Mobile Payment Successes and Challenges of the Industry and the Consumer’s Perspective

23 April 201347th APEC Telecommunication and Information Working Grou p

Rudyanto Herlambang ST., M.Sc.Head of Mobile Payment and Digital Money Business Management Division

2

Banks Telcos operators

Penetration • ~40% from addressable population

• 118% from total population

Geographic coverage

• 7,71 Branches per 1000km2, ATM 12,39 ATM per 1000km2

• 30,000 branches & 47,000 ATMs

• ~61,000 terminals per 1000km2 (~95% coverage)

• ~400,000 reseller points

Cost per transaction

• Branch: 8000 Rp/trx

• ATM: 3000 Rp/trx

• Mobile banking: 1,100 Rp/trx

Customer Segment Income

• Middle High • All Low – Middle - High

Indonesia – Facts on Banking and Telcos services

Total population • 245 Million

Bank Addressable population

• 165 Million (unbanked 86M and bankable 79M)*

Telco Addressable Population

• 190 Million

Source: AT Kearney Analysis, WorldBank 2011, KKSK BI Mar 2012, Mobile Banking, IFC 2010,* Unbanked avg annual income Rp 8 – 12 Million, Bankable Avg annual income above than Rp 12M

3

1.406

19.235

11.184

7.908 5.576 4.883

1.955 1.794 562

283 174 225 200 150

Source : Brand Health Tracking Project for Telkomsel – Q3 2012* Prediction only

In ‘000

User

Non User

Payment Shopping Buy Shopping Utilities F&B Legal Movies Modern Paying KRL Taxi*user in Gas in in Payment in Parking 21 / Book- Toll Jabo-

Jakarta*Usership Mini SPBU SPM/HPM Modern Blitz store tabek*

Market Merchant

Routine Payment Activities

Given low bank penetration and high mobile penetration, Indonesia has high m-payment potential across multiple services

4

Train Bus Taxi Toll ParkingModernGrocery

ModernRetail

157 stations all over Indonesia63 KCJ stations

TransJakarta : 11 corridors, 217 stops, 700 busesTotal: 49,000 buses

46,990 vehicles all over Indonesia

31 toll ways, 1,300 toll booths

250 hypermarkets, 2,157 supermarkets, 18,000 convenience stores

156,000 stores

Smartcard: Batik Solo Trans

E-Toll, Indomaret and Gaz cards: 12toll ways, 520 toll booths in Jabotabek

E-Toll: parking managed by ISS

E-Toll and Indomaret cards: Indomaret, E-Toll and Gaz cards:125 gas stations

Flazz, in partnership with PT. KAI

Flazz: Trans Jogja, Trans Pakuan Bogor: 30 EDC in 30 buses

BCA Flazz card accepted in Express taxis

BCA Flazz in Secure parking

>23k merchant outlets

Jakcard: TransJakarta : Corridor 6, aim to cover all corridors by end of 2012

Jakcard: 156Indomaret stores in Jakarta

Railcard: 9 train stations in Java, and 1 mallIntermode card:Prambanan Ekspress

Intermode card: Batik Solo Trans, Trans Jogja

Brizzi card accepted in TransJakarta

Brizzi: 100 merchants (restaurants, gas stations, dept stores)

Sources: Jakarta Post, Jakarta Globe, Bisnis Indonesia, Detik, Kompas, Solo Pos, Company Websites

Higherpenetration

Lowerpenetration

No. of payment points (vehicles, stations, shops etc)

However current e-money offerings in the market remain highly fragmented with no integrated solutions, leading to low take-up

Prepaid offerings

5

CashlessSociety

Cashless Society - Objective

Deputy Director of BI – Puji Atmoko

"it will improve efficiency in transactions and it is relatively inexpensive to maintain. Moreover, electronic transactions are easier to trace, thus helping in the prevention and eradication of corruption and money laundering crimes“

“Printing new currency costs a lot of money and main tenance costs are also quite high ,”

“a Cashless society can be established only if there is cooperation between the Ministry of Communication and Information Technology (Ministry) and BI”

We need a solution that is effective, efficient and fast in achieving a cashless society

Going forward, there is a clear objective of moving Indonesia to a cashless society

6

Access to e-money and moving towards a cashless economy will deliver variety of macroeconomic benefits

Source: “The Shadow Economy in Europe, 2011”, A.T Kearney-JKU-Visa, “What does it cost to make payment” Humphrey, Willesson, Lindbolm, Berdendahl , 2003, “The Impact of Electronic Payments on Economic Growth”, Moody’s analytics, 2010, A.T. Kearney analysis

Total 522

Induce consumption

and production

9

Cost savings from

reduced cash86

Transparency –reduce

“Shadow Economy“

428

• “Shadow Economy” is commercial activities hidden from public authority

• Shadow economy can account for 30% of GDP

• Reduction of cash usage can contribute up to 1% of GDP

• An increment of 1% penetration in e-payment will contribute 0.01% of GDP

Macroeconomic benefits

0

20

40

60

80

100

650500 300

France

Singapore

Thailand

Netherlands

Italy

Canada

U.S.

