Cashless in Indonesia: Gelling Mobile E-frictions? · 2017. 4. 13. · Gelling Mobile E-frictions?...

Cashless in Indonesia: Gelling Mobile E-frictions?Kathleen Azali

Journal of Southeast Asian Economies (JSEAE), Volume 33, Number 3, December2016, pp. 364-386 (Article)

Published by ISEAS–Yusof Ishak Institute

For additional information about this article

Access provided by Institute of Southeast Asian Studies (13 Apr 2017 09:32 GMT)

https://muse.jhu.edu/article/647394

https://muse.jhu.edu/article/647394

Journal of Southeast Asian Economies Vol. 33, No. 3 (2016), pp. 364–86 ISSN 2339-5095 print / ISSN 2339-5206 electronic

DOI: 10.1355/ae33-3e

Kathleen Azali is Research Officer at the ISEAS – Yusof Ishak Institute, 30 Heng Mui Keng Terrace, Singapore 119614; email: [email protected]

364 © 2016 ISEAS – Yusof Ishak Institute

RESEARCH NOTES

Cashless in IndonesiaGelling Mobile E-frictions?

Kathleen Azali

Indonesia has a large and diverse population, with highly uneven levels of development and a complex decentralized structure. This makes creating a long-term institutional framework and building connectivity infrastructure extremely challenging. The majority of the population is unbanked, and lacks access to fixed telephone lines or the country’s limited banking services. Cashless payment systems such as credit cards are used by less than 10 per cent of the population. The use of ATM and debit cards is still limited, although inter-bank transfers have increased after the introduction of a recent mechanism allowing inter-operability between different banks and mobile network operators. With the rapid growth of mobile uptake, mobile money has the potential to grow but comes with various constraints. This research note argues that in this highly dynamic and fragmented market, analysis and development of cashless payment needs to look beyond masterplan reports, to investigate the more informal, decentralized, mobile-led development and frictions in non-cash payments.

Keywords: Cashless, Indonesia, mobile, e-money, infrastructure.

1. Introduction

Indonesia, with the world’s fourth largest population (trailing behind China, India and the United States) is often eyed for its young demographics — nearly 60 per cent of its 250 million population is below thirty years of age. Moreover, McKinsey & Company estimates that in 2030, Indonesia will become the seventh largest

economy, more than 60 per cent of its working age population will enter middle-class status, and the consumer class is expected to increase from 45 million in 2010 to 140 million in 2030 (Oberman et al. 2012). Furthermore, the country also has a rapidly growing mobile market, which constitutes one of the largest social media user bases in the world.

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December 2016 Aza l i : Cash l e s s i n I ndones ia 365

Amidst the optimism about the country’s economic potential, challenges in the country exist. The country has a diverse set of languages and cultures with more than 300 ethnic groups spread over an archipelago of more than 13,000 islands. Additionally, in 2001, Indonesia underwent “big bang” decentralization, transferring political, financial and administrative authority to the second tier of sub-national governments, currently numbering more than 500 regencies (kabupaten) and municipalities (kota). Power has been dispersed from the centre towards hundreds of sub-national regions, presenting a highly fragmented market with massive challenges in interoperability and large-scale adoption in e-payments solutions. While mobile subscriptions are growing to near ubiquity in Indonesia, logistics and Internet coverage still remain spotty, with Internet speed rated as the lowest in Southeast Asia. With these challenges, it is extremely difficult to create a long-term institutional framework that builds infrastructure for connectivity.

Indonesia still relies mostly on cash payments, with limited growth in card-based instruments. The country’s rapid growth of mobile subscriptions and devices seem to offer the potential for cashless transactions, but intermittent network connections that cause transactions to fail are still prevalent. Until recently, performing a cash-out required a remittance licence issued directly by Bank Indonesia (BI), but after a regulation amendment, major transaction switching companies started implementing inter-operability among different networks. This has led to greater use of electronic money (e-money),1 inter-bank and inter-operator transfers. However, problems still exist: low trust; slow Internet connection; weak logistics; and a lack of qualified workers. Additionally, while Indonesia has grand development masterplans and blueprints at various levels, implementation is generally patchy, if executed at all.2

Based on an analysis of official documents, press and consultancy reports, this research note argues that, given the long-standing constraints of developing fixed infrastructures, and the potential development of mobile technology as a tool for cashless payments, the concept of “gelling”

distributed networks, rather than a focus on centralized blueprints and regulations, ought to be considered in future studies. As it is, individual sub-national or network providers have their own operators, users and potential markets, which are often overlapping and conflicting. Indonesia’s history has shown how challenging it is to “enforce” centralized laws and regulations amidst ever-shifting overt and covert alliances of political and economic actors, now dispersed not only down to sub-national governments, but also to ever-shifting market forces. The notion of “gelling” not only suggests the potential to build connections and interoperability across existing frictions and existing distributed, non-homogeneous networks, it also highlights the dynamic possibilities of changing fluidity, compatibility, and stickiness that can be caused by various ecological, economic, social, technological, political factors within gelleable, mobile networks (Tironi 2012; Sheller and Urry 2004).

In section 2 of this research note, I elaborate on the current state of affairs — the main players in the market, the number and volume of non-cash transactions, as well as government plans. In section 3, I analyse factors that affect the prospect of non-cash transactions, including the issues of infrastructure, regulations, standards, and security. Section 4 concludes by raising avenues for further inquiry in analysing decentralized, mobile-led development and frictions.

