2C2P | A Deep Dive Into Indonesia's Digital Payments Transformation

A Deep Dive Into Indonesia's Digital Payments Transformation

Contributed by Muhammad Arifin Adi Nugroho, Country Head of 2C2P Indonesia

Once a cash-heavy nation, Indonesia has rapidly moved away from using cash to make payments. According to the IDC Infobrief that 2C2P commissioned, Indonesia is quick on the uptake of digital payment methods.

In turn, this has caused traditional payment methods like cash-on-delivery to constitute just 16% of the total e-commerce payments market in 2019. This number is expected to continue declining to 11% by 2022 and 6% by 2025.

Mobile wallets are increasingly dominating Indonesia’s digital payments landscape. Our local banks are also responding by establishing digital banks that offer comprehensive services to facilitate payment flows in Indonesia.

In this article, I will explore the following points:

  • The Indonesian government’s digital payments schema
  • COVID-19’s influence on Indonesia’s digital payments landscape
  • The domination of mobile wallets
  • The rise of digital banking
  • Buy Now, Pay Later (BNPL) in Indonesia
  • Driving financial inclusion in Indonesia
  • How 2C2P drives Indonesia’s digital transformation

The Indonesian government's digital payments schema

The Indonesian government paved the way for digital payments transformation through its central bank, Bank Indonesia (BI).

This process began in August 2019 with the introduction of a digital payments system known as the Quick Response Code Indonesia Standard (QRIS), which accelerated the development of Indonesia’s digital payments landscape.

It forms an integral pillar under Bank Indonesia’s Indonesian Payment System Vision (SPI) for 2025, a comprehensive blueprint that systematically outlines the country’s digital payments development.

As its name suggests, the QRIS utilizes a Quick Response (QR) code standard to support real-time and secure digital payments such as mobile wallets and digital banking.

Specifically, the QRIS enables interoperability between disparate digital payment providers, streamlining and uniting their services under one central QR code. In so doing, it eliminated two specific problems:

  • Merchants having to cater to multiple payment systems
  • Consumers not getting support for their preferred payment methods

With the QRIS in place, merchants only needed to work with one QR code, while consumers had the freedom to make payments with any method of their choice. In turn, the QRIS can achieve its goal of encouraging Indonesia’s 65 million micro, small, and medium enterprises (MSMEs) to embrace and adopt digital payment systems.

The development of the QRIS in 2019 proved to be very timely, coinciding with the onset of COVID-19 in the following year.

COVID-19’s influence on Indonesia’s digital payments landscape

When COVID-19 reached Indonesia’s shores in March 2020, the government imposed mandatory lockdowns and restrictions under the Imposition of Emergency Community Activity Restrictions (PPKM Emergency) in Java and Bali.

The widespread social restrictions only served to further speed up the adoption of digital payment methods. Between December 2020 to October 2021, the QRIS experienced a surge in adoption rates from 5.8 million to 12 million merchants.

On the consumer end of the equation, digital payment adoption spiked due to COVID-19, with the value of electronic money transfers growing by 38.62% from $10.07 billion in 2019 to $13.95 billion in 2020.

In a comment on Indonesia’s digital payments landscape for The Asian Banker, Hans Patuwo, head of payments of Gojek Group, said:

“The pandemic has accelerated the trend towards digital services as more people practice physical distancing and look online to meet daily needs. During this period, we observed a growing reliance on cashless payments, especially for bill payments, e-commerce, and investments with last year’s gross transaction value for our payments-related businesses exceeding pre-pandemic levels.”

The dominance of mobile wallets

Mobile wallets recorded the most significant growth among all the digital payment methods adopted during COVID-19. Between 2019 and 2022, mobile wallets are expected to experience a jump in percentage proportion of Indonesia’s gross transaction value (GTV) from 23% to 28%.

This growth contrasts to cards, domestic payments, and other alternative payment methods, which are projected to decline.