South Korea

India

China

Japan

Australia

Indonesia

Malaysia

250

Cash displacement will create macroeconomic benefits

Indonesia has a long way to go e-payment penetration

Proportion of electronicto total tx. (%)

# of electronic tx. per capita

Bubble size: GDP per capita

To move to cashless society

Benefits of increasing e-payment penetration by 10% (IDR Tn)

7

Telkomsel’s payments strategy is a long-term play that will modernize and bring benefits to the country

Telkomsel vision

Modernize public transportation

Change people’s payment habit

Modernize the country

Reduce cost from cash handling

Convenience to users

Better monetary control

Indonesia as a cashless societyIndonesia as a cashless society

Modern societyElectronic transport payment

Electronic retail payment

Government voucher

NFC platform

Mobile payment

5 - 10 years

8

Telkomsel aims to create an end goal m-payment ecosystem

Payment and Banking roadmap

Current products Future development End-goal

The end goal is to create an ultimate payment mode for Indonesia with Telkomsel e-money

Telkomsel currently offers a range of payment and banking services to customers

Telkomsel is expanding its services to improve service and capture larger market

Proximity payment

Remote payment

Single mobile money platform with NFC capability

Proximity payment : contactless payment with NFC

Low-cost banking

Transportation payment (train, bus, toll)

Retail payment

• Branchless banking• Mobile EDC

Remote e-money payment

Mobile banking

USSD and SMS based m-banking service

• Cash-in/out• P2P transfer• Airtime purchase• Bill payment• Online payment• Retail payment

Mobile financial svcs.• Loan - Deposit• Remittance• Insurance

• Transport and retail NFC payment

• Server based e-money

Advertising and loyalty program

9

• Retail stores• Restaurants• Gas stations• Public facilities• Government vouchers

An open payment system will promote usage of e-payments

Cashless payments

“One payment media for All”“One payment media for All”

Payment service provider (mobile payment NFC / Card )

KRL Trans Jakarta Taxis Monorail MRT

Public transportation Other usage

One single platform of payment :

• Interoperable between different issuers and transport operators

• Standardized technology

• National Principal capability

Future

Source: A.T. Kearney, Telkomsel, Telkom

Multi-issuers (banks and telcos) :

• Sales and marketing, product development, customer data management, float management

Multi-purpose :

• Multiple payment applications

• Cash substitutes for micro-payments

10

An open integrated payment system will create benefits to all stakeholdersBenefits to stakeholders

Payment providers (banks, non-banks) Customer

GovernmentTransport operators

• Economies of scale from greater acceptance and penetration

• Minimize duplicate investments

• Improve business model –potential monetization for future business expansion

• Provide greater convenience in transport experience – less queue, less cash handling

• Value added benefits – loyalty programs, promotions

• Quick win in improving public transportation service

• Better efficiency in a cashless society

• Better monetary control and monitoring for regulators

• Future G2C applications of e-money –government vouchers, subsidies, etc

• Improved operations – reduce congestions with faster transactions

• Better accountability of revenue – fully automated

• Reduce cost from less cash handling –minimize manpower, logistics, cash loss

• Better monitoring and control of passenger traffic

Source: A.T. Kearney, Telkomsel, Telkom

11

Banks Telcos

Strengths

• High Experienced in financials transactions

• Trusted brand name in cash mgmt.

• Ability to facilitate foreign exchange, clearing, and settlement

• Regulatory compliance expertise• Financial Product and Service

competencies

• Nation wide network coverage (95%)

• Large customer base (~229 Mn simcard)*• Capability to handle enormous transactions

• Significant distribution/ dealer network (~400K points) with capabilities of day to day cash management for 17 years

• Low transaction cost

• Regulatory compliance expertise• Advanced technology for huge data base,

storage capacity and customer tracking• Significant customer service infrastructure

• Fully interconnect among operators

Weaknesses

• Limited coverage penetration in term of geographic and customer segmentation by income

• Low penetration overall (40% of addressable population)

• Lack of brand awareness for financial products and services

• Less experienced in financial services

Leverage strengths of each stakeholder

We need to leverage strengths of both banks and Telcos to drive consumer awareness/ confidence and uptake of services

* Big three telcos (Telkomsel, XL, Indosat)

12

Banks and Telcos need to rely on each other’s licenses to implement comprehensive mobile low-cost financial services

Banks Telcos Required regulatory framework

Service scope/

licenses

• Full financial services covering deposits, loans, insurance and payments (credit, debit, e-money)

• Full network services license including ISP, Jartup, ITKP, SLI

• Payment/eMoney and KUPU/ remittance

• Regulation to integrate banks and telcos services for low-cost mobile financial servicesInfra-

structure

• Branches, ATM network and EDC with limited coverage

• Full Operational Licensed. :