2. Current Situation

Non-cash payment services provided by banks and non-bank financial institutions (NBFIs) — whether for fund transfers, clearing operations or settlement — are available and in operation in Indonesia. ATMs have been in operation in Indonesia since 1979. However, the majority of Indonesians rarely utilize banking services. Data from the World Bank Index 2014 indicates that only 35.9 per cent of the Indonesia’s population have a formal account with a financial institution. This means that up to 64 per cent of the entire bankable population in Indonesia does not have a bank account. The Indonesian E-Commerce

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366 Journa l o f Sou theas t As ian Economie s Vo l . 33 , No . 3

Association (idEA) has a lower estimation, with banking penetration at only around 20 per cent (Figure 1). According to Rau (2013), in 2012, 99.5 per cent of transactions were conducted using cash, although notably, cashless transactions have been growing at 23 per cent on average per year. Conversely, Malaysia has a lower number of transactions in cash (92.5 per cent), but the growth of electronic transactions was at a comparatively modest 9 per cent per annum. MasterCard’s study on progress towards a cashless society (Thomas 2013) gave Indonesia 24 out of 100 for its readiness score, based on the presence of macroeconomic prerequisites for going cashless.

MasterCard’s estimates are also more conservative than the World Bank’s, where only 20 per cent of Indonesians over the age of 15 have bank accounts, and only 11 per cent have

debit cards, with cashless payments in Indonesia accounting for only 31 per cent of the total value of consumer payments (2013). A Nielsen Online survey found that up to 50 per cent of online shoppers in Indonesia used Facebook to browse and shop for products and services, while 49.2 per cent used Kaskus, an Indonesian social forum (similar to Reddit). In terms of transactions, up to 70 per cent of online shoppers choose to use bank transfers, 13.1 per cent use Cash on Delivery (COD), while 11.5 per cent use credit cards (Setyowati 2012). Interoperability between ATMs and mobile network operators is among the largest development in e-payments in recent years. Subsection 2.1 gives an overview of this development in the country, while sub-section 2.2 gives an overview of government plans in the future.

FIGURE 1Penetration of Financial Transaction in Southeast Asia (in percentage)

Source: Asosiasi E-Commerce Indonesia (2014).

20

66

27

98

72

21

1

12

3

37

5 1 3

13

2

42

9 3 1 3

22 17

3

10

0

20

40

60

80

100

120

Indonesia ThailandSingaporePhilippineMalaysia Vietnam

Banking penetration Credit card penetration Electronic payment Mobile payment

16-J00722 JSEAE 05.indd 366 30/11/16 11:17 AM


2.1 Payment Channels and Instruments

BI’s definition of payment instruments for cashless transactions includes cheques, interbank transfers (GIRO), credit and debit cards, and e-money (which includes prepaid card, and prepaid apps, stored on a computer or a mobile device). I first go through card-based instruments followed by e-money.

2.1.1 Card-based Instruments. According to Amianti (2015), Indonesia has four ATM-based transaction switching companies that provide a network for e-payments and transfers: (1) Artajasa Pembayaran Elektronis (ATM Bersama); (2) Rintis Sejahtera (ATM Prima); (3) Daya Network Lestari (ATM ALTO); and (4) Sigma Cipta Caraka (ATM Link), which is a second-tier subsidiary under the state-owned telecommunications firm Telkom. The four companies have agreed to enable interoperability by charging additional fees to customers of different banks. Prior to an agreement in 2013, customers from two different banks could not transfer money through different ATMs due to a lack of interoperability.

No systematic indicator to measure non-cash payment instruments has been officially approved by BI to date. The main indicator used to measure the development of card-based payment is transactions through ATM, debit and credit cards. The number of ATM and debit cards have increased from around 40.3 million cards in 2008 to around 112 million in 2015 (Table 1). The number of ATM and debit cards have a higher average per annum growth rate (15.9 per cent) as compared to credit cards (4.9 per cent) in the same time period. The slow growth of credit cards are generally attributed to: the restrictive regulations limiting credit expansion (which prohibit adults who have a monthly income of less than Rp3 million from credit card ownership); as well as the low level of trust towards security, with widespread fear of scam. Interestingly, both the volume and value of card-based transactions are high in comparison to the cash withdrawals (Tables 2 and 3). While cash withdrawal is still prevalent, the data indicates that the preference for card-based transactions have increased, while cash-based transactions have declined relatively.

TABLE 1Number of Card-Based Instruments

Period

Payment Instrument Using Card

CreditCard

Change(%)

ATMCard

Change(%)

ATM +Debit Card

Change(%)

2008 11,548,318 — 2,495,024 — 140,298,706 —2009 12,259,295 6.16 3,378,235 35.4 141,151,850 2.122010 13,574,673 10.73 2,766,085 –18.12 148,873,080 18.762011 14,785,382 8.92 3,623,992 31.02 159,761,318 22.282012 14,817,168 0.21 4,533,187 25.09 173,219,365 22.522013 15,091,684 1.85 6,292,164 38.8 183,170,125 13.592014 16,043,347 6.31 7,189,917 14.27 198,638,287 18.602015 16,813,855 4.80 7,252,712 0.008 112,166,998 13.71Average Growth2008–15

4.88 18.07 15.94

Source: Bank Indonesia.

