The Indonesian fintech industry has made ever-expanding usage of online lending platforms since the first P2P platform launched in 2016. According to Financial Services Authority (OJK) data, the number of P2P platforms has reached 116, facilitating a cumulative total lending fund of Rp 237.35 billion (US$16.9 billion) as of August, or an increase of 60.4 percent year-to-date (ytd).

To ensure regulatory certainty, the OJK enacted regulations on P2P lending in the very early stages in 2016, and has been supervising the industry along the way. However, the growing popularity of P2P lending unfortunately may have a dark side. The OJK reported that P2P loans that were in default for more than 90 days reached Rp 462 billion owed by as many as 286,227 borrower accounts as of August. This was 5.32 percent more than in July when it amounted to Rp 439.85 billion with 316,137 accounts.

This data show that both sides, lenders and borrowers, must have adequate financial literacy, particularly in the realm of P2P lending. Lenders should understand that despite the benefits of a new revenue stream, P2P lending comes with the risk of platform failure. There is also a risk that investors could lose their life savings if founders liquidate the platform or clear out with their money. Different from banks, P2P platforms do not bear risks through their contractual positions. While banks accumulate risks by recognition on their statement of financial positions, P2P platforms spread the risks to their users.

Borrowers should have the necessary knowledge that although there is a simpler process in getting the online loan proposal assessed and approved, they have to be aware of the interest rate, installment due date as well as all terms and conditions applied for the loan. In parallel to the increased threat to security of information systems, borrowers have to understand that the protection of personal information is central.

It is also essential to be conscious that loans should not be used for consumption purposes, or for repayments of a previous loan that can lead to overindebtedness. To what extent do consumers, without any prior exposure to financial services, gather adequate information to enable informed decision-making, and apprehend the risks related to P2P lending?

At the same time, the authority should not take a light regulatory touch. Such an approach could allow P2P platforms to become a breeding ground for risky lending. In order to anticipate rising P2P lending risks, the authority should also act firmly to ascertain discipline in the P2P lending. Assuming direct participation in industry development plans would be adequate to stimulate development of a robust P2P lending industry. When the authority heightens official scrutiny of P2P platforms, it also has to ensure the process can answer the vital question of what factors lead to P2P failure.

Keeping up with the swift pace of development in technology-driven financial services, like P2P lending, is challenging for regulators globally. Fast-paced innovation also poses challenges to regulatory frameworks, policies and law enforcement. Modifying the existing finance and banking regulations is inadequate, the internal organization and knowledge may not be apposite to regulating P2P, as well as the capital mediation by the platforms, which demands a more distinctive regulatory approach than the traditional banking industry.

Our foremost challenge is to remain consistent in breaking down obstacles to innovation and motivating paradigm shifts. It is worth noting that innovation and supervision can exist simultaneously to complement each other. The authority should go beyond “suspicion-based supervision”.

We care about P2P with respect to regulation and supervision, so that we can prevent an uncertain and unclear regulatory environment for financial services providers that could create failures. It is evident that fintech firms often have limited resources to navigate multifaceted regulatory frameworks.

In particular, the COVID-19 pandemic has led to rapid technology adoption, but bias and gaps across different groups have been heightened. Technological developments also elevate a number of issues for regulators that may fall outside of traditional considerations. Financial sector turmoil arising out of the COVID-19 crisis is projected to link with a readjustment of fintech firms, induce consolidation and transpire in most fintech subsectors for the next couple of years. Such a situation intensifies challenges to regulate and supervise with the intention to provide more optimum outcomes.

The pandemic also raises the possibility of a deep downturn and has resulted in an unprecedentedly broad-based policy response. Regulators may implement several principles for fintech, including P2P regulation, and incorporate the concepts such as legal certainty, technology neutrality and proportionality. These can focus on safeguarding predictability, equality and responsible conduct. 

There is also the potential for a heightened risk of moral hazard, whereby policies that waive standards during a crisis, but are not tightened subsequently, may lead to unnecessary risk taking in the long term. 

It is evident that there is no forthright answer to effectively regulating P2P lending. In many jurisdictions, especially in developing economies, the most consequential actions regulators can take may be traditional instead of innovative. Meanwhile, enforcement approaches may also be challenging, and supervisory jurisdiction for the protection of consumers’ personal information may fall into the jurisdiction of different institutions. For instance, the responsibility could be under an information authority or ministry, or under the jurisdiction of a consumer protection department in a financial services regulator.  

A lesson learned from other countries is that it may be worthwhile for the regulator to step back and consider the bigger picture.

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The writer is the academic director of the State Polytechnic of Finance, with a PhD in accounting and finance from Deakin University, Melbourne, Australia. The views expressed are her own.