Card Chip Migration Burdens Banks’ Operational Costs

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JAKARTA (TheInsiderStories) – A series of ATM-skimming attacks in a number of cities across the country has forced Indonesian banks to allocate more budget to update their technology security amid slow progress in lending growth and stagnant profit.

ATM skimming is a global threat and cash withdrawal machines in countries that rely on magnetic stripe technology-based debit cards, like Indonesia, are very vulnerable to the crime. Bank customers in ASEAN countries such as Indonesia, the Philippines, Thailand and Vietnam, where the outdated technology is still in place, are easy prey to global ATM-skimming syndicates.

A number of depositors of state lenders, PT Bank Rakyat Indonesia Tbk (IDX:BRI) and PT Bank Mandiri Tbk (IDX: BMRI), have become victims of skimming recently.

The easiest way to counter the skimming attacks, of course, is to replace the magnetic-stripe technology with chip technology, which is less vulnerable to digital data theft. Bank Indonesia (BI) issued a regulation in 2012 that required commercial banks to gradually apply chip technology by 2016 for the sake of the security of their customers’ bank accounts.

Financial Service Authority (FSA) Deputy Heru Kristiyana has asked banks for early migration of ATM card from magnetic stripe to chip, which has higher security standard. The call came following reports of rampant skimming cases in the world, a cyber crime which already hit a number of major Indonesian banks.

“We call on banks to move faster in the migration to chip card as chip card could avert the risk of skimming,” he said on Thursday (29/3).

However, the policy was not implemented as most banks complained about the cost of the new technology. The central bank finally extended the deadline for the full migration to chip technology to December 2021.

The central bank said at least 30 per cent of debit and ATM cards should be in chip with six digit PIN online by the end of this year, and by December 2021, all Debit and ATM cards would use the chip technology with six digit PIN online.

In Bank Mandiri’s case, the bank has to spend US$2 to replace a single magnetic stripe card with a chip-based card, meanwhile, there are 7 million cards that have not been fully used chip technology, implying the bank has to allocate more than $14 million cost to recover.

However, maintaining operational cost is not an easy job for bankers. A number of banks are projecting their net interest margin (NIM) could depress this year, forcing the banks to keep their operations as efficient as possible.

Indonesia’s banking industry is currently having difficulty in lowering its lending rates even though BI’s benchmark interest rate has dropped to 4.25 per cent. The reason is operational cost is high so that reducing lending rates is difficult for banking industry players to do.

In the past, it seemed that Bank Indonesia, FSA and the commercial banks themselves were half-hearted in adopting the new technology — at the expense of the security of customers’ accounts. Banks may cover the losses from the fraud, but a rise in the number of crimes, resulting from the failure to protect customers, will erode the credibility of our banking industry.

The arrest of ATM-skimming specialists should be a wake-up call for the banking industry to do more to protect its customers from fraudsters. The banks, for example, have no other choice but to accelerate the migration to chip technology to provide a sense of security among customers. The banks also need to improve their data-system protection and conduct regular inspections of their cash withdrawal machines.

Even if the banking industry fully adopts the new technology, it does not mean that customers will be totally safe from fraud. Criminals will always seek new ways to steal money and they will go to places where security is lack.

Written by Elisa Valenta, email: elisa.valenta@theinsiderstories.com