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TABLE 2Credit Card Transactions (value in rupiah million, volume in number)

PeriodCash Withdrawal Purchase

Volume Value Volume Value

2008 5,390,134 3,800,977 161,346,501 103,468,5442009 4,807,180 4,040,297 177,817,542 132,651,5672010 4,361,194 4,521,434 194,675,233 158,687,0572011 4,048,637 4,441,568 205,303,560 178,160,7632012 3,614,669 4,281,751 217,965,183 197,558,9852013 3,402,550 4,342,593 235,695,969 219,026,9842014 3,776,843 4,879,942 250,543,218 250,177,515Jan 2015 560,030 622,155 20,951,073 20,973,888Feb 2015 515,637 568,604 20,339,113 19,829,911Mar 2015 567,783 646,913 22,728,807 23,376,337Apr 2015 546,595 612,691 22,215,873 22,351,578May 2015 548,923 606,567 22,534,995 22,949,942Jun 2015 557,102 630,447 23,882,905 23,994,102Jul 2015 438,363 539,595 24,393,147 24,124,480Aug 2015 562,171 620,288 22,596,506 22,383,961Average Growth 2008–14 –5.47% 4.44% 7.62% 16.01%


2.1.2 E-money — Pre-paid Cards and E-wallets. In line with the growth of non-cash transactions, e-money showed a growing trend. Most e-money development is led by mobile-network operators (MNOs), or increasingly, by third-party providers. The MNO-led developments rely on mobile phones as the interface to enable transfer and storage of e-money, and on telephony infrastructure as the channel. The three major MNOs in Indonesia — Telkomsel, Indosat, and XL Axiata — dominate the market share (up to 85 per cent). Telkomsel launched TCash in 2007; Indosat followed in 2008 with Dompetku; and XL launched XL Tunai in 2012 (see Table 4 for the full list of licensed issuers).

The year 2009 marks the beginning of the popularity of e-money. Between 2008 and 2013, there was a marked increase in terms of e-money transaction volume and value, and a spike in the uptake of both volume and value in 2015 (Figure 2 and Table 5), followed by a noticeably

sharp decline in value, and a less drastic decline in volume. Perhaps it is indicative of the dynamic growth of mobile apps (mostly for transportation), implementation of new regulation, and overall economic slowdown. On average, the growth in transaction volume and value of e-money are 152.9 per cent and 135.8 per cent respectively (Table 5).

In May 2013, the three major mobile operators agreed to allow interoperability between their mobile wallets, allowing customers to send and receive money across each other’s networks. According to a GSMA report (Camner 2013), Indonesia’s initiative of allowing interoperability of mobile operators, with support from the central bank, was a ground-breaking milestone.3 At the same time, while MNO-led mobile money services in Indonesia had 12 million registered users and two million agents, only a small minority of users are considered active, where the main service used is topping-up value (Stapleton 2013, pp. 357–58).

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TAB

LE

3A

TM

/Deb

it C

ard

Tra

nsac

tions

(va

lue

in r

upia

h m

illio

n, v

olum

e in

num

ber)

