This article was first published at Tech for Good Institute in October 2024.
Indonesia’s fintech sector is witnessing rapid growth, driven by increasing digital penetration, regulatory facilitation, and positive investor engagement. Regulatory sandboxes have become a crucial policy tool, fostering innovation while ensuring regulatory oversight, particularly in Indonesia’s burgeoning digital sector. The Tech for Good Institute’s report, “Sandbox to Society: Fostering Innovation in Southeast Asia,” provides valuable insights into regulatory sandboxing across Southeast Asia, offering a solid framework to analyse Indonesia’s journey, the lessons learned, and the potential future implications.
The Current State of Regulatory Sandboxes in Indonesia
Since the initial implementation of regulatory sandboxes in 2017-2018, both Bank Indonesia (BI) —the nation’s central bank overseeing digital payments—and the Financial Services Authority (OJK), which supervises financial sector technology innovation (FSTI) and the non-bank financial industry, have made significant progress. These initiatives have yielded ongoing results and valuable lessons that will shape future coordinated sandbox strategies.
In 2021, Bank Indonesia introduced Sandbox 2.0, expanding its function to include an Innovation Lab, Industrial Sandbox, and Regulatory Sandbox. Concurrently, OJK issued a new regulation aimed at addressing previous framework weaknesses. The updated regulation refines eligibility criteria, clarifies expected outcomes, and establishes more robust exit policies, streamlining the sandbox process and providing clearer guidance to participating companies.
Acknowledging the overlapping jurisdictions in fintech regulation, the Indonesian government is now exploring the establishment of a “coordinated sandbox” involving both BI and OJK. This initiative recognises that many fintech innovations fall under the purview of both institutions, seeking to create a more cohesive regulatory environment.
Beyond the fintech sector, regulatory sandboxes have been implemented in the healthcare industry. In April 2023, the Indonesian Health Ministry launched its second Regulatory Sandbox Program for Health Digital Innovation, focusing on medical diagnosis. This expansion highlights the versatility of the sandbox approach and its potential applicability across various sectors.
Challenges in the Regulatory Sandbox Landscape
Since the launch of OJK’s fintech sandbox in 2018, there have been 458 applications from diverse fintech business models. Between 2023 and 2024, OJK streamlined the initial 15 fintech clusters into two primary clusters—innovative credit scoring and aggregator. As of July 2024, over 90 FSTI entities have expressed interest in participating in OJK’s regulatory sandbox, with 35 entities recommended for licensing and one already registered with OJK.
However, the Center for Indonesian Policy Studies (CIPS) study in 2023 identified several key challenges in the implementation of regulatory sandboxes. These challenges, also relevant in other ASEAN countries, were highlighted in TFGI’s report. They include an uneven playing field, where the sandbox appears to favor designated “prototype” firms, discouraging broader participation and information sharing. Additionally, a lack of clarity in the sandbox process affects both expected outcomes and exit mechanisms, potentially undermining the legitimacy of regulators and participants in the eyes of investors and partners.
Another significant challenge is the insufficient resources and expertise within regulatory bodies. A successful regulatory sandbox requires resources, skills, and technical expertise that are often lacking, leading to incomplete information exchange and delays in providing real-time feedback to participants.
Opportunities Beyond Innovation-Focused Sandboxes
The Tech for Good Institute’s report on regulatory sandboxes in Southeast Asia offers valuable insights that could enhance Indonesia’s approach. The report introduces a typology of sandboxes, providing a framework to understand both the current state and future potential of regulatory sandboxes.
In Indonesia, the primary focus has been on innovation and an advisory approach, similar to the broader trend in Southeast Asia-6 countries. The sandbox’s stated objectives are to allow new business models or startups to test their products in a real-world setting under close regulatory supervision. However, these sandboxes primarily provide advice to companies to ensure compliance with existing regulations rather than adapting regulations to innovations.
While this approach allows for the testing of new ideas, it limits the sandboxes’ ability to address regulatory barriers or drive regulatory change. Innovations are considered successful and “graduate” from the sandbox if they comply with existing regulatory requirements. However, this compliance-focused approach may not always facilitate the regulatory evolution needed to keep pace with rapid technological advancements. Consequently, the potential of regulatory sandboxes as tools for policy innovation becomes constrained.
Indonesia’s focus on innovation and advisory approaches aligns with common practices, but there is potential to expand the sandbox’s utility by drawing on key lessons from the broader regional experience in Southeast Asia-6. For example, some countries in the region have used sandboxes not just for testing innovations but also as tools for regulatory learning and policy development. Indonesia could adopt this broader perspective to enhance the impact of its sandbox initiatives, particularly in regulating emerging technologies such as artificial intelligence, drones, smart cars, or smart cities. These technologies will require the government to adopt approaches that anticipate future innovations, not just ensure compliance.
The need for cross-border collaboration in sandbox initiatives is another element that deserves further attention, especially in the context of ASEAN’s Digital Economy Framework Agreement. The report suggests that regional cooperation can accelerate learning and promote harmonisation of regulatory approaches. Indonesia could explore opportunities for knowledge sharing and potentially collaborative sandbox initiatives with other Southeast Asian nations, for example in the field of payment systems that would facilitate cross-border payments while tackling consumer protection and data sovereignty issues.
Recommendations for Maximising Policy Innovation
By incorporating lessons from the broader Southeast Asian experience, Indonesia can further enhance its sandbox approach, positioning itself as a regulatory innovator while addressing unique challenges. To achieve this, the following recommendations are proposed:
Strengthen Institutional and Legal Foundations: Indonesia can learn from successful models in other countries, such as Singapore or Malaysia, particularly regarding cross-sectoral sandboxes. Integrating sandbox mechanisms into higher-level regulatory development processes can help address inter-institutional coordination challenges.
Improve Sandbox Design with Clearer Objectives: Building on recent improvements by OJK, there is an opportunity to refine the goals of regulatory sandboxes beyond mere compliance, focusing on regulatory adaptation and anticipation to drive meaningful innovation and effective regulation.
Explore Alternative Policy Innovation Approaches: While sandboxes are valuable, they are not universally applicable. It is essential to foster a collaborative spirit between regulators and companies, prioritising innovation while protecting consumer and societal interests.
Pursue Cross-Border Collaboration: The need for cross-border collaboration in sandbox initiatives is critical, particularly within ASEAN. Indonesia could benefit from regional cooperation in sandbox initiatives, especially in areas like payment systems, to facilitate cross-border payments while addressing challenges such as consumer protection and data sovereignty.
In conclusion, Indonesia’s journey with regulatory sandboxes has demonstrated the nation’s commitment to fostering innovation while maintaining regulatory oversight. The strides made by institutions like Bank Indonesia and the Financial Services Authority in refining sandbox frameworks show a clear recognition of the importance of these tools in supporting the rapidly evolving fintech and digital sectors. However, as the country continues to advance, there is a pressing need to expand the scope and utility of these sandboxes beyond mere compliance, embracing them as instruments for broader policy innovation.
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