“Our NPL level is at 11 per cent, and we are still strong,” said Mr Fong. “Banks like yours would have collapsed.” Mr Fong, not a real name, was the CEO and the co-founder of a Singapore-based financing company. I had the privilege to meet him during his short trip to Jakarta back in mid-2019. While the name was not his real name, the event really took place which I attended myself. Mr Fong wishes to expand his apps-based financing company and establish a presence in Indonesia. He finds Indonesia’s huge population a promising market.
“People like yourself, an employee, can select which company you wish to invest in. Say you have 200 dollars to spare from your salary each month. Using our apps, you can choose three or four companies that offer better returns but with acceptable risk levels to you. Then you invest 50 dollars in each company. So you don’t put all your eggs in one basket.”
“For each company, there will be a time window. Say, two weeks,” he continued. “The owner of the company set the amount of capital to raise. Say a hundred thousand dollars. There will be others like you who also put their money collectively into this company. If by two weeks the total amount collected is still less than a hundred thousand, then the investment would be cancelled, and you will get your 50 dollars back. But if it reaches a hundred thousand dollars by the end of the time window, then you will get your interests paid monthly for one or two years, depending on the tenor of the loan.”
“What if the company fails to pay off their debt?” I asked. “Like they missed out on an instalment or fail to pay off the principal at the end of the term?”
“Our company provides the infrastructure that would connect lenders and borrowers in a mobile platform, giving you a nice and convenient way to invest. We even provide our lenders with the company’s audited financial statements and risk level assessment by an independent party. We are not forcing you to invest in any of the available companies, you are free to choose for yourself.”
“Are you saying that you will not be eligible to any legal issues in the event of default?”
“Please understand that the relationship is strictly between the lenders and the borrower. We provide reminders to the borrower on the upcoming instalment dates. We also provide notifications of default to the lender when the need arises. Lenders are free to take legal actions against the borrowers based on the prevailing rules and regulations in Indonesia.”
“You do realize that the Financial Services Authority requires you to mediate any dispute between lenders and borrowers, don’t you?” I asked.
“Yes, we are aware of that regulatory requirement. However, as I mentioned, we are a technology company that provides a mobile infrastructure to help connect lenders and borrowers conveniently and effectively. We will comply with the regulatory requirements to the extent permissible by law.” A political response. I bet he has rehearsed that many times before.
“So, how do we fit in?” I asked.
“Indonesia has a different regulatory environment than in Singapore. In Singapore, we are required to appoint a Trustee. In here, we are required to open an Escrow account. This is where you come into the picture.”
“What would be your expectation from us, with regard to the escrow account?”
“There will be retail lenders sending money to this escrow account 24/7. We will need you to inform us, on a real-time basis through API, the origins of these incoming. We will then reconcile that information with our database at our end. At the end of the collection time window, we will instruct you to either remit the funds to the company’s account at another bank or to return the funds to its original senders.”
“You said it is an escrow account, yet instructions unilaterally come from you only?”
“I understand your confusion. I was confused too when I first read this requirement. The account is actually a collection account, not an escrow account. There are two parties involved only, our company and your bank. However, for some reason, your FSA regulation called it an escrow account. There will be no escrow agent here, but there will be a bi-party escrow agreement, which is essentially a collection account agreement. I am not here to judge,” he laughed.
“You know, people are saying start-up companies like you would disrupt the banking industry. The way people see it, you provide financing the same way banking does. But with less stringent requirements,” I said to him. “What you are asking us now shows that you actually still need banks to support you.”
“Well, you know, we can never be a bank. We may purchase a bank one day, but we are just simply a technology company providing a mobile platform. We don’t take the risks of a bank. You know borrowers are mostly non-bankable. Either too small or they were just recently established with no track records. You guys don’t want to give a loan to them. That is the main reason they come to us. You rejected them.”
“So you are saying there is segmentation between banks and fintech companies like yourself.”
“We fill in the blank you guys create when you reject them. But these are promising new enterprises, which could be big companies one day. Once they become too big for us, like they start asking for a million-dollar loan, they are no longer our segment. They become your segment.”
This was a real conversation I had with an established fintech company offshore wishing to expand in Indonesia, though not exactly word for word. In the end, we declined their request for a so-called escrow account.
Banks have been around for at least a couple of centuries. This industry has survived many economic crises and several wars. Along the way, banks have shaped up their processes and procedures. All banks are connected electronically and governed closely by central banks and financial services authorities. The banking industry is a mature and ever-evolving industry, compared to fintech start-ups. Fintech has yet to face the big challenges that banks had in the past.
In the end, I found it relieving. The notion that fintech companies pose an existential challenge to the banking industry is at best hyperbolic in my humble opinion.