Peri

odC

ash

Wit

hdra

wal

Pur

chas

eIn

tra-

bank

Inte

r-ba

nk

Volu

me

Valu

eVo

lum

eVa

lue

Volu

me

Valu

eVo

lum

eVa

lue

2008

1,01

2,56

8,06

769

6,50

5,03

979

,618

,170

42,8

13,8

8924

4,49

7,83

11,

282,

800,

929

17,1

25,3

9534

,056

,866

2009

1,13

4,55

6,74

479

1,93

4,37

898

,178

,888

56,1

71,2

3528

8,32

4,53

789

2,63

3,80

640

,101

,504

70,7

56,9

5220

101,

303,

272,

394

925,

984,

926

111,

720,

556

65,3

17,6

2233

6,47

5,24

590

0,72

1,24

560

,607

,686

109,

829,

410

2011

1,61

6,63

2,43

51,

157,

684,

283

138,

330,

821

84,5

71,3

8241

6,34

7,61

81,

072,

512,

227

90,9

88,5

5916

2,27

3,55

820

121,

954,

555,

337

1,42

2,38

5,34

218

4,88

0,39

811

0,70

3,02

053

6,88

6,93

61,

270,

110,

689

147,

785,

639

261,

880,

991

2013

2,30

1,50

2,83

71,

674,

210,

377

242,

845,

289

147,

112,

907

653,

930,

855

1,50

7,36

8,12

226

2,87

0,88

446

8,67

9,03

320

142,

644,

726,

305

1,92

0,78

0,69

029

2,05

4,98

318

0,64

0,90

280

0,44

0,98

51,

705,

169,

655

340,

473,

891

638,

482,

190

Jan

2015

233,

567,

614

167,

809,

191

25,6

45,4

3216

,026

,342

73,1

02,1

4814

7,08

6,17

030

,395

,443

56,7

62,4

31Fe

b 20

1521

6,45

5,13

415

4,56

0,42

723

,327

,001

14,4

00,4

1171

,509

,342

133,

431,

162

26,1

87,1

1551

,947

,854

Mar

201

523

7,11

3,95

616

6,37

6,25

726

,832

,513

16,7

16,7

6082

,979

,477

156,

714,

825

29,7

18,5

8759

,193

,958

Apr

201

523

7,40

3,86

016

8,15

3,72

326

,656

,077

16,8

20,1

3778

,293

,137

149,

008,

302

28,0

31,2

1857

,588

,918

May

201

524

5,04

7,39

117

5,20

2,56

429

,336

,002

17,9

31,7

1580

,587

,564

151,

350,

832

28,6

18,2

2458

,906

,815

Jun

2015

240,

408,

029

177,

000,

513

28,9

14,4

1018

,343

,716

80,7

09,8

2815

7,81

6,91

929

,276

,874

61,8

95,8

92Ju

l 20

1525

6,86

3,83

319

9,37

9,43

233

,543

,305

18,8

65,4

0976

,910

,279

151,

117,

888

29,8

40,1

7964

,758

,169

Aug

201

523

9,67

7,48

617

5,31

4,49

129

,778

,368

17,9

83,8

2081

,610

,061

156,

218,

225

29,3

72,8

0462

,561

,042

Ave

rage

Gro

wth

2008

–14

17.4

2%18

.49%

24.3

7%27

.26%

21.9

2%6.

63%

67.5

4%64

.55%

Sou

rce:

Ban

k In

done

sia.

16-J00722 JSEAE 05.indd 369 30/11/16 11:17 AM


TABLE 4List of Electronic Money Operators Licensed by Bank Indonesia, as of January 2016

No. Issuer No. Issuer

1. BPD DKI Jakarta 11. PT. XL Axiata 2. Bank Mandiri 12. PT. Finnet Indonesia 3. Bank Central Asia 13. PT. Artajasa Pembayaran Elektronis 4. PT. Telekomunikasi Indonesia 14. Bank Permata 5. PT. Telekomunikasi Selular 15. Bank Cimb Niaga 6. Bank Mega 16. PT. Nusa Satu Inti Artha 7. PT. Skye Sab Indonesia 17. PT. Bank Nationalnobu 8. PT. Indosat 18. PT. Smartfren Telecom 9. Bank Negara Indonesia 19. PT. Mvcommerce Indonesia10. Bank Rakyat Indonesia 20. PT. Witami Tunai Mandiri


FIGURE 2E-Money Transaction


0

10

20

30

40

50

60

70

0

100

200

300

400

500

600

700

Jan-

08

Aug

-08

Mar

-09

Oct

-09

May

-10

Dec

-10

Jul-1

1

Feb-

12

Sep

-12

Apr

-13

Nov

-13

Jun-

14

Jan-

15

Aug

-15

Vol

ume

(Tril

lions

)

Rp.

(Bill

ions

)

Value and Volume of E-Money Transactions

Value

Volume

More recently, the Ministry of Communication and Information is working on new regulation to cut interconnection fees4 to Rp204 (around 2 U.S.

cents) per minute between all cellular operators in the hope of increasing efficiency, since currently, people own multiple SIM cards to get lower call

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TABLE 5E-Money Transaction

Period Volume Change (%) Value (rupiah million)

Change (%)

2008 2,560,591 — 76,675 —2009 17,436,631 580.961 519,213 577.1612010 26,541,982 52.220 693,467 33.5612011 41,060,149 54.699 981,297 41.5062012 100,623,916 145.065 1,971,550 100.9132013 137,900,779 37.046 2,907,432 47.4692014 203,369,990 47.476 3,319,556 14.175Jan 2015 25,563,528 — 253,373 —Feb 2015 24,186,946 — 246,223 —Mar 2015 30,515,495 — 339,241 —Apr 2015 29,665,397 — 294,805 —May 2015 53,703,513 — 478,024 —Jun 2015 59,724,050 — 663,652 —Jul 2015 58,746,812 — 665,753 —Aug 2015 59,853,437 — 527,866 —Average Growth 2008–14 152.911 135.797


fees. The regulation is still subjected to major tussles between operators, particularly between Telkomsel and private companies such as Indosat and XL.

In 2014, the number of e-money cards in circulation reached 35.7 million. TechinAsia reported that in 2014, about Rp7.7 billion (US$643,000) was circulated daily using e-money tools in Indonesia like e-wallets and prepaid cards (Lukman 2014). Some banks have issued e-money prepaid debit cards that can hold up to Rp1 million (US$85), and are usually integrated with other cards such as student cards. However, most transactions are still limited to low-value transactions such as toll road payments, parking, and purchases at mushrooming mini-markets like Indomaret. Major online retailers generally expect less than 10 per cent of their total transactions to be completed online. The bulk of the transactions are generally processed using offline bank transfers or COD. More recently, in April 2016,

Bank Central Asia (BCA) has reported significant usage of its prepaid card for transportation services (around 60 to 70 per cent transaction), specifically for paying toll road, parking fees, fares for TransJakarta buses and commuter trains (Amianti 2016).

Flazz, the prepaid debit card issued by BCA, is the leader in terms of the number of cards issued, reaching 8.5 million in 2015, an increase of 32 per cent from 6.4 million in the year before, according to the head of BCA’s consumer card (Amianti 2016). The biggest bank in Indonesia, Bank Mandiri, also has aggressively developed its own version of cards through exclusive partnerships such as: through the Indomaret Card with its major minimarket chain; GazCard, in partnership with the state-owned Pertamina; and E-Toll Card, for road tolls. It has also developed a mobile e-cash app called Mandiri eCash. BCA has recently followed suit, with the launch of a mobile e-cash app called Sakuku.

