E-money has emerged as an increasingly popular means of payment in Indonesia. In terms of value, credit and debit cards still account for the lion’s share of retail electronic transactions, representing 82 percent of total value as of 2019. However, in terms of number of transactions, e-money has eclipsed credit and debit cards in recent years, accounting for 84 percent of total retail economic transactions in the same period.
Among the key drivers of growth in e-money usage are low transaction costs, fast expansion of the digital economy, and a large population of unbanked individuals. On the supply side, the primary driver is lower transaction costs, which are passed on to users through discounts and promotions. Meanwhile, the rapidly expanding digital economy has translated into rising demand for digital payment. In addition, growth of e-money in Indonesia benefits from the country’s relatively low rate of bank penetration. More recently, the COVID-19 outbreak has boosted the popularity of e-money due to its contactless nature.
Evolving risks
E-money is a fixed-value claim with a private backstop. In contrast to some types of money that can be considered an object, e-money is a claim. The value of e-money is fixed, as opposed to some types of money with variable value such as Bitcoin. However, e-money differs from bank-issued money, i.e. deposits, because it has a private backstop in the form of the e-money issuer’s prudent business practice, such as balance sheet strength and legal framework. Meanwhile, bank-issued money has a government backstop in the form of deposit insurance as well as the central bank’s role as a lender of last resort.
One of the main risks facing e-money issuers is market risk, i.e. volatility in the value of assets the e-money issuers hold to back e-money. Liquidity risk constitutes another key risk, necessitating that e-money issuers have adequate funds to meet redemption requests. In addition, e-money issuers have to manage fraud and other cyber threats.
In light of these risks, a prudent regulatory framework is one in which: (i) assets backing e-money are invested in safe and liquid assets, kept in an account used only for backing e-money balances, and are not pledged as collateral for loans; (ii) the amount of e-money created does not exceed the funds e-money issuers receive from customers; and (iii) e-money issuers have adequate capital to cushion potential losses.
Keeping e-money issuers in check
In Indonesia, e-money’s market and liquidity risks are relatively low, with funds required to be placed in full in safe and liquid assets. The e-money regulation specifies that 30 to 100 percent of the funds be placed in cash or in a current account at a large commercial bank, and the remainder of the funds be placed in an account at Bank Indonesia (BI), invested in BI, or government securities. Indonesia is comparable to most countries in this aspect.
Consumer protection is also prioritized in Indonesia. The funds need to be separated from other financial accounts belonging to the e-money issuer and cannot be used for purposes other than fulfilling the e-money issuer’s obligations toward e-money users and merchants.
Lastly, Indonesia has relatively high requirements on ongoing capital for small e-money issuers, while the requirements for large issuers are comparable to other countries’ regulations.
Opportunities and challenges ahead
Looking ahead, the use of customer data for commercial purposes could be the most important source of revenue in Indonesia. At present, the regulatory framework governing e-money issuers’ latitude in asset allocation is quite strict, rendering earnings relatively modest. Instead, transaction-based income is the major source of revenue, but it will likely decline with greater competition in the field. As a result, the use of customer data for commercial purposes has come to be seen as potentially the main revenue generator going forward, particularly in the use of customer data for e-money issuers’ other activities, such as the selling of financial products and peer-to-peer lending.
Some of the key challenges for Indonesian e-money issuers are regulatory in nature. Limits on e-money balances as well as monthly transaction value have been cited by e-money issuers as an obstacle to growth. Another regulatory challenge is the curb on foreign ownership in the industry, which can deprive e-money issuers of foreign know-how and funding of a greater scale than is available at present. Furthermore, e-money issuers have to continue expending resources on technological improvements to mitigate fraud and other cyber risks. Lastly, financial literacy poses a challenge for some e-money issuers, especially those that target the lowest-income segment of the population.
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