Alternate channel growth: Mobile payment systems promise to expand the sector’s reach

As banks seek to increase efficiency while expanding their reach, Bank Indonesia’s (BI) push towards mobile payments systems holds potential in a country whose under-banked population is spread over some 6000 inhabited islands and is largely rural. Mobile payments hold the promise of cutting costs, expanding access and driving banks’ fee revenue. While telecoms operators’ e-wallet initiatives have met limited success, new guidelines in early 2013 hold promise to expand reach through networks of licensed agents.

By allowing various pilot schemes in 2013, BI’s flexibility will be key to supporting successful initiatives. “Given the more sophisticated nature of existing retail banking services in Indonesia compared to certain African markets, mobile payments systems will have a tougher time demonstrating their value,” Ivan Daniel MortimerSchutts, East Asia Pacific mobile and electronic banking specialist at the International Finance Corporation (IFC), told OBG. “To capture enough volume, mobile payments systems will need to complement and work alongside the existing banking system, rather than try and go it alone.”

Physical Reach

Although there were 18,114 bank and 4656 rural-bank branches as of October 2013, according to BI, penetration remains very limited. A mere 19.6% of Indonesians over 15 had a bank account in 2011, according to the World Bank, compared to 21.4% in Vietnam, 26.6% in the Philippines, 66.2% in Malaysia and 72.7% in Thailand. Over 60,000 microfinance institutions provide services to an additional 50m people, according to the World Bank-funded Consultative Group to Assist the Poor (CGAP). In addition to limited branch facilities, the share of Indonesians with a debit cards is even lower, standing at around 11%, according to MasterCard.

With most commercial bank networks focused on densely urbanised areas in Jakarta, Java and Bali, stateowned banks and microfinance lenders have the widest reach. Lenders like Bank Rakyat Indonesia (BRI) and BNI have over 40% of their branches outside Java, but private banks are much more concentrated – Bank Central Asia (BCA), for instance, had 79% of its branches in Java as of 2012. BI’s November 2012 rules requiring large banks to open one branch in remote areas like West Papua, West Sulawesi, West Nusa Tenggara, North Maluku and Gorontalo for every three new branches opened in Jakarta are meant to encourage wider reach. Yet banks’ concern over high costs and low profitability in rural areas may limit expansion.

Telecoms

Various mobile money platforms have been launched since 2007, although BI rules issued in 2009 place strict limits on use. Unregistered users are allowed to keep up to Rp1m ($100) in e-wallets, while registered users (requiring only one form of identification, compared to two for bank accounts) can hold up to Rp5m ($500). Monthly transactions are capped at Rp20m ($2000) and minimum payments are Rp10,000 ($1), while merchants receiving payments from e-wallets can only cash out through a bank branch or a licensed telecoms agent able to handle remittances.

By 2013 BI, had registered 13 e-money issuers including third-party platforms, according to Indosat, but developments are dominated by the three largest sector players. Telkomsel’s T-Cash, launched in 2007, claimed to have covered 8.2m users by 2012, although a 2010 study by the IFC found that only 20% of accounts then were active. Indosat’s Dompetku followed in 2009 and XL Axiata’s XL Tunai in 2012. By end-2012, the Indonesian Cellular Telecommunication Association reported 12.6m e-wallet users and 50,000 cash-out points nationwide, although only 6% of users were active. Some 95% of users were unregistered as of 2012, according to CGAP, meaning balances held in e-wallets were minimal. In February 2013, BlackBerry followed suit by launching BBM Money, a service providing real-time payment between users who use the service to trade products. Having registered 60,000 users in the first three months, it aims to reach 200,000 clients by end-2013.

The vast majority of transactions consist of merchant payments, in coordination with the Association of Indonesian Provincial Governments, and bill payments such as mobile top-ups, according to the IFC.

Regulatory constraints ranging from the inability to use third-party agents for cash-in/cash-out, to the lack of interconnection between the various platforms are seen as key barriers to the telecoms-led model’s growth. Operators have seen e-wallet schemes as add-ons to existing service offerings, used as value-added services to boost average revenue per user and to improve client loyalty. Yet, in May 2013, the big three unveiled an interconnection between their platforms that allows for real-time transfers across networks for a fee of Rp2000 ($0.20). The existing e-wallet schemes provide for low-value transactions between individuals given the reduced “know-your-customer” (KYC) requirements, yet there is significant potential in scaling these up as business payments systems. “The telco-led branchless banking model seems to have the greatest potential for market penetration,” Herani Hermawan, HSBC’s head of global payments and cash management, told OBG. “Yet very low transaction ceilings limit the model to customer-to-customer transactions, when the real potential lies in business-to-business.”

