From cash to card: A rise in credit and debit cards will bring new opportunities and rules

While still overwhelmingly a cash society, Indonesia has witnessed rapid growth in the number of credit and debit cards in circulation. The number of credit cards rose from 11m in 2008 to 15m by May 2012, expanding at 6.35% a year, and the number of cardholders is estimated at 4.3m for credit cards and 67m for debit cards in 2012, according to Bank Indonesia (BI).

Credit card transactions have grown 20% a year to Rp19trn ($1.9bn) monthly by June 2012 according to the Indonesian Credit Card Association (AKKI) as clients have increasingly switched to conducting simple transactions like withdrawals and deposits through ATMs rather than bank branches.

Although card issuers have converted to chip-and-pin (EMV) systems from ATM and magnetic strip cards in recent years, reducing fraud rates to the lowest in ASEAN, according to Visa, three parallel clearing and settlement systems persist. Inefficiency in payments systems keeps banks’ operating-costs-to-operating-income ratios (BOPO) higher than their regional peers.

BI is seeking to integrate the payment clearing and settlement systems into a single national payment gateway by 2015 as a key mean of controlling costs. Meanwhile, new rules on credit card issuance in force from 2013 should contain the rise in credit card debt defaults and curb excessive indebtedness.

REGULATING ISSUANCE: The growth in credit card debt, which rose 12% y-o-y to Rp17.51trn ($1.751bn) in May 2012, and the rise in credit card non-performing loans, from 2.5% in 2008 to 4.6% in 2011, has prompted concern among authorities. While BCA has long been the largest card issuer historically, it has in recent years faced quickly growing competition from a number of state-owned banks, such as Bank Mandiri and Bank Negara Indonesia (BNI).

Yet amidst a sustained expansion in consumer finance and credit card debt in particular, the central bank has sought to temper excessive growth in individual debt. Following allegations of abuses in credit card debt collections on the premises of banks including Citi, UOB and Bank Mega in 2011, BI enacted new rules regarding credit card issuance in 2012.

From January 2013, clients earning less than Rp3m ($300) monthly will be barred from applying for a credit card, while those earning less than Rp10m ($1000) will need to undergo a special assessment from banks before being able to apply for more than two credit cards. A guarantee from a client over 21 years old will be necessary for any cardholder over the age of 17 to apply for a second card, while banks will be barred from extending credit card debt to over three times clients’ monthly income. Interest rates on card debt will be capped at 3% a month, a rule expected to impact foreign banks in particular as their rates often reach 3.5%.

FRAGMENTED SYSTEMS: Most card transactions are carried out through parallel networks of over 60,000 ATMs nationwide, a number that has doubled in the past six years according to BI. Poor or non-existent interconnections between these parallel networks have resulted in high operating costs, however. The largest foreign card issuer in Indonesia remains Visa, which works with 18 card-issuing banks in Indonesia and handled some $16bn in transactions in 2011. The two major internationally-run ATM networks coexist with three local networks. The largest domestic card issuer has been Bank Central Asia (BCA), which utilises its own clearing system for processing transactions: the ATM Prima network operated by Rintis Sejahtera. Those providing switching services for 49 domestic banks include BCA, with interbank settlements through the participating banks’ accounts currently held with BCA. Bank Mandiri was the 49th bank to join the system in January 2012, providing a much-anticipated interconnection between the market’s largest public and private banks, Mandiri and BCA, and raising the number of ATMs in the network from 22,000 to 31,000. The ATM Bersama network operated by Artajasa Pembayaran Elektronis, links 72 commercial banks, including the four state-owned banks, and two rural banks with interbank settlement effected through BI’s real time gross settlement (RTGS) system. The smallest network, ALTO, operated by Daya Network Lestari, connects 14 commercial banks and one rural bank with settlement through participating banks’ accounts, held at Standard Chartered Bank. Meanwhile, Visa operates its Plus network of ATMs linking 26 commercial banks, while Mastercard operates the Cirrus network with 13 commercial banks and Artajasa.

ONE GATEWAY: The three major domestic ATM principals have moved towards closer integration over the past year. In July 2012 the three established a joint venture, Citra Bakti Indonesia, to act as certifying authority for card distributors, ATMs and chip-based card issuers in a bid to support the full migration to EMV cards under way over the past three years. More fundamentally, however, BI has planned to establish a national payment gateway from 2013 to 2015 to unify payment and clearing systems for cards nationwide. While the central bank’s RTGS system, to which BI provides liquidity to avoid gridlock in intraday settlements, interlinks with Artajasa, the post office and other electronic switching companies, BCA’s settlement system operates on an independent settlement system internal to the firm. The aim is to unify the three separate settlement systems in a single gateway, although it remains unclear whether this would be an entirely new gateway or if an existing one would be prioritised.

In the shorter term, BI is urging all credit card issuers to complete the shift to chip-based cards under the National Standard Indonesian Chip Card Specification (NSICCS), with the single payment network likely to follow only in a later stage. “The central bank is focusing on NSICCS first, while the national payment gateway will only follow at a later stage, perhaps using the same infrastructure,” Bret Ginesky, senior vice-president and head of investor relations at Bank Mandiri, told OBG. The NSICCS standard, independent of any one card issuer, is meant to establish a common standard that would allow more efficient competition and price efficiency across all card issuers. The new standard of EMV credit cards and NSICCS for debit cards has curbed card fraud, given the stricter security standards for chips than for magnetic strips common previously. The single standard should be fully implemented by 2015.

With roughly 95% of card transactions involving two domestic parties, interest has also grown in establishing an Indonesian card issuer. The central bank announced in September 2012 that it was discussing the establishment of such a system with AKKI. The system would be modelled on China’s successful local payments venture, China UnionPay. While the creation of a new domestic card issuer would cut costs further for the industry by redressing terms of trade with foreign card issuers and promote the unification of the various payment settlement systems, a corollary benefit would be to keep client and transaction information in the country. The central bank already passed legislation in 2011 requiring banks to hold their clients’ credit information on data centres hosted in Indonesia. Establishing a domestic card issuance and payment settlement system is seen as the next step.

Control of client data will become an increasingly important goal for the country’s financial regulator, which could spur the emergence of a local payment system to compete against the global heavyweights of Visa and Mastercard. In the short run, unifying payments systems into a single national gateway will be crucial by 2015 to improve efficiency in the banking sector in the run-up to ASEAN-wide free competition.