Fintech is a combination of financial and technology. This term is firstly mentioned by John Reed, a former chairman of Citicorp in 1990s. The implementation of Fintech in financial service industries has evolved significantly since 1959 which is signed by the introduction of automated teller machine (ATM) in Arlington/Ohio (Arner et. al. 2015). Since then, the Fintech has grown rapidly throughout the world. According to a study by Accenture (2015), the investment in Fintech has tripled from $4.05 billion in 2013 to be $12.2 billion in 2014. The emergence of Fintech disrupts the traditional business of financial services (Marr 2017).
The fintech emerge to threat and improve the banks and other financial services (Accenture 2015). The implementation of Information and technology (IT) in financial industry enables many star-up companies that have the businesses related to banking and other financial services to be the new competitors for the existing banks and other financial services. The new competitors may erode the profits of the banks and other financial services. On the other hand, the emergence of fintech stimulates banks to improve its services and to provide more customized products to meet the needs of their customers. Bank cannot provide the same services like usual anymore amid of the threat of the new competitors.
Fintech has also existed in Indonesia. The Financial Services Authority (OJK) is preparing to finalize a draft Fintech Lending Regulation, a lending based on information technology. As soon as this regulation approved, the customers will have plenty of channels to get credit. In other words, banks will face a tougher competition considering the most banks in Indonesia still rely the main income source from the traditional banking business, namely interest income. However, is Indonesia ready for the implementation of the Fintech Lending? Is it feasible to apply the Fintech lending in Indonesia? These are the main questions to face this situation. To answer these questions, let's refer to the two of the five Cs of Credit, i.e. character and collateral.
Do not judge a book by its cover. It is a prominent proverb to warn us all how the cover can fake the content. It also happens in assessing the character of the prospective debtors. The real character of someone can be covered by his/her suits. Sometimes, it spends long time to recognize the character, though mistake also can happen in perceiving a character of someone. In assessing the character, most Indonesian banks use the information provided by the Bank Indonesia, i.e. the debtor information system (Sistem Informasi Debitur (SID)).
This system records the quality of all credit facilities received by the individual and organization. It is an early system to prevent from moral hazard of the prospective debtors. Indonesian banks have access to this system and use it to assess the character of the debtors. In spite of Indonesian banks have an access to this information, it cannot avoid from an increase of nonperforming loans (NPLs) to total gross loans. According to the data of World Bank, the NPLs have been increasing gradually from 1.69% in 2013 to 2.90% in 2016. The NPLs may be worse if the Fintech lending providers which likely do not have an access to this system give a loan facility to the individuals or organizations.
It is also difficult to verify the validity of identity card of Indonesian people when the fintech lending providers do not live in the same city with the prospective debtors. Indonesia has yet to possess an excellent database of information of every Indonesian citizen. At the moment, the Indonesian government is trying to make it through electronic identity (e-KTP). The problem is that not all Indonesian people have been registered at the e-KTP database. Prior to e-KTP, there were some Indonesian people who had a double ID card. By this system, it will eliminate this problem. Despite all Indonesian people have been registered in the e-KTP system, it will be difficult for the loan provider to verify the identity of someone because the access is highly limited, like SID.
Collateral is also a problem in Indonesia. For the traditional credit facility, the debtor ought to give the land and building as the collateral. The problem is that sometimes land may be owned by the two different individuals which both of them can prove it by showing the land certificate. For the fintech lending providers who never check carefully the validity of the land certificate may be trapped in this problem. The fintech lending providers cannot liquidate the collateral to repay fully the credit facility once it has been default. Probably, the fintech lending providers will use credit insurance to guarantee the loan facility. They therefore may not face this problem.
Based on the character and collateral, it can be concluded that it is not easy to apply fintech lending in Indonesia. There are many obstacles have to be overcame. However, it does not mean the fintech lending is not feasible in Indonesia. As long as the fintech lending providers can overcome these obstacles, it is believed that the fintech lending may erode the traditional banking business. For instance, the Gojek and Grab application has been successfully eroding the traditional transportation businesses amid all the obstacles. One thing for sure, banks and other financial services have to improve their services and products to meet the tougher competition.
Accenture (2015). Growth in Fintech Investment Fastest in European Market, according to Accenture Study. Available at: https://newsroom.accenture.com/industries/financial-services/growth-in-fintech-investment-fastest-in-european-market-according-to-accenture-study.htm [Accessed 3 Oct. 2017].