ii) OJK Regulation No. 13/POJK.03/2021 on the Management of the products of Commercial Banks (“POJK 13/2021”), regulating the licenses and management of the banking products using a risk-based approach, which will facilitate the digital bank to create innovative products or services.
Below are the key points related to the Digital Bank:
1. Definition of Digital Bank
POJK 12/2021 provides the definition of a Digital Bank as “a BHI Bank (BHI Bank or Indonesian Legal Entity Bank means a bank that engages in banking activities in the form of an Indonesian legal entity in accordance with the laws and regulations, including intermediary bank) that provides and runs business activities mainly through electronic channels without a physical office other than the head office or using a limited physical office.”
2. Establishment of Digital Bank
A Digital Bank can either be newly established or a BHI Bank having been transformed into a Digital Bank. A Digital Bank shall have one office as the head office, and it can carry out its businesses electronically without any physical office except the head office or using a limited physical office.
A newly established Digital Bank must follow the following requirements:
A. Paid-up Capital
The paid-up capital of the digital bank shall at least be IDR 10 trillion.
The Digital Bank shall be established by:
- Indonesian citizens and/or Indonesian legal entities; or
- Indonesian citizens and/or Indonesian legal entities with foreign citizens and/or foreign legal entities in partnership, provided that the maximum ownership of the foreign citizens or foreign legal entities is 99%.
The Digital Bank shall follow these licensing processes:
- Principal License, this license is required prior to the establishment of the Digital Bank (valid for 6 months). When applying for the Principal License, 30% of the paid-up capital must be deposited with an Indonesian Bank.
- Business License, an operational license to carry out banking activities after the establishment of the Digital Bank.
Under POJK 12/2021, there is no specific license for Digital Banks. To be considered as a Digital Bank, a Bank shall carry out its businesses as a Digital Bank, and, either as a new establishment or a transformation from BHI Bank, the Digital Bank shall fulfill the following requirements:
(a) to have a business model that utilizes innovative and safe technology in serving the needs of customers;
(b) to have the ability to manage a prudent and sustainable Digital Banking business model;
(c) to have sufficient risk management;
(d) to comply with the corporate governance aspect, including having a member of board of directors that is competent in technology and any other competencies according to the OJK regulation on the fit and proper test for principal party of the financial institution;
(e) to manage the data protection of customers; and
(f) to contribute on the development of a digital finance ecosystem and to financial inclusion.
The above requirements shall be outlined in the Digital Bank’s business plan.
3. Banking Products
POJK 13/2021 was made with the objective to accelerate the digital transformation which provides space for banks to be more innovative in issuing digital products and services without neglecting the prudential aspect. POJK 13/2021 also focuses on strengthening the licensing and operations of the bank products from capital-based approval to risk-based approval.
Under POJK 13/2021, the bank products are divided into two types, which are:
(a) Basic Products, consisting of (i) fund collection, (ii) fund distribution, and (iii) other basic bank products as stipulated by OJK; and
(b) Advanced Products, consisting of (i) IT-based products, (ii) products of another financial services institution, (iii) products that require approval from another institution, and (iv) products that are complex in nature.
POJK 13/2021 requires banks to include the new products in its banking product implementation plan (RPPB) as well as to have written policies and procedures to manage risks inherent with the bank products.
Furthermore, POJK 13/2021 also provides an incentive to get approvals with notifications (instant approvals) for banks that will conduct the new, advanced products related to the IT-based for banks which meet the following criteria:
(a) to have a tier 1 or tier 2 ranking for the quality of its risk management in the most recent bank assessment;
(b) to have a tier 1 or tier 2 ranking for the quality of its corporate governance in the most recent bank assessment; anа
(c) to have a good IT infrastructure and management capabilities.