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2.2 Government Plans to Promote Non-cash Transactions

Plans to reduce cash transactions and improve financial inclusion have faced many delays and impediments. In 2014, together with the Association of Payment Systems of Indonesia (ASPI), BI launched the “National Non-Cash Movement (Gerakan Nasional Non Tunai, GNNT).” The campaign intended to raise public awareness of the use of non-cash instruments and subsequently formed a society comfortable with using non-cash instruments (the Less Cash Society). However, while GNNT has promoted the use of non-cash transactions, a long-term plan and clear mechanism to increase non-cash instruments remain unclear.

In December 2015, BI reaffirmed its decision to develop a master plan for an integrated payment system, called the National Payment Gateway (NPG), which will be the main infrastructure for financial services and payments (Amianti 2015). The roadmap would oversee inter-connectivity of electronic payments through various tools, including ATMs, debit and credit cards, and e-money. The roadmap is expected to be completed by 2016.

The Ministry of Communication and Information Technology has developed an e-commerce roadmap, including the roles of related government institutions (Table 6).

3. Factors Affecting the Prospects of Non-cash Transactions

This section outlines the challenges to increasing the use of non-cash transactions, namely infrastructure and regulations.

3.1 Infrastructure: Banking, Telephony, and Internet

The Boston Consulting Group ranked Indonesia as among the top countries with the highest “e-friction” points,5 which measures the ease of access and effective use of the Internet (Zwillenberg, Field and Dean 2014). Unsurprisingly, Indonesia’s biggest pain points

come under the infrastructure category, including factors such as: broadband penetration; average mobile connection speed; and Internet architecture (Freischlad 2015). Individual pain points include: a huge unbanked population; a high number of people not using online financing tools; and a high level of adult unfamiliarity with banking services. Information issues include: the availability of content in the home language; press freedom; and filtering.6

The quality and coverage of Indonesia’s physical infrastructure is considered sub-standard, and remain a key bottleneck to growth. The under-investment in infrastructure since the late 1990s has contributed to the low quality and quantity of physical infrastructure. After the 1998 Asian Financial Crisis, the government’s development expenditures have been severely curtailed, and Indonesia’s expenditure on infrastructure were reduced to half of that of the Soeharto era (Aswicahyono and Hill 2015). More than a decade later, infrastructure has improved steadily and slowly, but still lags considerably behind.7

BI’s data show a relatively low ratio of bank offices and ATM per 100,000 adults for each province in Indonesia. Again, a high discrepancy exists: Jakarta is the most financially accessible region in Indonesia, with most provinces having only a third of the bank services and about 20–30 per cent of the number of ATMs in Jakarta (Table 7). Meanwhile, the 2014 data from the World Bank states that less than 20 per cent of Indonesia’s population are Internet users (Figure 3), while the data from the Indonesia Internet Service Provider Association (APJII) estimates this figure as 35 per cent (Figures 4 and 5). While it is not surprising that these various statistics have large gaps on the exact number of Internet users in Indonesia, it is clear that the percentage is still below half of the population, and distribution is highly intermittent in Indonesia.

Historically, Indonesia’s landline usage has been limited. Telephone lines have been controlled by state bureaucracies, and citizens have had to wait for years for a phone line to be extended into their neighbourhoods, much less their homes. While Figures 6 and 7 show

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TABLE 6E-Commerce Roadmap and Government Roles

No. Aspects Problems Related Government Institution

1. Integrated payment system

• Only 4–10 per cent of transactions use online payment. The remaining transactions consist of COD or bank transfers

• So far, there is no integrated payment system. Sellers and distributors use a payment system through different banks individually and separately

Bank Indonesia andMinistry of Finance (MoF)

2. Low trust • Indonesia is the 14th out of 15 countries with the highest e-commerce crime. The top three crimes are: payment fraud; new account fraud; and account takeover

Ministry of Communication and Information Technology, Ministry of Law and Human Rights, and The Prosecution Service

3. Slow internet connection

• Average connection speed of Indonesia is 3.7 Mbps

• Technical problems in connecting to the Internet

Ministry of Communication and Information Technology

4. Weak logistics • Logistics quality is poor, accounting for 10.7 per cent of GDP

• Poor infrastructure, low capacity of logistics network as well as illegal transactions

Ministry of Transportation

5. Lack of qualified workers

• Logistics quality is poor, accounting for 10.7 per cent of GDP

• Poor infrastructure, low capacity of logistics network, as well as illegal transactions

Ministry of Higher Education

6. Tax regulation • There is no specific tax regulation for e-commerce

• Tax incentives may support and accelerate e-commerce growth

Ministry of Finance

Source: General Directorate of Informatics Application, Ministry of Communication and Information Technology (2015).

a decline on fixed telephone subscriptions, the number of mobile cellular network subscribers has increased tremendously.

In other words, the discussion on the telecommunication and Internet industry in

Indonesia primarily concerns mobile transactions.8 Similar to the phenomenon in telephony, majority of Internet users in Indonesia “leap-frogged” fixed connections to mobile usage. With the rapid uptake of mobile phones, there are high hopes that the

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TABLE 7Ratio for Number of Bank Office Service and ATM per 100,000 Adults, 2014

Province Bank Office Service

ATM Province Bank Office Service

ATM

Nanggroe Aceh Darussalam 20 126 West Nusa Tenggara 13 21North Sumatra 22 136 East Nusa Tenggara 15 17West Sumatra 23 126 West Kalimantan 23 26Riau 22 137 Central Tengah 18 27Jambi 21 127 South Kalimantan 26 41South Sumatra 16 129 East Kalimantan 32 60Bengkulu 22 122 North Sulawesi 21 43Lampung 13 119 Central Sulawesi 15 25Bangka Belitung Islands 22 138 South Sulawesi 19 40Riau Islands 29 175 Southeast Sulawesi 17 23DKI Jakarta 71 215 Gorontalo 16 21West Java 17 140 West Sulawesi 12 14Central Java 18 126 Maluku 15 23DI Yogyakarta 29 155 North Maluku 16 18East Java 17 134 West Papua 33 54Banten 17 163 Papua 54 97Bali 31 181


networks can provide — and extend the provision of — financial services to the great majority of the unbanked population in Indonesia (IFC World Bank 2010).

