Digital Bank Regulated by the OJK

Summary and introduction

Digital banks have garnered an increasing amount of attention globally. In Asia, Hong Kong and Singapore have led the digital banking charge. Other jurisdictions have been following suit – and Indonesia has just introduced a digital banks regulatory framework. 

The Indonesian Financial Service Authority (OJK) recently issued a set of new regulations, including OJK Regulation Number 12.POJK.03/2021 on General Banks (Regulation 12) which replaces several previous OJK regulations related to banks. 

While many banks these days offer digital banking services such as mobile banking and internet banking, frameworks for digital banks take this to the next level by introducing the concept of "virtual" or "digital" banks – that is, banks that offer banking services (including loan applications) entirely online without physical branches.  Governments have been pushing these efforts for a number of reasons – including the general push of technology services and financial inclusion-related efforts. 

As part of the Government's efforts to support this, the OJK issued Regulation 12 which introduces digital banks to the Indonesia banking regulation framework. However, the provisions on digital banks under Regulation 12 are not yet as comprehensive with not too many differences in requirements compared those of a general bank, save for the capitalisation requirements at the in-principle licence application stage. 

Under Regulation 12, a digital bank can be established either from the outset or by converting a general bank (in the form of an Indonesian legal entity (referred to as BHI Bank under Regulation 12)) into a digital bank, subject to the various requirements set out in Regulation 12. On the former, the prescribed minimum paid-up capital to obtain the in-principle approval is IDR3 trillion (or approximately USD200 million), in contrast with the IDR4 trillion (or approximately USD667 million) required of a general BHI Bank to obtain the in-principle approval.

The provisions on digital banks under Regulation 12 are not extensive, and we expect that more details will be provided later on under implementing regulations. 

Analysis

Requirements of a digital bank

Regulation 12 defines digital bank as a bank which conduct their business operations mainly through electronic channels without or with only limited physical branches/offices, in addition to the digital bank's main office. 

Only banks that are incorporated in the form of an Indonesian legal entity  (i.e. BHI Banks) could operate as digital banks. Branch offices or representative offices of foreign banks are not allowed to operate as digital banks in Indonesia. 

A digital bank shall meet, among others, the following requirements: 

• (a) the bank shall implement a business model using an innovative and secure technology to serve the needs of its customers;
• (b) the bank shall have the ability to manage a prudent and sustainable digital banking business model;
• (c) the bank shall have the adequate risk management system as required under OJK regulations, which includes, among others, risk management of general banks and risk management in utilising information technology by general banks;
• (d) the bank shall meet the corporate governance requirements of bank as regulated by the OJK, including the requirement to have a Board of Directors that has competence and experience on information technology as well as other relevant competencies;
• (e) the bank shall provide security protection over the customer data; and
• (f) the banks shall provide efforts that contribute to the development of a digital financial ecosystem and/or financial inclusion, for example, by providing an electronic banking terminal (ie. an electronic device or machine which either placed within or outside the offices of the relevant bank (Terminal Perbankan Elektronik - TPE)) that could be used jointly by different digital banks in providing their banking products to their respective customers. 

Capitalisation and foreign workers

There are two ways of obtaining a digital bank licence. The first one is by establishing a digital bank from the outset, and the second one is by converting a general BHI Bank into a digital bank. 

On the former, the applicant for a new digital bank approval should include the efforts to fulfil the above requirements in its bank business plan. On the latter, a general BHI bank that wishes to convert itself into a digital bank should update its bank business plan to cover the efforts to fulfil the above requirements. 

A key requirement for digital banks under Regulation 12 is the minimum paid capital. For a newly established BHI Banks - IDR10 trillion (approximately USD667 million), 40% of which (i.e. IDR4 trillion or approximately USD267 million) should have already been paid up when applying for the in-principle approval. However, for digital banks, only 30% of which should have been paid up when applying for the in-principle approval, i.e. IDR3 trillion (or approximately USD200 million).

Regulation 12 also increases the minimum paid-up capital requirement to establish a new BHI Bank from previously IDR3 trillion to IDR10 trillion. However, it also stipulates that an acquisition of a BHI Bank (among others) would not fall under this bucket without clearly setting out what this means. It is not entirely clear whether this minimum paid-up capital will also apply for existing BHI Banks which has a paid-up capital of less than IDR10 trillion, or whether they are grandfathered from this minimum paid-up capital requirement. This would further pose a question in relation to an acquisition of a general BHI Bank (which has a paid up capital of less than IDR10 trillion) which would later be converted into a digital bank, i.e. whether the conversion would trigger this new minimum paid-up capital requirement.

Physical branches and use of overseas workers

In overseas digital banking frameworks, a digital bank is usually designated as being a bank that has no physical branches. In this regard, Regulation 12 is more "relaxed". 

Specifically, Regulation 12 specifies that a digital bank can operate with very limited physical offices/branches or without any physical branch other than main office. However, Regulation 12 does not limit the number of branches that a digital bank could have. Therefore, particularly in the case of a conversion/transformation of an existing general BHI Bank into a digital bank, the bank will still be allowed to (a) maintain their existing physical branches/offices and/or TPE; (b) closing down their existing office network other than the head office and/or TPE at once or gradually; and/or (c) adding their office and/or TPE network . 

There is an open question here about how a digital bank would differ from a traditional bank, and whether this will cause tension between regulator, digital banks and traditional banks. 

Subject to the requirements to utilise foreign workers and on knowledge transfer in banking sector, a digital bank is also allowed to have foreigners as its Directors, Executive Officers, experts and/or consultants, notwithstanding the foreign ownership level of the digital bank. Just to note, a bank (including a digital bank) is subject to maximum 99% foreign shareholding threshold. 

What to expect

We appreciate that the provisions on digital banking under Regulation 12 are not as extensive as it is intended to provide principle guidelines for digital banks and we anticipate that more details will be provided in the implementing regulations. 

On the one hand, this is a positive sign that OJK is not intending to heavily regulate digital banks (beyond what is required of traditional banks), potentially encouraging investors to invest in the space (particularly given how "red hot" the fintech investment market is at present). 

When Regulation 12 is considered together with various other steps taken by the Central Bank (BI), including the launch of the National Open API Payment Standards (SNAP) in August 2021, shows that Indonesian authorities are strongly supportive in developing the FinTech space, including supporting the once seemingly unlikely collaboration between a bank and a non-bank fintech company.

Ultimately, the digitalisation of banks is expected to borne benefits in a number of ways – and this has been seen in a number of jurisdictions. The Hong Kong Monetary Authority, for example, stated the following about virtual banks in Hong Kong in their Virtual Banks Guidelines:

The development of virtual banks will promote the application of financial technology and innovation in Hong Kong and offer a new kind of customer experience. In addition, virtual banks can help promote financial inclusion as they normally target the retail segment, including the small and medium-sized enterprises (SMEs).

Any development and success of digital banks will depend not only on the regulatory framework in question, but also on surrounding infrastructure and market forces. For example, Internet access in Indonesia can vary substantially between one area and the other; and e-KYC and e-signature systems will need to be implemented and accepted by the different businesses and authorities in Indonesia. 

Nevertheless, this among other things reflects that Indonesia is going towards the right direction in the development of digital banking in particular and fintech space more broadly. 

Authors: Dion Alfadya, Partner; Joshua Cole, Partner; Hoi Tak Leung, Counsel and Rika Salim, Senior Associate