In the latest edition of our Global Payments Report 2022, we highlighted Indonesia’s move toward non-cash payments, which grew 30 percent in transaction volume from 2016 to 2021 and is expected to increase fivefold by 2031 as nontraditional payment options gain popularity.

The convenience of payments is increasingly becoming a value proposition that merchants are vying to offer their customers. As part of the Indonesia Payment System Blueprint 2025 (BSPI), the central bank is building its own payments infrastructure with the introduction of the Indonesian Standard QR Code (QRIS) and payment platforms such as BI-FAST, which already encompasses around 87 percent of the national retail payment system.

Payment networks are swiftly adapting to BI-imposed margin compressions via lowered or fixed fees in merchant discount rates (MDR) for QRIS transactions. For issuers, new payment methods such as Buy Now Pay Later (BNPL) and X-border are becoming instruments for customer loyalty.

These trends are leading to a surge in fintech funding, which in Indonesia is expected to have reached US$3.6 billion in 2022 based on investments in the first half of the year. While the ongoing crypto winter is likely to see more caution toward overvaluation of fintech firms, those invested in building a sustainable payments infrastructure with essential payment rails as well as merchant and issuer networks have a higher chance of long-term success.

This article explores three selected trends to watch over the next five years as Indonesia becomes a more cashless, financially inclusive society.

 

The rise of ISVs through VAS

A major untapped playing field for the payments sector is the small and medium enterprise (SME) space, where independent software vendors (ISVs) will play a key role in acquisition, digitization and payment monetization. With merchants seeing payments as a critical element of customer experience, ISVs are aggressively entering the traditional acquirer space to better serve SMEs.

Vertical software vendors, focused on specific industry segments, have built highly tailored solutions that facilitate strong payment integration. As such, the merchant acquisition share among traditional acquirers is falling, a trend further observed in the smaller role that banks and traditional independent sales organizations (ISOs) are playing in merchant acquisition.

The rise of ISVs is expected to more pronounced in emerging markets in Asia Pacific, where SME markets are still largely untapped. ISVs can effectively enter the distribution of payment solutions through the use of innovative point of sale (POS) machines. Their enhanced understanding of the merchants’ end users and adaptability in bridging the gap between traditional providers and merchants are central to their success.

Vertical ISVs also provide significant VAS, which make them attractive to merchants while providing a new sales channel for payments companies.

 

Issuers, network required to invest, adapt

A second key area is the wide adoption of alternative rails, especially in large emerging markets where financial inclusion and lower transaction costs are government priorities. Many of these technologies are moving from proof-of-concept to being widely adopted, for example PIX in Brazil, which has seen 70 percent adoption, and UPI in India, which grew nine times in the past three years, increasing from 5 billion transactions in 2019 to close to 46 billion transactions in 2022.

In Indonesia, government initiatives have realized significant growth on the back of a strong value proposition for the end consumer in the form of reduced fees and added convenience. Platforms such as BI-FAST, the National Payment Gateway (GPN) and the National Open API Payment Standard (SNAP) are pushing incumbents to innovate.

BI-Fast transaction value is likely to surpass Rp 1.5 quadrillion ($96.31 billion) through 450 million transactions by the end of 2022. GPN, although limited to debit card transactions, has lowered MDRs to drive adoption, while SNAP will further offer the financial industry the means to provide more efficient, reliable payment services.

The recent Group of 20 Summit in Bali saw the central banks of Indonesia, Malaysia, the Philippines, Singapore and Thailand sign an agreement to strengthen cooperation on payment connectivity for cross-border payments. Currently, QRIS and BI-FAST are available in Thailand, while being trialed in Malaysia. They are expected in Singapore and the Philippines by 2024 and 2025 respectively.

Networks can capitalize on these developments to build value propositions, for example, by enabling open-banking participants to manage compliance-related payments matters, especially in the case of cross-border account-to-account (A2A) payments.

 

Rapid innovation in wholesale transaction banking

Within the payments ecosystem, emerging disruptive players such as Tradeshift, PrimeRevenue and Tualia are offering a range of payments services from transaction banking to supply chain finance. In tandem, traditional players are increasingly investing in expanded payments services on their banking platforms. Examples include DBS’s shift to a service-oriented architecture via an application programming interface (API)-first approach, which allows for ease of integration and connectivity with its merchants’ payments infrastructure.

Similarly, in Indonesia, Bank Mandiri has integrated its payments services into a single digital super platform, Kopra, which recorded 68,000 registered users and Rp 13.42 quadrillion in transaction value in September 2022.

Most banks will benefit from trusted partners to drive transformation, with partnerships outside the banking ecosystem, such as with fintech firms, spurring growth in areas such as cross-border payments, trade finance and supply-chain finance, similar to the partnership between cross-border business-to-business payments provider TransferMate and United States bank Wells Fargo. Wholesale central bank digital currencies (CBDCs) will also spur innovations within the transaction banking space, with cross-border transactions becoming faster and more reliable.

We are likely to see proven proof-of-concept across three key areas: embedded payments/finance; the use of blockchain for cross border payments; and tokenization, which we predict will be a $16 trillion business opportunity globally by 2030. In Asia, the potential of on-chain asset tokenization is close to $3 trillion in terms of total market cap of private unlisted assets, with robust retail adoption in countries such as Indonesia.

Given these three areas of growth, payments sector players in Indonesia will gain from developing a VAS-focused strategy for SMEs through partnerships with ISVs, while banks will benefit from thinking more like payment platforms to be more agile and responsive to innovation. Issuers can benefit from business acquisitions, using data to unlock additional revenue, while payments networks will gain from accelerating the adoption of open banking.

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Tushar Agarwal is managing director and partner at Boston Consulting Group. Kanchanat U-Chukanokkun is lead knowledge analyst at Boston Consulting Group.