However, Internet speed remains slow and spotty, and it is typical for users to own multiple SIM cards and phones. The ambitious Palapa Ring project, which was to implement undersea fiber optic networks throughout Indonesia to boost connectivity, has faced years of delay since it was first initiated in 1998.9 Indonesia has no centrally planned or centralized fiber optics networks — in fact, many are connected to overseas cables, with the central node in Singapore (Figure 9). This brings complicated security concerns (Citizen Lab and Canada Center for Global Security Studies 2014, p. 9). The current government had stated that it would be one of Indonesia’s priority infrastructure projects, and since early this year, the bidding processes have been ongoing.

While the 3G service market is sizeable and growing, the 2.5G mobile market is still widespread across the country (U.S. Commercial Service 2015). Prepaid plans — which can be easily bought or topped-up through providers, agents, or banks, without strict identity checks — are the overwhelmingly predominant means of obtaining a mobile connection, used by up to 98 per cent of subscribers.10 These conditions shape patterns of mobile phone usage in Indonesia, including the propensity to frequently change phone numbers, swap SIM cards, or own a number of them.

The market of mobile network communications are dominated by three big operators — Telkomsel, Indosat, and XL Axiata — which have about 85 per cent market share between them.11 These operators have enormous influence over the development of the Internet and telecommunication sector, which is rapidly growing in Indonesia. They also have

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FIGURE 3Internet Users as a Percentage of Population in Selected Southeast Asian countries

Source: Compiled from World Development Indicators, World Bank (1998–2013).

0

10

20

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a major role in shaping the patterns of use and implementation of standards, protocols, payment and security systems. This suggests that to move forward on non-cash payments, Indonesia should consider thinking of these existing networks as untapped resources, networks that can be gelled, rather than reinventing the wheel.

3.2 Regulations, Standards, and Security

The second challenge to cashless transactions in Indonesia concerns regulations, standards and security. To give a brief overview of the institutional dimension of regulations, under Act No. 23 of 1999, BI is mandated to maintain the stability of the rupiah. One way it does this is through the regulation and management of the National Payment System (NPS). As of

31 December 2013, supervision to individual banks (micro prudential) has been transferred from BI to the Financial Service Authority (OJK). Two related organizations have also been established: the Association of Payment Systems in Indonesia (ASPI)12 and the Forum for Indonesian Payment System (FSPI).13

The range of policies regulating NPS on the types and standards of payment instruments is also determined by BI. High-value non-cash payments are processed by BI through the BI-RTGS (Real Time Gross Settlement) system and the Clearing System, the major channel for settlement of financial transactions in Indonesia.14 BI-RTGS is categorized as a Systemically Important Payment System (SIPS), one that processes high-value and urgent payment transactions. There are also System Wide Important Payment Systems

16-J00722 JSEAE 05.indd 375 30/11/16 11:17 AM


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16-J00722 JSEAE 05.indd 376 30/11/16 11:17 AM


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16-J00722 JSEAE 05.indd 377 30/11/16 11:17 AM


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16-J00722 JSEAE 05.indd 378 30/11/16 11:17 AM


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(SWIPS), which includes the clearing system and card-based instruments used by the public.

Almost 95 per cent of high-value and urgent financial transactions, such as on the inter-bank money market, the stock market, government transactions, foreign currency transactions and clearing settlement, are processed through the BI-RTGS system. In 2005, the daily turnover of transactions handled in the BI-RTGS system reached at least Rp82.8 trillion (approximately US$6.1 billion). By comparison, only Rp4.7 trillion (approximately US$346 million) was recorded in daily non-cash transactions using card-based instruments provided by banks or NBFIs. In 2015, BI reported that the daily turnover of high-value transactions recorded at around Rp242 trillion, with an average of Rp12 trillion (Primadhyta 2015). In 2013, BI amended Regulation No. 11/12/PBI/2009 on the use of e-money. Article 4 stated that Cash Payment Points (Tempat Penguangan Tunai or “TPT’s”) is allowed to provide a cash-out service without requiring a fund transfer licence from BI.

BI has recently reaffirmed its commitment to the long-delayed master plan for an integrated NPG, which has been postponed since 2012 (Amianti 2015). It aims to establish a central institution that will oversee inter-connectivity of all electronic payments through various tools, including debit cards, credit cards, and e-money. It would also support the BI-RTGS. However, details on how this will be implemented still remain unclear, and delays seem to be likely. For example, extended deadlines have already been applied numerous times in requiring debit cards to be equipped with chips that comply with the National Standard of Indonesian Chip Card Specification (NSICCS). Additionally, the NSICCS had already been established before the NPG master plan, which complicates matters further.

