Game Theory of Regulator, Companies, and Cooperation in Indonesian Financial Technology Industry

Abstract

This article tries to examine possible rational payoffs of cooperative and non-cooperative interaction between the financial regulator and companies in the financial technology industry. To understand the interaction paradox within the financial technology industry, a framework based on Game Theory Prisoners Dilemma Payoff Matrix is used to iterate conditional probabilities that represents the possible decisions given by both the financial regulator and the fintech companies. The possible decisions and consequences of cooperative or non-cooperative decision from each of the player, are encoded into a 2 X 2 matrix to illustrate the conditional probabilities, then analyzed to find the best interaction option. Indonesian financial regulators have not provided clear regulations about the financial technology industry on broad terms inclusive of major types of fintech businesses commonly found in Indonesia. Indonesian financial regulators represented by the Bank Indonesia (Indonesian Central Bank), Ministry of Finance, and Otoritas Jasa Keuangan (Financial Services Regulator), only enacted regulations for certain types of fintech, such as peer-to-peer lending, digital banking, and digital payments. Many other types of fintech have not been regulated or inadequately regulated for business boundaries, liabilities, and obligations toward the consumers. The financial regulators mostly rely on enforcement efforts to fulfill the mandate to promote innovation, protect market integrity, ensure clarity in the market. However, these enforcement actions have potential harms to the mandate if the financial regulators cannot provide clear regulations or ensure enforcement predictability, transparency, and consistency. The best possible rational option for the legal interaction between financial technology companies and financial regulators would be to cooperate. The second-best option would be the company cooperating while the financial regulator does not cooperate. The third option would be both the company and the financial regulator do not cooperate. The least beneficial option would be for the company not to cooperate while the financial regulator cooperates. This article presents a possible contribution to corroborating the conjecture that the best possible rational option for the legal interaction between financial technology companies and financial regulators, would be to cooperate.