Differences Between Banks and Finance Companies, You Must Know!

When you need additional funds or apply for a vehicle loan, the presence of a bank may be the first choice for many people. In fact, there are other options that can also be considered, namely finance companies. Although at first glance they are similar, both serving financial needs, but actually both have differences. 

In order not to make the wrong move in choosing, it is very important to know what the differences are between banks and finance companies. Starting from how they work, the products offered, to the regulations that govern them, all have their own characteristics. 

1. Definition 

1.1 What is a Bank? 

A bank is a financial institution that has a permit to collect funds from the public in the form of savings, such as savings, checking accounts, and deposits. These funds are then channeled back to the public in the form of loans or credit. In addition, banks also offer other services such as transfers, foreign exchange, and credit cards.

1.2 What is a Finance Company?

A finance company or multifinance is a non-bank financial institution engaged in financing for specific needs. Usually, this financing includes the purchase of motor vehicles, heavy equipment, business capital loans, or other multipurpose needs. Unlike banks, finance companies do not accept deposits from the public.

2. Types of Business Activities

2.1 Types of Bank Activities

Types of bank activities can generally be distinguished based on the function and type of bank itself. The following are the types of activities carried out by banks:

1. Collecting Funds from the Public: Banks act as a place to store money for the public, such as through savings, checking accounts, or deposits. The funds collected are then used by the bank to provide loans or financing to other parties who need them.

2. Distributing Funds to the Public: In addition to collecting funds, banks also distribute them back in the form of credit (for conventional banks) or financing (for Islamic banks). The goal is to help with financial needs, both for personal and business needs, so that they can run more smoothly.

3. Providing Various Banking Services: Banks are not only limited to saving and lending money, but also provide other financial services that facilitate daily activities, such as fund transfers, clearing, issuing credit or debit cards, bank guarantee services, foreign currency exchange, and storing valuables in safe deposit boxes.

4. Conducting International Banking Activities: Banks can conduct foreign trade activities, including opening Letters of Credit (L/C), remittances, and foreign exchange transactions for export-import purposes.

5. Other Activities According to OJK and BI Permits: In addition to the four types above, banks can also conduct other activities that have obtained permits from the Financial Services Authority (OJK) and Bank Indonesia (BI), and the Deposit Insurance Corporation (LPS) in accordance with industrial developments and community needs.

2.2 Types of Financing Company Business Activities

In general, financing companies carry out four main types of business activities. The following is an explanation of each type of financing business activity:

1. Investment Financing: This type of financing is intended to support long-term business activities. For example, to purchase capital goods, finance services related to business development, or for the needs of rehabilitation, modernization, expansion, or even business relocation. Generally, investment financing is provided with a tenor of more than two years.

2. Working Capital Financing: This financing is used to fund the daily operational needs of the business. For example, buying raw materials, paying wages, or other production needs that are consumable in one business cycle. The working capital financing tenor is usually a maximum of two years.

3. Multipurpose Financing: Different from the previous two types, multipurpose financing is used for personal needs (consumptive) that are not directly related to business activities. For example, financing for education costs, weddings, home renovations, or purchasing consumer goods. The financing period is adjusted according to the agreement between the company and the debtor.

4. Consumer Financing: Consumer financing is a type of financing aimed at individuals to purchase consumer goods or services in installments. The goods purchased are usually used for personal needs and are durable, such as motor vehicles, electronic equipment, or household equipment. In this scheme, the goods financed generally become collateral or security until the repayment is complete. Payments are made periodically according to the agreement that has been agreed between the debtor and the financing company.

5. Other Business Activities Approved by OJK: In addition to the four main types above, financing companies can also submit other specific business activities, as long as they obtain permission from the Financial Services Authority (OJK). For this, the company needs to include supporting documents such as details of the products offered, business feasibility analysis, financing schemes, rights and obligations of the parties, and examples of financing agreements to be used.

3. Differences between Banks and Finance Companies

3.1 Main Function

The fundamental difference between banks and finance companies lies in their main function. As explained above, banks collect funds from the public. Funds are collected through savings products, which will be distributed in the form of loans. While finance companies only focus on financing or distributing funds without collecting funds.

3.2 Source of Funds

The second difference lies in the source of loan funds, where banks get funds from customers who save money either in the form of savings, deposits, checking accounts, and others. While finance companies get owner capital, loans, or issuance of debt securities.

