CHANGES in consumption patterns from offline to online have driven the development of digital products, including financial products that are increasingly adopted through digital technology, known as financial technology or fintech. Data from the Financial Services Authority (OJK), Bank Indonesia (BI), and the Ministry of Communication and Information (Kominfo) show an increase in the number of players in the fintech industry, resulting in massive growth in financial services.
According to Digital Economy Director Celios Nailul Huda, the use of digital wallets in Indonesia jumped by 200 percent in 2019, and credit distribution through online lending fintech or P2P Lending also showed positive growth even in the midst of a pandemic.
On the other hand, people are increasingly reluctant to use physical financial services and are turning to digital services. The number of visits to bank branches has dropped drastically, with Bank Indonesia data recording the closure of more than 5,000 bank branches between 2019 and 2023.
This phenomenon reflects a significant shift in access to financial services, with fintech becoming one of the main choices. One of the fintech services that is growing rapidly is fintech P2P Lending, which experienced an annual increase in users of 59 percent during the 2020-2023 period, compared to credit card growth of only 0.5 percent. “Unbankable or underserved people prefer alternative digital financing such as fintech P2P Lending,” said Nailul in his statement, Tuesday (9/7).
Fintech P2P Lending itself has a two-sided market business pattern, namely a market that has two types of consumers. The first consumer in fintech P2P Lending is called a borrower or recipient of funds. Recipients of funds in the Financial Services Authority Regulation (POJK) No. 10/2022 concerning Information Technology-Based Joint Funding Services (LPBBTI) are stated to be individuals, legal entities, and/or business entities that receive funding.
While another consumer is a funder or called a lender, namely an individual, legal entity, and/or business entity that provides funding. The function of the P2P Lending fintech platform is to bring together lenders and borrowers. Changes in behavior in one consumer can affect other consumers, including in protecting activities. Therefore, it is important for regulators to provide protection for both borrowers and lenders.
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In the latest POJK regulations, protection is still emphasized from the borrower’s side where article 100 of POJK N0.10/2022 is still from the data side, transparency, to handling of collections which are specifically for the borrower side. In fact, there is a lender side that also needs protection as a funding provider.
In a two-sided market system, default on the borrower side causes losses for the lender side. In fact, the money given to the borrower is not money from the platform, but from the lender. So the platform is only an intermediary, not an institution that distributes financing to borrowers. Interestingly, the cases that have occurred recently have involved many borrowers without seeing protection for lenders. Lenders are still considered people who are not harmed by various cases in fintech P2P Lending.
Investment System
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One thing that is still not widely understood by the public is that the activity of providing funds is an investment activity where there is a return in the form of a benefit fee obtained by the lender. When there is an investment, it is only natural that there is a potential risk faced by the lender. This investment risk must be known by lenders as an inseparable part of their investment activities in fintech P2P lending. Regulators must also prepare risk mitigation regulations when there is a default or fraud.
One of the alternatives offered to increase investment security in fintech P2P Lending is insurance for funds provided by lenders to borrowers. This insurance aims to protect lenders from the risk of default by borrowers, so that lenders can feel safer and calmer in investing their money through the fintech P2P Lending platform. With insurance, lenders will have a guarantee that the funds they lend will remain safe even if the borrower has difficulty in returning.
“However, this solution is also full of risks, especially the risk of moral hazard from the borrower. Borrowers who know that the funds have been insured may feel that they do not need to take full responsibility for the return of the funds. They may assume that the obligation to return lies with the insurance party, not with them,” explained Nailul.
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As a result, this behavior can lead to a higher risk of default, known as the 90-day default rate (TWP). When borrowers do not feel fully accountable, they may be less motivated to meet their payment obligations on time.
This potential will be even greater when the credit scoring process cannot fully describe the quality of the borrower. Moreover, there is no collateral provided by the borrower to fintech P2P Lending which further increases the potential for moral hazard. Borrowers do not provide assets that can be used as collateral, so there is no additional pressure for them to repay the loan. This makes insurance have to be careful in formulating policies and managing risks, so as not to get caught in major losses due to increasing default rates.
“Therefore, mitigation steps are taken at the beginning of the transaction in fintech P2P Lending, both from the borrower and lender sides. From the borrower side, credit scoring validation must be sharpened. Integration of innovative credit scoring (ICS) used by fintech P2P Lending with financial information service system (SLIK) data must be carried out as initial filter data to filter bad borrowers from the start,” said Nailul.
Then, insurance becomes an optional option that is given freedom to borrowers (especially for productive credit) to increase their credit scoring value. Information regarding insurance participation is displayed when lenders want to provide funds to borrowers.
From the lender’s side, information regarding investment risks must be explained when starting an investment. This investment risk must be accompanied by an assessment from the lender’s side related to the lender’s risk profile, similar to what is done when assessing the fintech wealth management investment risk profile.
Thus, the platform can also provide recommendations for the right borrower for lenders according to their risk profile. Understanding of lender investment must also look at the impact that will be given by the lender to the borrower and the business world in general. (RO/Z-6)
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