The question now is this: why mobile wallets? Very simply, mobile wallets are easy to register and set up on one’s phone. Combine this ease with Indonesia’s high smartphone penetration rate of at least 72% in 2021, and it’s little surprise that mobile wallets are so widely used in the country.

Furthermore, GoPay and OVO, the first movers of mobile wallets in Indonesia, had a hand in driving adoption rates. Both apps enjoy the advantage of being backed by super apps.

GoPay, for one, is tied to super app Gojek as its embedded mobile wallet/payment system. When it was first launched, the system was primarily used by drivers performing Gojek’s courier delivery and ride-hailing services. Today, GoPay remains one of Indonesia’s embedded mobile wallets, with more than 38 million monthly active users recorded in 2020. This number is only exceeded by ShopeePay, with more than 51.5 million monthly active users in the same period.

As for OVO, this independent mobile wallet has formed strong partnerships with key super app players like Grab and Tokopedia. This move has allowed OVO to develop an enormous ecosystem that houses all assets and conglomerates under one app. Today, OVO leads Indonesia’s independent mobile wallet market with 20.8 million monthly active users.

COVID-19 only served to further boost the dominance of mobile wallets in Indonesia, with other local players like GoPay, OVO, DANA and LinkAja similarly experiencing surges in adoption rates. I believe that mobile wallets will continue to dominate in the short term of one to two years.

However, I feel that the future of Indonesia’s digital payments truly lies in digital banking, which I believe will come to overtake mobile wallets eventually.

The rise of digital banking

Why do I say this? If we look at the trends in recent years, it is apparent that digital banking has made great strides in moving forward to attract millennials. After all, mobile wallets have limitations that digital banking can address, such as loans, credit card applications, and trading.

The growth of digital banking in Indonesia began in 2016 with the launch of Jenius by BTPN Bank, making it possible to access the entire suite of banking services from the convenience of one’s phone. Over the years, more digital banks joined the fray, including DBS’ Digibank, UOB’s TMRW, Danamon’s D-Save, and ARTO’s Bank Jago. Other established banks have also been expanding rapidly into digital banks, as seen from examples such as Livin by Mandiri, Blu by BCA, and Nyala by OCBC NISP.

Although Indonesia’s overall digital banking app downloads grew just 7% in 2020, new players often experience a massive initial market share growth that can reach up to 500%.

The government has also stepped up measures to aid the growth of digital banking with the launch of the Task Force for the Acceleration and Expansion of Regional Digitalisation (P2DD) in April 2021.

Spearheaded by Bank Indonesia, one of the task force’s key objectives is integrating the national digital economy with financial institutions like banks. To this end, the task force has made it easier for new digital banking licenses to be issued with new banking regulations.

These new regulations permit near-full foreign ownership of local lenders, with foreign companies now allowed to hold up to 99% in a local lender - a marked change from the previous limit of 40%. Bureaucratic red tape traditionally tied to the whole process is also largely eliminated, improving market access for new potential digital banks.

Furthermore, digital wallets have already laid the groundwork for digital banks to thrive. With more people onboard online platforms thanks to digital wallets, all digital banks have to do is jump in to promote their services. It is even possible for digital wallets to wind up being acquired by digital banks.

At present, Indonesia ranks second in the world (minus China and India) in the proportion of adults owning digital bank accounts (24%). Given these recent developments and figures, I am optimistic about the continued growth of digital banking in Indonesia in the long run.

Buy Now, Pay Later (BNPL) in Indonesia

And now we come to one of the biggest digital payment trends in the world today: BNPL. BNPL offers an excellent payment alternative for consumers who want to pay for big-ticket purchases in small monthly installments. In turn, merchants benefit from increased conversion rates and lower checkout friction.

In Indonesia, BNPL is still very new with high growth potential. According to Research and Markets’ Q4 2021 BNPL Survey, BNPL payments in the country are expected to grow by 94.7% annually to reach $2,669.3 million in 2022. Between 2022 and 2028, BNPL payment adoption is projected to grow at a CAGR of 44.4%, reaching a Gross Merchandise Value (GMV) of $24,247.2 million.