Moreover, as mentioned earlier, the current developments in non-cash transactions appear to be strongly driven by mobile market development, where dominant players have an enormous influence over the development of the sector. The outcome has not been optimal. Mobile development is still dependent on the existing

infrastructure for signal, connections, and security which are intermittent, depending on where they are. Delays or failures in transactions to and from their devices and banks are common (Boellstorff et al. 2013). Moreover, fraudulent businesses are widespread, such as fake businesses advertising on social media and Google. They are hard to identify — and even if possible, with long-standing weak law enforcement, little can be done about it legally (Wirdana 2014). It is not only a problem of a lack of trust in payment security, but also in the credibility of travel logistics and businesses. Most online shoppers prefer paying through ATMs or through COD than through online payment gateways.

4. Conclusion and Further Research

Mobile money transfer services have achieved huge successes in places like Kenya, Tanzania, with rapid adoption in Philippines and China. However, Indonesia has not seen the same level of uptake. The problems plaguing Indonesia’s banking and logistic services are a familiar litany: weak formal institutions and legal structures; businesses with considerable influence in steering standards; a high unbanked population not familiar with financial services; low broadband penetration; limited and spotty Internet and phone coverage; lack of information services in home language; and arbitrary filtering. The government is well aware of the conditions.

Despite these e-frictions,15 there is huge potential for mobile-based financial provision, and many investors are still attracted to Indonesia. In its 2013 eCommerce Readiness Index, Vela Asia ranked Indonesia as the most attractive eCommerce market in Southeast Asia, due to its sheer population size and high domestic consumption.16 According to the World Bank, its foreign direct investment increased to approximately US$26 billion in 2014; additionally, some 6.5 million migrant workers sent US$7.2 billion home in 2012 (Camner 2013, p. 5).

Stapleton (2013) argued that the commercial banking sector in Indonesia focuses narrowly on corporate lending, whereas the telecommunications

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market has been relatively fragmented and competitive. He advised Indonesia’s regulatory and policy bodies to create a more conducive setting for branchless banking, and for providers to allow interoperability. At the same time, given that the development is strongly driven by various players rather than coming from a centralized blueprint, there is an urgent need to look beyond technical or administrative issues.

“Gelling” mobile agents and frictions rather than a grand masterplan or blueprint-like structures might provide an avenue for further inquiry and research. Recent developments — such as picking up of the Palapa Ring development, the flagship programme of tax amnesty to spread the tax base, the implementation of electronic identity cards, the plan to launch new rules governing financial technology (fintech) companies by the end of the year under the Financial Services Authority (OJK), and the lobbying for international investment in information and communication technology from China, the United States, and European countries — indicate that the current national government is dedicating increasingly significant attention, resources, and planning to the integration of technology and financial services. But the implementation also shows various long-standing frictions and resistance. In a highly fragmented market like Indonesia, driven by oligarchic industries with weak and convoluted regulations, and rapid technological innovation, compounded by archipelagic geography, setting common technical and legal standards of inter-operability can indeed be very challenging. At times, it can even be counter-productive. In the face of the widespread unfamiliarity with e-money, the long history of distrust against the legal bureaucratic system, how can “gel” lubricate these frictions and connect different networks? What sort of

gelling would catalyse rather than halt frictions? How do early choices constrain available options to move forward and create path dependencies? As networks of players are gelled into webs of inter-networks, how do they build standards to solidify common standards, or maintain their fluid flexibility to work across gaps — or would we see stronger consolidation of competing alliances among bigger players that exclude smaller ones? More ethnographic research and attention need to be devoted to the agents “on the ground” — the sellers, buyers, SIM cards, the gadgets, etc. — who shape and improvise how cash is pushed and pulled into the e-money transfer system (Maurer, Nelms and Rea 2013).

History has shown that effective infrastructures have rarely been “built” from an orderly grand design or blueprint (Edwards et al. 2007). There are growing studies of infrastructure pushing its analysis beyond technical, administration, or institutional issues, to look into how infrastructures enable and are shaped by circulation of power, information, goods, and wealth.17 Davidson (2015) argued that for countries with weak formal institutions and law such as Indonesia, analysis and development must go beyond formal institutions and rules. Informal state-business relations strongly influenced how a more optimal telecommunication liberalization occurred in the Philippines rather than in Malaysia, despite Malaysia being a wealthier country with a stronger regulatory governance and foreign private sector participation (Salazar 2009). This article is still a preliminary analysis based on official documents, press and consultancy reports, but sets the groundwork for deeper analysis into the process of gelling as a possible conceptual tool, and hopes to incite further research and cross-pollination with works from other disciplines and geographic areas.

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NOTES

1. Bank Indonesia (2007) defines e-money as: “a non-cash payment instrument where the value of the money is stored electronically on chipped cards. The use of e-money does not require authorization like card-based payments instruments. There are presently two types of e-money: pre-paid cards or electronic purses, where the money is stored electronically on cards using chip technology. Additionally, there is also prepaid software or digital cash. The distinguishing characteristics of this payment instrument are that the money is stored electronically on a computer hard disk and the payment mechanism is executed through the internet”.

2. For example, the call for a masterplan of an integrated payment system and a national payment gateway have been in discussion since 2007. For an example of bigger physical infrastructures, none of the thirty-eight toll way projects proposed in the 2005 Infrastructure Summit had materialized by mid-2014 (Davidson 2015, pp. 1–5).

