Unprotected digital industry

Editorial Board

The Jakarta Post


Jakarta   /  Wed, July 24, 2019  /  08:58 am

An employee checks the identity card of a customer at peer-to-peer lending start-up PinjamDuit in Gading Serpong, Tangerang, Banten.(The Jakarta Post/R. Berto Wedhatama)

With smartphone penetration estimated to near 48 percent of the population, Indonesia has become one of the most fertile grounds for e-commerce businesses in the world. Unsurprisingly, the number of start-up companies has grown rapidly in the last five years.

The latest data of Startup Ranking.com shows the number of Indonesian start-ups stood at 2,122, the fifth-largest after Canada, the United Kingdom, India and the United States. According to a study by American consulting firm McKinsey & Company published recently, alongside India, Indonesia has outrun the world in digital adoption amid an investment shift in start-ups to Asia over the past five years.

Indonesia itself boasts three unicorns — start-ups valued over US$1 billion — and one decacorn valued at $10 billion. With such growth, McKinsey maintained its 2016 projection that the digital economy would contribute $150 billion to the country’s economy by 2025.

Such an atmosphere provides not only convenience for business transactions but also creates employment and new sources of income for millions of people. The country’s expanding online market places, such as Bukalapak, Tokopedia, Lazada and Blibli, have allowed millions of small virtual stores to sell their products online. Ride-hailing apps Go-Jek and Grab have generated millions of jobs, as well as business opportunities for small enterprises.

The country’s high internet penetration has also led to the mushrooming of financial technology start-ups, which have also expanded rapidly, offering either peer-to-peer (P2P) lending or payment services.

The speedy growth of the digital industry, however, makes users, both players and consumers, vulnerable to cybercrime, while the law does not adequately protect them. The National Consumer Protection Agency recently advised that the government temporarily suspend the activities of a number of digital businesses because of the lack of regulations to protect consumers.

What really concerns us is the lack of legal protection for investors and borrowers of P2P lending platforms. P2P lending platforms have become attractive options not only to borrow money but to invest. With a return of 20 percent per annum, many people have shifted to online lending platforms from conventional bank deposits when investing their money. According to data from the Financial Services Authority (OJK), the P2P online lenders have channeled loans totaling Rp 41.80 trillion ($2.99 billion) as of May 2019, an 80 percent increase year-to-date (ytd). In the same period, outstanding loans totaled Rp 8.30 trillion, a 60 percent increase ytd.

P2P lending platforms, which link lenders and borrowers, are governed under OJK Regulation No. 77/2016, which only provides guidelines on the licensing and general aspects of the online lending business. With this weak regulation, investors risk losing their money given the lack of legal protection in the event of the borrower’s default.

Indonesia should learn from the recent scandal in China, now home to the largest online lending industry in the world. Because of weak regulations, millions of investors in China have lost their life savings, having invested in P2P lending platforms that collapsed suddenly following allegations of widespread fraud and mismanagement.