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Bank Indonesia–Universitas Gajah Mada Joint International Seminar Program

Bank Indonesia–Universitas Gadjah Mada

Joint International Seminar Program

Digital Economy and Business For High Economic Growth

Yogyakarta, 7 September 2016

Honorable,

Vice Rector of UGM, Dr. Paripurna, S.H., M.Hum., LL.M,

Dean of the Faculty of Economics and Business UGM, Prof. Wihana

Kirana Jaya, PhD,

Our esteemed guest speakers,

Banking Leaders,

My fellow colleagues from Bank Indonesia,

Distinguished Guests, Ladies and Gentlemen,

Assalamualaikum warahmatullahi wabarakatuh,

Very good morning to all of you,

1. Allow me to begin by thanking Allah SWT who has blessed us with

the opportunity to attend this Joint International Seminar Program

by Bank Indonesia and Gadjah Mada University. I would like to

express my sincere gratitude towards our distinguished speakers

who have travelled a long way to be with us today.

2. As the global digital economy picks up its pace, it is now a perfect

time for us to discuss the topic on “Digital Economy and

Business For High Economic Growth”. By way of background,

“Digital Economy and Business” was believed to be the driving

theme in economics and finance study.

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3. Nowdays, we are observing a very rapid innovation in information

technology contributed by the wide-spread use of the internet,

smartphones and social media. The amount of data and

information disseminated through various media channel has

expanded exponentially. According to research from McKinsey, “while

flows of goods and finance have lost momentum, used cross-border

bandwidth has grown 45 times larger since 2005”.

4. Innovation in information technology has generated innovations in

financial services, which we now recognize such integration of

innovations as "FinTech". However, technological innovation in

the world of finance is not a new phenomenon. Started in the 19th

century, telegraph-aided financial transactions served as an early

mark of technology’s influence in finance.

5. The creation of FinTech was also a result of the more stringent

regulatory regime in formal financial sectors following the Global

Financial Crisis in 2008. Such crisis left a large financing gap that

stimulated public needs for alternative financing solutions.


6. Today, there is a growing need for the use of Big data and

cloud computing technology. Information related to retail

transactions of goods and services, which was left unused in the

past, is now gathered and utilized for business purposes. Moreover,

"blockchain" and "distributed ledger technologies," challenge the

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conventional concepts of ledgers kept by a trusted third party in a

centralized manner.

7. Furthermore, the new concept of "sharing economy" that give

rise to new forms of economic activities are rapidly

expanding. In this process, idle resources dispersed throughout the

economy are identified and organized on the micro-level and

matched with people's needs.

8. The prospect of digital business and economy is also promising.

Based on international research1, cross-border data flows added

some $2.8 trillion to world GDP in 2014, surpassing the impact of the

global goods trade. The global shared transportation of sharing

economy market is also expected to grow to $350bn in gross

bookings with the user base expanding to 890m in 2020.

9. We view the wave of economic digitalization has a great potential to

encourage resources allocation in a more efficient manner, to boost

productivity, and ultimately, to provide greater benefits to society.


10. Now I would like to talk about the Digital Economy in the Indonesian

Context. I will start by highlighting how Indonesia is a unique

country. We are the world’s third largest democracy. Approximately

half the population is below 30 years old, highly adaptive to new

technology, and has a low dependency ratio among its workforce,

giving rise to a so called ‘transitional demographic dividend’.

1 Mckinsey Global Institute and UBS Research 2016

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11. As a developing country with a significant middle income proportion

of its large population, Indonesia has a substantial amount of market

requiring alternative financing solutions. Up to this point, the formal

financial sector can only service 34.77% of GDP, while the

remaining majority is still catered by the non-formal financial sector.

12. In regard to Financial Inclusion, only about 36% of Indonesia's

population have a formal financial account2. The low figure is

partly due to the geographical challenge that banks face considering

Indonesia’s archipelago.

13. In response to the need for financial inclusion, Bank Indonesia

has developed a Digital Financial Services (DFS) program.

