Indonesia’s National Payment Gateway: impact on operations of licensed principals

November 2018 | EXPERT BRIEFING | BANKING & FINANCE

financierworldwide.com

As the world moves closer to a cashless economy, the role of cashless payment instruments (such as credit and debit cards and electronic money) becomes even more important in today’s modern society. Along with the rapid growth of technology and innovation in other sectors such as e-commerce, payment transactions in Indonesia are now increasingly cashless compared to ever before.

According to the ‘G4S World Cash Report’, a little over 50 percent of all transactions in Indonesia are completed with cash, with a growth in card issuance of 56.7 percent in the past five years. This means that the remaining 50 percent of transactions are made by cashless payment instruments. The report further indicates an 84 percent growth in debit card transactions, a 37.7 percent growth in credit card transactions and a 578.9 percent growth in e-money transactions. Given this upward trend in cashless transactions, the roles of the parties processing these transactions have become more significant in the Indonesian payment industry.

After years of preparation and anticipation, Bank Indonesia finally issued Bank Indonesia Regulation No. 19/8/PBI/2017 on The National Payment Gateway on 22 June 2017 (NPG regulation). Under the NPG regulation, Bank Indonesia introduced its first yet very own national payment gateway (NPG) which is claimed to be Indonesia’s integrated, efficient and affordable electronic payment system network that relies on the interconnectivity and interoperability of payment systems. Upon the full implementation of this regulation, all domestic cashless transactions made within Indonesian territory are expected to be processed through the NPG as the state’s integrated payment system. Therefore, parties wishing to provide payment processing services will have to connect to the NPG integrated system network.

From now on, Bank Indonesia generally recommends that all consumers (payment service users) in Indonesia have at least one payment instrument with the NPG logo. The NPG regulation sets a deadline for banks and non-bank operators to be connected to the NPG. Issuers, acquirers and payment gateway operators in the form of banks dealing with ATM and debit cards, must be connected to the NPG by becoming a member of at least two switching institutions by 30 June 2018. For issuers, acquirers and payment gateway operators in the form of banks but not dealing with ATM and debit cards, or not in the form of banks, the deadline will be regulated in a separate board of governors of Bank Indonesia regulation which has not been issued as yet.

With the NPG branded instrument, consumers will then be able to conduct payment transactions in all electronic data capture (EDC) machines and automated teller machines (ATMs) in Indonesia, regardless of which bank issued their cards. Consumers will no longer be required to match their cashless payment instruments to the EDC machine available in the merchant’s store to complete a transaction, the way it was before the NPG was implemented. Despite the upside of having the NPG instrument, the regulation does impose ‘game-changing’ requirements which may impact existing payment processing service providers, especially non-bank principals in their business activities. These possible impacts are the focus of this article.

Brief introduction to the NPG regulation: institutions in the NPG system

According to the NPG regulation, the NPG payment network will be operated by three types of institution: a standards institution, services institutions and switching institutions – each of which must be either appointed or approved by Bank Indonesia. The division of the roles was intended, among other things, to avoid any monopoly practices in the payment industry in Indonesia.

The standards institution is in charge of creating, developing and managing the standardised technical and operating specifications of the NPG. The services institution is in charge of, among others, maintaining the security of payment transactions and the confidentiality of customer’s data and conducting reconciliation, clearing and settlement. The switching institution is in charge of processing domestic payment transaction data. What this means is that, under the NPG, the switching institution will enable payment transactions using cards issued by different issuers to be accepted and then processed when used in any EDC or acquiring bank by providing switching services through the NPG system network.

A switching institution is not to be confused with a switching company.

In essence, the NPG integrated system will perform the functions and roles of a principal. Similar to a card principal, the NPG will have its own branding with an interpretation of a flying garuda bird logo. Further, under the supervision of Bank Indonesia, as the national integrated system, the NPG has its own standardised technical and operating specifications, including, for example, the merchant discount rate (MDR) that will apply under the NPG regime. The NPG also has its own network which would allow the application of switching activities. Lastly, the NPG also conducts its own reconciliation, clearing and settlement. With the role of principal being divided and carried out by three different institutions as explained above, this raises the question of how the operation of a principal in Indonesia will be impacted by the implementation of the integrated NPG system under the NPG regulation.