3. According to GSMA report, most countries with mobile money deployments then worked with the mechanism of generating a voucher for the fund receiver that can only be cashed out at an agent in the sender’s network (Camner 2013, p. 4). With this interoperability system in place, a mobile money customer can use the money in their e-wallet not only to pay bills, but also to transfer money to other customers within the three dominant networks. Customers can cash in to their service using a range of mechanisms, from banks, ATMs, to telco agents and outlets.

4. Interconnection fees are paid by one operator to another, when a user makes a call from a former to the latter. Telkomsel, a subsidiary of the state-owned giant telecommunication giant, PT Telekomunikasi Indonesia (Telkom), has built and maintained more than 118,000 base transceiver stations (BTS) across Indonesia, up to border areas outside of urban centres. The private companies have less BTS and coverage, and less interconnection fees. The current interconnection fee by Telkomsel is Rp250, Indosat Rp86, and XL Rp65. The cost is borne on the user.

5. The “e-friction” points comprises of 55 indicators categorized under Infrastructure, Industry, Individual, and Information. A high score of e-friction means that there are many factors limiting the ease of access and usage.

6. Freedom House (2015) ranked Indonesia’s Internet Freedom status as “Partly Free”, as the Supreme Court has upheld a Ministerial Regulation on “negative content” passed without legislative review, giving officials the power to arbitrarily block websites. Vimeo, and more recently, Tumblr, have been blocked, though its implementation has been inconsistent and varies across internet service providers. At least five people had been sentenced to prison under the notorious Information and Electronic Transactions Law (ITE Law).

7. In the Global Competitiveness Report, out of more than 140 countries researched, Indonesia’s ranking in infrastructure quality fell drastically from 46 in 2001 to 84 in 2009-2010. While it has demonstrated a steady growth to 78 in 2012, 72 in 2012–13, 61 in 2013–14 and 56 in 2014–15, it backslid to 62 in 2015–16. The archipelagic geography of the country, compounded by a long history of uneven, centralized control in Jakarta that suddenly went through one of the biggest “big bang” decentralization in the world, makes creating a national infrastructure and framework an extremely challenging technical and political issue that must be investigated in long term.

8. Arguably, long before the Internet, the thousands of loosely connected islands now known as Indonesia already had a long history of interconnectivity through high mobility and maritime trade. Boellstorff et al. (2013) has raised this as a thought experiment, and also pointed out how despite the limited fixed infrastructure, it has a long history of building informal collective mechanism such as wartel and warnet to temporally access telecommunication networks on demand, rather than through fixed ownerships.

9. In mid-2016, there were news reports that the Palapa Ring project was expected to begin in the third quarter of 2016, scheduled for completion in 2018. The Rp1.38 trillion (US$105.6 million) project will involve laying down 11,000 kilometres of undersea fiber optic cable, divided into three sections: the West, Central, and East packages.

10. Operators do not subsidize handsets, and long-term contracts do not exist, even for post-paid customers. Providers play between marketing their brand as offering the better signal, and luring customers with discount packages that include steeply reduced charges for messaging or calling others within the same provider, or allowing “free” access to certain websites and apps such as Facebook, Kaskus, KlikBCA, even when their prepaid plan and data has run out. It is thus very easy and common to buy and discard one prepaid SIM card for another.

11. According to Redwing (n.d.), at the end of 2012, these three operators owned up to 221 million of the 278 million subscribers in Indonesia. Telkomsel leads the pack with a user base of 123 million, making it the seventh largest mobile network company in the world. Indosat is the second largest with 55 million subscribers, and XL Axiata with 42 million subscribers. The next operator, 3 (Three), trails behind considerably with 20 million subscribers.

12. ASPI consisted of BI, OJK, Ministry of Communication and Information, and Centre of Reporting and Analysis of Monetary Transactions.

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13. FSPI was established in August 2015, signed by BI, Ministry of Finance, Ministry of Communication and Information Technology, Ministry of Trade, and Financial Service Authority (OJK).

14. BI has developed three transaction settlement systems: (1) BIReal Time Gross Settlement (BI-RTGS), an electronic fund transfer in rupiahs between participants where the settlement conducted directly and individually per transaction; (2) BIScriptless Securities Settlement System (BI-SSSS), a transaction media with BI and securities administration electronically; (3) National Clearing System (SKN), an interbank clearing system for cheque payment, giro, other debit notes and interbank credit transfer.

15. Tsing’s (2004) concept of friction in her ethnographic analysis of global interconnections is also another potential conceptual tool to analyse diverse connections and networks.

16. Indonesia’s economy is strongly driven by consumer spending, with consumption accounting for more than half of the country’s GDP. Online stores such as bukalapak.com, tokobagus.com, berniaga.com, tokone.com, laku.com, bhinneka.com, bibli.com have been growing in Indonesia since the early 2000s (and becoming more visible after 2007) (Boellstorff et al. 2013).

17. Some notable studies analysing the networked interaction between infrastructure, spaces, and people include Graham and Marvin (2001), and Simone (2010). Star (1999) also offers a classic on the ethnography of infrastructure. There is also a growing number of ethnographic studies of financial institutions (Ho 2009) and telecommunication industries, but none has been done in Indonesia. We also need to remember that the history of the archipelago has been greatly shaped by technology that is deeply intertwined with (the imposition of colonial and state) power. The emergence and development of technological modernity such as railroads, optical technologies, radios in the Netherlands East Indies (now Indonesia) at the turn of the nineteengh century had a large impact in not only gelling together the inhabitants of the vast archipelago in making sense of their world, but also segmenting and excluding different groups (Mrázek 2002).

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