Jakarta (TheInsiderStories) – In recent years, Indonesia’s urban population has become accustomed to use non-cash payment instruments, such as credit cards, debit cards, ATM cards and prepaid cards, to meet their daily transactional needs. Prepaid cards are looming as a future trend, e.g. in payments for fuel at gasoline stations, for toll road tickets and purchases of other goods and services.

The use of prepaid cards in transactions represents part of the evolution from cash to non-cash forms of payment. Illustrating this is the shift from use of paper-based instruments, such as cheques, drafts and non-negotiable payment orders, to electronic instruments, such as prepaid cards and even digital cash.

By definition, Indonesia’s national payment system covers a legal and regulatory framework, as well as implementing institutions and mechanisms for transferring funds to settle liabilities arising from economic activities (Law 3/2004 on Bank Indonesia).

The processing of all payments involving these different instruments is handled by various system operators, such as banks and non-bank financial institutions. It is these institutions that will provide services ranging from processing of remittances to clearing and settlement.

Indonesia currently relies on an array of 11 systems for non-cash payments, including Bank Indonesia-Real Time Gross Settlement (BI-RTGS), Bank Indonesia clearing system, Shared ATM network for national brands, shared ATM network for international brands, Intra-bank ATM network, Debit Card Network for national brands, debit card network for international brands, Fund Transfer or Remittances for domestic networks as well as Fund Transfer or Remittances for international networks.

BI-RTGS: launched in 2000, this is an electronic fund transfer system that enables real-time settlement (in Rupiah) of individual transactions. It processes high-value interbank electronic fund transfers, settlements, interbank money market transactions, customer transfers, government transactions and monetary management as well as funds settlement for BI Certificates and Government Securities traded on the BI-Scriptless Securities Settlement System (BI-SSS).

In February 2004, as a central registry for government bonds, BI introduced BI-SSSS, which promises to provide a facility for financial market players to perform transactions with Bank Indonesia, such as funding for banks and trades in BI interest rate and Government securities. In a recent development, it has become a central depository and book entry settlement system run by the Indonesian Central Depository.

E-money instruments, in the form of prepaid cards, were introduced in Indonesia in mid-2007. E-money transactions rose from 26.5 million, with a value of Rp693.4 billion in 2010, to 62.5 million transactions moving Rp790.6 billion by August 2017.

The development of non-cash payments, however, is more than just e-money and credit cards. The best example of ‘people payment behavior’ is the recent Chinese phenomenon: basically citizens did not want to owe money to anyone, as you do with a credit card balance. People in China are now paying even with their cellphones.

Chinese consumers are essentially leapfrogging plastic, and going straight from cash to mobile payments. Chinese spent $5.5 trillion through mobile payment platforms last year, about 50 times the turnover in the United States. Nowhere is the cashless trend more obvious than in the eastern Chinese city of Hangzhou, which is home to Alibaba, the world’s largest online shopping platform.

Its mobile payment app, Alipay, and WeChat Pay, which belongs to the country’s leading social messaging platform, together hold a commanding 90 percent of the market, leaving Apple Pay struggling to make inroads. People in Hangzhou, extended to Beijing all accept Alipay.

Even in Buddhist temples, visitors can make donations with a swipe of their phone. A woman performing music on the street for change — or for a scan of a QR code, placed beside the change box. Over a plate of noodles in any restaurant in China, half of their customers pay for their meals with cellphones.

In South Korea, the cashless society is ‘king’. About 70 percent of its consumer payments are cashless and 58 percent of its population use debit cards.

Certain start-ups threaten to make ATMs obsolete: Apple is making a big bet on mobile payments, and American Express even declared that it is unconcerned with the potential demise of plastic. Current trends seemingly point to a future with increasingly less cash floating around. For certain countries, however, that future is close to becoming a reality, as a number of nations have shifted almost entirely to nonphysical payments.

Meanwhile, in traditional Indonesian offline retail there is little choice but to pay in cash. Otherwise, customers use ATM’s, online banking or pay in cash in convenience stores. In a more sophisticated digital environment, card payments and other forms of cashless payments, such as through mobile wallets, only account for a small fraction of overall payments in Indonesia – even though they promise a smoother experience. Consumers may have arranged ATM transfers, online banking, and COD payments, but these methods have obvious disadvantages.

It’s risky for businesses to trust a delivery person with cash. It also adds to cost of transactions, delays in settlements, and more returns or undelivered items. ATM payments and online payments are a hassle for customers, and they’re also not instantaneous. Overall, this friction can lead to many unsettled payments. Industry players speak of an 80 percent card abandonment rate.

While it is almost impossible to dramatically increase the number of bank accounts, debit, and credit cards in use, the key factor to increase cashless payment is to ascertain how Indonesia’s formal banking sector is adapting to change. In the US, for example, credit cards are a ubiquitous form of cashless payment.

According to Statista, there are over a billion credit cards in circulation there. That’s for a population of around 320 million people. Other than that, at least two major factors will be game changers in Indonesia’s cashless payment development: creating an affordable top-up free and high-security cashless payment system that will definitely require massive investment in the IT sector.

Having said that, bear in mind that Non-cash payment instruments have come into use because of the obvious public need for conducting transactions not suited to the use of cash. Even so, cash will never be fully displaced by non-cash instruments.  People still use cash for purchases in Indonesia—mostly banknotes and coins. Why? Non-cash instruments are low-value payment transactions and under certain conditions, cash is still a more efficient alternative.

Writing by Yosi Winosa, Email: yosi.winosa@theinsiderstories.com