Impact of the implementation of the NPG regulation on existing principals

The first main impact, by the deadline that Bank Indonesia will set, is that transactions involving credit cards must be processed domestically through the NPG. Bank Indonesia Regulation No. 18/40/PBI/2016 on payment transaction processing (PTP regulation) further indicates that this “domestic processing” requirement applies to payment instruments issued by Indonesian issuers and transactions conducted within the Indonesian territory. Therefore, in addition to ATM and credit cards, in future, credit cards issued and transacted in Indonesia must also be processed through the NPG. When this time comes, it is not clear if the network of a credit card principal may still be relevant in the payment process in Indonesia or if it is still necessary for an issuer or acquirer to be a member of a credit card principal.

The second impact is related to the foreign ownership restriction. Upon full implementation of the NPG, parties engaged in providing domestic payment transaction processing services must be interconnected to the NPG payment network. Therefore, if existing principals wish to process domestic payment transactions directly, they must register as a switching institution to be connected to the network. Otherwise, to be connected to the NPG, principals must cooperate with at least two switching institutions.

To be registered as a switching institution, an existing principal must obtain approval under the NPG regulation. Principals which have a licence pursuant to PTP regulation can directly apply for approval as a switching institution as long as they can satisfy additional requirements under the NPG regulation. However, applications for approval had to be submitted within three months of the effective date of the NPG regulation, which was 22 June 2017. Therefore, existing principals that wish to obtain approval as a switching institution using their current licence as a principal, should have submitted their application at the latest by 22 September 2017. Otherwise, they must apply for a separate licence as a switching company first, before they can apply for approval as a switching institution.

To become a switching institution, there is a requirement to: (i) be licensed as a switching company under the PTP regulation; (ii) have domestic infrastructure located in Indonesia; (iii) be a legal entity, 80 percent of the shares of which are owned by local shareholders (either Indonesian citizens or Indonesian legal entities); and (iv) be able to perform switching functions in the NPG.

Among the above, the requirements to have domestic infrastructure located in Indonesia and 80 percent local ownership may be very challenging. As a background, before the NPG regulation was issued, a (non-bank) principal existing in Indonesia established before the issuance of the PTP regulation can be 100 percent-owned by foreign parties. With the NPG regulation, if an existing principal (with foreign ownership) decides to be interconnected with the NPG network, it must reduce its foreign shareholding to 20 percent. This reduction may affect its control over the principal. Seeking reputable local shareholders may also prove a challenge.

Another challenging requirement is the third impact of the principal having to have infrastructure located in Indonesia. To date, it is common for a principal to process transactions through infrastructure (networks) owned by its affiliates abroad. To satisfy the requirement to be a switching institution, principals must build their own network in Indonesia which will be costly and requires more resources. Meanwhile, the transitional provision of the PTP regulation states that existing principals under foreign ownership may maintain their current foreign ownership provided that no change to the shareholding composition is made thereafter. It is not clear whether the increase in capital needed to build the infrastructure in Indonesia will be deemed a change to the shareholding composition and will therefore trigger the 20 percent foreign ownership restriction. If it does trigger the restriction, the second impact will be relevant to this third impact.

The fourth impact will be that by becoming switching institutions, principals, among others, will not be able to market their brand or use their logos as part of their marketing strategy. This is because once the NPG is fully implemented, only the NPG logo may be printed on the cards.

Conclusion

The introduction of this new system network creates significant game-changing requirements, especially for non-bank principals in Indonesia. The question of whether it will still be commercially beneficial to continue processing domestic transactions still needs to be addressed and resolved. This is especially true considering the impact of the NPG on current payment processing activities, such as the limited transactions principals can process, the maximum foreign ownership in a principal company, the infrastructure location requirement and the brand limitation.

However, so far, Bank Indonesia has only set a deadline for ATM and debit cards, but not credit cards. Principals for credit cards can start considering this matter in anticipation of when it is fully implemented.

Maria Sagrado is a partner, Puji Atma is a senior associate and Nadira Sjarif is an associate at Makarim & Taira S. Ms Sagrado can be contacted on +6221 5080 8300 or by email: maria.sagrado@makarim.com. Mr Atma can be contacted on +6221 5080 8300 or by email: puji.atma@makarim.com. Ms Sjarif can be contacted on +6221 5080 8300 or by email: ghaliva.sjarif@makarim.com.

Maria Sagrado, Puji Atma and Nadira Sjarif

Makarim & Taira S.