Agency Guidelines

To foster more experiments led by banks, BI unveiled broad guidelines for branchless banking in April 2013, allowing banks to outsource cash-in/cash-out functions to third-party agents. The rules provide for both telecoms- and bank-led initiatives, as well as hybrid models: agents are allowed to provide basic services like account opening, deposit taking, cash withdrawals and money transfers. The guidelines do not include less onerous KYC requirements than for bank account opening, however. Basic bank accounts – either e-money or savings accounts – can be opened by providing two forms of identification and one’s mobile number, while clients can withdraw cash from agents by showing a notification SMS, an ID and paying Rp2000 ($0.20). Agents do not require specific remittance licences, but they are required to work exclusively with one partner (bank or operator) during the initial launch phase.

The pilot period, from May to November 2013, involved five banks and the big three telecoms operators, and covered eight provinces: South and North Sumatra; West, Central and East Java (but not Jakarta); Bali; East Kalimantan; and South Sulawesi. Each participant was only able to launch pilots in up to two provinces and three sub-districts per province, but had to include rural areas. The guidelines’ general nature, which do not specify internal controls, give banks room for experimenting, but the regulator requires close communication to take stock of results.

“Payment providers are increasingly building their business case on new sources of value: big data, risk management and enhanced sales experience,” the IFC’s Mortimer-Schutts told OBG. “Use of digital payments will not be expanded by providers that hope to make a case primarily out of transaction fees: new payments systems will need to improve on serving particular needs.” Following a review of these mobile payments pilots, BI intends to issue more detailed regulations in December 2013, providing for the scaling-up of such schemes in three years to 2017.

Pilots

The five banks involved are Mandiri, BRI, Bank BTPN, Bank CIMB Niaga and Bank Sinar Harapan Bali, a Mandiri subsidiary. The first to launch was CIMB Niaga with its “Rekening Ponsel” service in Bandung (West Java) and Kebumen (Central Java). Investing some Rp50bn ($5m) in the trial service, the bank hopes to enrol 500,000 new customers by the end of 2013. While clients still need to open an account at a CIMB Niaga branch, the lender is exploring collaboration with convenience stores like Indomaret, Alfamart and 7-Eleven, as well as remittance handlers like Western Union, MoneyGram and Pos Indonesia.

Since 2008, Mandiri has rolled out an e-money service allowing clients to store up to Rp1m ($100) for tollroad and convenience-store payments. With 3.2m users, only 30% of which are Mandiri customers, the bank was handling roughly 9m transactions worth Rp150bn ($15m) per month by early 2013. Building on this record, the bank rolled out its pilot branchless banking service, officially launching it in October 2013.

Initially the service will provide for deposit and withdrawals only, before being expanded to bill payments, as well as loan and insurance extension at a later stage. The bank is collaborating with both institutional agents like Indomaret, Pos Indonesia and Taspen, and with individual agents – it is using 60 such agents in the pilot to November. Sinar Harapan Bali was an early pilot for branchless banking, enrolling six agents alongside Pos Indonesia and Taspen outlets in the Gianyar and Tabanan sub-districts of Bali to cover 145 new customers by September. It recorded transactions worth Rp123.86m ($12,386) in the three months to August.

BRI has focused on East and Central Java, piloting its scheme in Banyuwangi and Kebumen. By September it had signed up 11 agents charging Rp3500 ($0.35) per transaction and handling a total of 200 transactions daily. It plans to expand to 12,000 agents nationwide once it scales up and aims to begin offering loan approvals early on. BRI is also cooperating with Telkomsel in its T-Bank service. Finally, BTPN, co-owned by the government and Japan’s Sumitomo Mitsui, has enrolled 60 agents in West Java’s Bogor (in the Dramaga, Ciampea and Cibungbulan sub-districts) and Bali (in Pekutatan, Mendoyo and Penebel).

Next Steps

Other leading retail banks like BCA, Permata and BTN are watching from the sidelines pending detailed rules in December. Amidst overlapping experiments by banks and telecoms operators, the IFC is working with a wide range of players – including consumer goods firms, banks, operators, the payments association and switching firms – to study what common standards may be needed to support businessto-business payments systems for the retail supply chain. The issue of transaction costs will be a determining factor in the success of agent and mobile banking for individuals and businesses. Scaling up the branchless initiative nationwide will require taking stock of the pilots’ results, expected in December, and close cooperation between all players in the emerging ecosystem.