Fintech and new demands for payment services

I personally choose credit cards as my preferred payment method for almost all transactions. It is convenient because there is no need to search for an ATM or to keep some cash on hand every time you go shopping.

Credit cards are also great for record keeping as they provide regular transaction statements to help customers track expenses and spending categories. My favorite part of using credit cards is that I can accumulate loyalty points for my next purchase or trip.

In Indonesia, however, credit card payment options for both online and in-person transactions are not widely offered by merchants. Some who do provide this option charge customers an extra percentage, which goes against Article 8 section 2 of Bank Indonesia (BI) Regulation No. 11/11/PBI/2009.

Under such circumstances, I find myself forced to pay in cash or by bank transfer. Seeing the dynamics and challenging landscape of electronic payments in Indonesia, I decided to join Xendit, a payment gateway provider.

A few years ago, 99.5 percent of transactions in Indonesia were carried out in cash. The country, however, is now witnessing the increasing popularity of cashless transactions on the back of multiple factors, including the emergence of financial technology (fintech) firms. The preferred payment method is still cash, but the volume of bank transfer and credit card transactions is growing, along with increasing use of e-money products.

The percentage of e-money payments in Indonesia is still relatively small, but shows no signs of slowing, especially with the incentives offered by various e-money providers. The average growth of ATM and credit card payment values in Indonesia over the past five years is about 13 percent and 7 percent, respectively, while that of e-money stood at a whopping 30 percent.

Fintech companies around the world are now pushing for a cashless society. In Indonesia alone, 44 percent of fintech firms are payment service providers. When we look at payment trends around the world, we see a lot of exciting and exploding trends driven by payment gateway providers such as AliPay, WePay, Toss, Paytm, Venmo, Dwolla, Ruru and many more.

After researching these companies and speaking with those behind their operations, we have learned that: (1) all of them work with banks. By working alongside banks, fintech firms are able to provide users with a seamless experience that encourages cashless transactions. Fintech companies and banks, ultimately, need each other. (2) By working with banks, these payment service providers have essentially brought to life the concept of auto debit (or direct debit), which is the ability to access and immediately deduct funds from users’ bank accounts. A startup, for example, saw its payment volume grow by US$2 billion within six months after the introduction of the auto debit feature. (3) These companies are able to connect with their banking partners via Application Programming Interface (API).

Offering the payment option of deductions directly from a bank account solves the friction of needing to manually transfer or top up into e-money accounts and encourages customers to move their transactions online. When cash transactions move online, the velocity of money increases, which in return makes transactions more transparent for regulators, as well as reducing the cost of transfers.

The concept of auto debit is also parallel to the need of custodian accounts found abroad, where two or more parties have full access to the account.

It is encouraging to see that banks have been developing APIs, although only for limited access. Fintech companies in many other countries have seen significant growth with the introduction of APIs that can be easily accessed by startups. We imagine that Indonesia could see hundreds of payment innovations with the auto debit concept and the introduction of banking APIs.

Payment innovations not only come from ideas within startups, but also from partnerships with banks and other global payment players, such as MasterCard and Visa, meaning customers can withdraw and transfer money between cards. We see that this trend has emerged among fintech firms like MatchMove, which has issued pre-paid cards in Southeast Asia.

It is hard to guess what the next big thing will be in the payment sector. However, after learning the current trends being pushed by local and overseas fintech firms, we are optimistic about the sector’s huge potential in the country.

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