From what I observe, people living in urban areas like Jakarta tend to own credit cards and are more inclined to use the traditional Installment Payment Plans (IPPs) offered by credit card companies and banks. BNPL is more widespread in rural areas, where credit card ownership is much lower.

Driving financial inclusion in Indonesia

In Indonesia, the unbanked and underbanked account for around 66% of the country’s 275 million-strong population. Financial inclusion efforts must be stepped up, as doing so can help the poor and vulnerable break out of poverty cycles, reduce inequality, and drive overall economic growth.

The role of mobile wallets

Mobile wallets are the first essential step in helping drive financial inclusion in Indonesia. Setting up a wallet does not require a bank account or credit card; all one needs is a smartphone with access to Internet services.

As mentioned earlier, some of these wallets are tied to super apps that provide courier delivery and ride-hailing services, meaning that new employment opportunities are indirectly created.

Financial inclusion for Indonesia's warungs

Indonesia is home to a vast network of warungs, or small family-owned businesses. Indonesia has an estimated 3.5 million warungs, which account for at least 70% of the country’s fast-moving consumer goods (FMCG) retail transactions.

Given how vital warungs are to Indonesia’s economy, measures must be taken to make digital payments accessible to them.

Retail startup Warung Pintar is a pioneer on this front, collaborating with GoPay in 2018 to make digital payment services available to warungs across Greater Jakarta. Warung Pintar has since expanded its operations to include warungs in other regions in Indonesia.

Grab has also prioritised financial inclusion for warungs as part of its regional strategy. When it first expanded into fintech services in 2017, it acquired an online-to-offline business named Kudo, now known as GrabKios, for the express purpose of financially empowering warungs.

Today, Grab deploys millions of GrabKios agents to serve warungs throughout Indonesia. With GrabKios, warungs and individual consumers can access digital financial services, including remittance and bill payments.

As for OVO, it promotes financial inclusion through education. This is done through OVO FinTalk, a series of free webinars that teach the Indonesian public financial literacy, planning, and digital payments.

How 2C2P drives Indonesia’s digital transformation

Given that Indonesia is right on the cusp of its digital transformation, I am excited to be a part of this growth as 2C2P’s Country Head for Indonesia. 2C2P holds tremendous potential to further accelerate the development of Indonesia’s digital payments landscape with its comprehensive suite of regional and global solutions.

2C2P is well poised to be a leader in Indonesia’s digital payments transformation given its unique position as a regional payment gateway - this sets us apart from other Indonesian players. My immediate goal is to leverage our Southeast Asian presence to boost the Indonesian market. Specifically, I want to further drive financial inclusion by onboarding more merchants and increasing transactions.

2C2P also has stellar cross-border capabilities. Our EasyBills product, for example, makes the sale of digital goods across borders much more straightforward. EasyBills also eases the cross-border transfer process; for example, a migrant worker from Indonesia would be able to top up his loved one's e-wallet balance from Malaysia to be able to use it back home.

On a broader scale, I believe that 2C2P is the best partner for Indonesia’s companies that want to expand to the international market, especially Indonesia’s conglomerates, including Djarum, Sinar Mas, Gajah Tunggal Group, and Mugi Rekso Abadi (MRA). Partnering with these industry leaders will mutually benefit both parties, empower them with 2C2P’s digital payment solutions, and also provide greater exposure through 2C2P’s regional presence and acceptance.

2C2P will also delve into other big industries like tourism and e-commerce, both of which are integral to the development of Indonesia’s economy.

Want to get involved?
2C2P is hiring in Indonesia! If you’re interested in joining our expanding team to be part of our exciting journey to further Indonesia’s digital payments transformation, head over to our Careers page to find a suitable role here: https://2c2p.com/careers