Frequency ( 2G, 3G, 4G) with nation wide coverage and 95% population

Fund mgmt• Manage float for interest

and investments• Manage float by a custodian

bank

Compliance

• Transactions at branches and ATMs

• KYC required at branches

• New regulation on Cash-out through agent now without KUPU license

• KYC required at Telcospremises

• Cash-in/Cash-out for eMoney from/to Bank/ATM network

• Optimize prudent vs. efficiency required on KYC regulation and AML/CFT

13

Benchmark : Collaborative approach to building mobile money solution has seen greatest success

Case 1: Different objective, but successful only after collaborating

Case 2: Same objective, and successful via collaboration

Case 3: same objective, but failed due to no collaboration

Name of service

Oi Paggo, Brazil(Telco centric model)

G-Cash, Philippines (Collaborative/Hybrid model)

Mobile money, Liberia (Bank centric model)

Background • Large unbanked population, highly skewed income levels (42% income held by 10% population)

• Large prepaid customer base

• Low banking penetration (~50%), ATM penetration at 0.1 ATMs/1000 people

• Large prepaid customer base

• One of the lowest GDP/capita in the world (USD 370)

• Nascent banking sector• Large prepaid customer base

Objective • Target unbanked population without access to credit/debit cards

• Objective to promote m-payments and move to Cashless society

• Providing basic banking facility especially to overseas workers requiring low cost remittance solution

• Basic banking especially access to secure remittance services for unbanked population

Business model

• Remote payments using SMS based mobile interface – initial model non-bank based

• Modified model to have a profit sharing model with partner bank operating as co-issuer and a 50-50 JV with acquiring partner

• Hybrid business model, collaboration with rural banks as cash-in, cash-out agents

• Low cost of remittance ~1% of transactions compared to 2.5%-10% via traditional

• Mobile money services provided by banks and its agents and MNO operating as transmission channel only

• However, MTN has offered its mobile money platform to Lonestar bank for services

Key outputs • Building a closed loop network by MNO alone did not yield traction

• Collaboration with banks for co-issuing and acquisition of large merchant acquirer led to success

• Collaborative model proved highly successful and saw high take up

• Lack of innovation expected in this model as operators are offered a dormant role in the model

����

Source : AT Kearney, Telkomselis

14

Benchmark : Collaborative approach has been seen ideal to build NFC payments over the years, worldwide

Collaboration over the years

Case 1: 1 MNO, 1 bank and 1 transit player, 1 handset

Case 2: 1 MNO, 1 bank, 1 payment player, multiple

handsets

Case 3: 3 MNOs, 1 bank, 1 transit operator, multiple

handsets

Name of service

Maxis (Malaysia) (2009)

Telenor (Norway)(2011-12)

Singtel, Starhub and M1 (Singapore)

(2013)

Objective • To create a technology leader positioning by launching world’s first NFC payment solution

• To deliver superior customer experience by enabling major transit and retail payment solutions over NFC phones

• To bring greater value to high end postpaid subscribers using NFC handsets

Business model

• Launched Maxis Fast tap over Nokia 6216 in 2009 and for use at Visa Paywave and touch n go terminals

• Fast tap can be used to pay at retail stores, transit and toll points

• Partnered with DNB bank (Norway’s largest bank) for launch of NFC payments in Norway for Android users

• Also partnered with Mastercardto allow use over Paypassterminals

• Collaboration between 3 largest operators – Singtel, Starhuband M1 along with DBS bank and Ez link transit payment service for Android users

• Common TSM established by all entities and each MNO has its own wallet

Key outputs • Initial launch did not see a very high take up on account of only one handset being compatible

• Maxis now launching the service over iPhone with external NFC jacket

• Early pilot results have has witnessed high interest levels amongst customers and is expected to see high acceptance on commercial launch

• Initial launch has seen healthy take up, with more number of NFC handsets arriving in the market, penetration expected to be high.

Collaboration has increased between entities over t he years

Source : AT Kearney, Telkomselis

15

Conclusion

■ Large potential for mobile payment services in Indonesia

■ However low penetration of e-money services due to fragmented offerings and low customer awareness to drive behavior change

■ Telkomsel’s vision is to drive mobile payments usage across multiple usage areas from transit to retail to remote payments to drive Indonesia’s growth to a cashless society

■ By having the end goal m-Payment ecosystem, it is generating direct revenue plus defensive & synergy value

– Revenue stream from mobile payment and financial service

– Revenue from new marketing platform on mobile wallet

– Create customer stickiness and reduce churn

– Reduce distribution cost of airtime (direct sales)

■ An open payment system will promote usage of e-payments

■ A collaborative approach between Banks and Telcos is critical for success

■ Benchmarks show that collaboration model has highest probability of success – needs to be applied in Indonesia as well, but customized to local situation

16