3.3 Regulation

The difference between banks and finance companies can also be seen from the regulations that govern them. Banks are regulated and supervised by three main institutions, namely Bank Indonesia (BI), the Financial Services Authority (OJK), and the Deposit Insurance Corporation (LPS). The main legal basis governing banking activities is Law Number 10 of 1998 concerning Banking, which is an amendment to Law Number 7 of 1992. In addition, banking activities are also subject to additional regulations such as*:

• Law Number 3 of 2004 concerning Amendments to Law of the Republic of Indonesia Number 23 of 1999 concerning Bank Indonesia

• Law Number 24 of 1999 concerning Foreign Exchange Traffic and Exchange Rate System

• Law No. 37 of 2004 concerning Bankruptcy and Suspension of Obligations to Pay Debts

• Law No. 1 of 1995 concerning Limited Liability Companies

• Law No. 8 of 1995 concerning Capital Markets

*source: https://siplawfirm.id/perbankan-di-indonesia/?lang=id

Meanwhile, financing companies are only regulated and supervised by the OJK. The main regulation that is the legal basis for financing company business activities is POJK Number 35/POJK.05/2018 concerning the Implementation of Financing Company Business. In addition, financing companies must also comply with:

• POJK Number 7/POJK.05/2022 concerning Amendments to Financial Services Authority Regulation Number 35/POJK.05/2018 concerning the Implementation of Financing Company Business

• Law Number 4 of 2023 concerning the Development and Strengthening of the Financial Sector

• POJK Number 42 of 2024 concerning the Implementation of Risk Management for Financing Institutions, Venture Capital Companies, Microfinance Institutions, and Other Financial Services Institutions

• POJK Number 48 of 2024 concerning Good Governance for Financing Institutions, Venture Capital Companies, Microfinance Institutions, and Other Financial Services Institutions

3.4 Risk

The difference between banks and financing companies can then be seen from the types of risks faced by each. Banks face a variety of major risks, including credit risk (the possibility that debtors will be unable to repay loans), liquidity risk (the bank's ability to meet customer withdrawals), market risk (losses due to interest rate or exchange rate fluctuations), operational risk (system failure, internal processes, or human error), and legal and compliance risk. Because banks collect funds from the public, risk management, especially liquidity and credit risks, must be carried out carefully and in accordance with regulatory provisions.

Meanwhile, finance companies also face credit risk as the main risk, namely the failure of debtors to pay their obligations. However, finance companies do not face liquidity risks as large as banks because they do not collect funds from the public, but use their own capital or loans from other institutions. In addition to credit risk, finance companies also face operational risks, strategic risks, liquidity risks, and compliance risks. All of these risks are regulated in POJK Number 42 of 2024, which requires companies to implement comprehensive risk management through four main pillars: active management supervision, adequacy of policies and procedures, adequacy of risk management processes and information systems, and internal control systems. 

3.5 Collateral or Security 

The last difference between banks and finance companies lies in the aspect of collateral or security. Banks have various loan products, ranging from those that require collateral to those that do not. One of them is Unsecured Credit (KTA), where banks can provide loans without physical collateral. Even without collateral, the bank will still assess creditworthiness based on the credit history and income of the prospective borrower. 

Meanwhile, finance companies generally require collateral for every financing facility provided. This collateral can be in the form of ownership documents for the financed goods (such as BPKB for vehicles), invoices, or other assets. In many cases, the financed goods themselves become the main collateral for the loan.

Also Read: These are 8 Types of Credit Collateral for Your Loan

Understanding the difference between banks and finance companies is important so that you can choose the right funding solution according to your needs. As explained, banks collect funds from the public and redistribute them, while finance companies such as BFI Finance focus on providing financing services with various products tailored to your needs with collateral in the form of motorbike BPKB, car BPKB, and house or shophouse certificates.

BFI Finance is here as a trusted finance company that offers convenience for those of you who need funds without having to go through complicated savings and loan procedures. With permission and supervision from the Financial Services Authority (OJK), BFI Finance ensures a transparent and safe financing process, and provides fast service.

So, if you need financing for your business, vehicle, or other needs, choosing a finance company like BFI Finance can be the right solution that is efficient and according to your needs. #AlwaysThereIsAWay with BFI Finance.