This program enables marginalized communities to get secure

financial services at affordable cost, without using traditional bank

branches. Alternatively, it utilizes DFS agents that uses mobile-based

or web-based infrastructure to achieve finance inclusion. Through

the use of the DFS channel, Bank Indonesia has strengthened

Government to Person Program via non-cash distribution of

Social Assistance Family Hope Program (PKH).

14. The presence of Financial Technology is also expected to

close the financial gap so that more people can obtain financial

services from formal financial sector. Our research suggests that

there are at least 96 FinTech companies in Indonesia. The majority

of which is in the Payment, Clearing and Settlement category

(53.1%), while the rest is in Deposit Lending and Capital Raising

2 World Bank, Global Financial Inclusion Index - 2014

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(18.75%), Market Provisioning (16.6%) and Investment and Risk

Management (11.45%).


15. BI acknowledges and will continue to study and explore both the

opportunities and risks embedded within the unavoidable

development of financial technology. There are opportunities

such as increased efficiency and productivity, but on the other side,

the stability of financial and payment system must be maintained

and consumer protections must remain a point of concern.

16. The main issue is; there is no level playing field with the

regulated financial institution. At the same time, there is cause

for concern that efforts to enforce a tighter regulation may distort

the development of Fintech and economy.

17. With these considerations, BI continues to encourage the

development of Fintech and the penetration of technology

into the financial services industry. In line with this, financial

institutions are also encouraged to adopt Fintech.

18. In terms of mitigating risks, BI as the authority for payment

systems has in place a robust framework. Nearly all payment

system-related Fintech are under a clear regulatory and oversight or

supervision regime. Going forward, the greatest challenge is to

strengthen monitoring and enforcement of prevailing regulations.

19. Bank Indonesia will seek to maintain a balance between the role of

formal and informal financial sector and to mitigate risk through a

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balanced and proportional regulatory regime. Subsequently, in the

near future, Bank Indonesia will launch :

i. Fintech Office, a task force unit served as a vessel to evaluate,

assess and mitigate risks and also act as a related Fintech

research initiator. It shall serve as a place for industry players to

collaborate and to ensure synergy as well as harmony among

regulatory authorities.

ii. Regulatory Sandbox, is a laboratory used by business players

and regulators to examine their product or business model, and

also used by Bank Indonesia to facilitate innovation development

and to examine future policies.

20. We also realize that the technological innovation created by FinTech

raises various new business models in the payment system including

payment gateway, merchant acquiring services and e-wallet

providers. In response, to accommodate current and future

developments, Bank Indonesia will issue a regulation on

“Payment Transaction Processing”.

21. Bank Indonesia will also issue a regulation on the implementation of

the National Payment Gateway (NPG) to ensure efficient

payment transactions. With NPG, we aim to further organize the

interconnection and interoperability between payment system

providers in Indonesia. Thus, eliminating fragmentation and

inefficiency. This regulation also applies to all payment instruments

and methods that are issued and used by FinTech.

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22. One advantage of FinTech is the creation of valuable data and

information that are derived either from conventional or alternative

data sources such as the social media. It is used for a variety of

purposes including credit scoring and transaction behavior analysis.

23. However, misuse of data may cause a concern in terms consumer

protection. Accordingly, Bank Indonesia requires that all FinTech

companies to ensure the protection of data and customer

information.


24. Before closing my speech, I would like to give thanks to the

committee which have thoroughly initiated and prepared such a

great event. I would also like to thank all the speakers and

partcipants for the willingness and enthusiasm to participate in this

event.

25. With that final note, I hope this event provides us with an

understanding of the digital economy and business, particularly with

regards to the Indonesian context. I strongly believe it will be

beneficial for the industry, academia and related authorities.

Henceforth, I would like to invite all of us here to share thoughts in

what I hope would be a spirited discussions filled with fruitful

conclusions. May Allah bless and lighten our steps forward. Thank

you.

Erwin Rijanto Deputi Gubernur

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