G-Lab News & Media
Market movements: Indonesia and its payment industry opportunities
Cards Now! Magazine (Indonesia)
In January 2012, a team of graduate students from the prestigious Massachusetts Institute of Technology Sloan School of Management's Global Entrepreneurship Lab (MIT Sloan G-Lab) worked with PrimaVista to study the payment industry in Indonesia.
Established in 2002, we are now the dominant player in this industry, providing innovative solutions, including credit card, debit card, bill payment, microbanking and contactless payment via VeriFone EDC terminals and customised services in Indonesia. The e-Banking and payment industry in Indonesia is ripe for explosive growth. Huge base of population needs secure and convenient means of conducting cashless transaction. PrimaVista has the required assets to bring this industry forward. The question that MIT Sloan helps to answer is - what's the best strategic approach to produce an end result that is beneficial for Indonesian market at large? We believe that the positive energy and expertise brought by the MIT Sloan G-Lab team will greatly impact the participating companies in gearing up, to spearhead the period of explosive growth of Indonesia. For the benefit of CardsNow! readers, PrimaVista and MIT Sloan jointly share a concise version of the macroeconomic findings and analysis.
Understanding Indonesia And The Opportunities
Indonesia is a true South East Asian melting pot, with five acknowledged religions, over 300 ethnic groups scattered over 17,000 islands. Indonesia has come a long way since post-Suharto era in the late 90s. The economic recovery triggered a major shift with rapid urbanisation, doubling the urban population in two decades from 40 million people to around 80 million. The urban population is growing at 4.4% per year as compared to national population growth of 1.7% per year. This urbanisation represents huge potential consumer spending and increased domestic consumption in the next 25 years.
The question remains - how did Indonesia get to the point where it is widely considered to the "next big thing"? While the Western world was entering a recession, Indonesia's economic growth has been hovering around 6% in the past five years. This GDP growth has led to a decline in poverty and helped ensure that the country is making progress towards a full-employment economy. The reason for this strong performance amid a global slowdown is that over two-thirds of GDP continues to be as a result of domestic consumption. The government took a number of measures including strengthening banking sector balance sheets and reducing bank vulnerabilities through higher capitalisation and better supervision.
When payment cards were introduced in Indonesia in the 80s, the vast majority of consumer transactions were cash-based. Card payment offers convenience as consumers can pay for goods or services without stopping to visit an ATM. This is especially important in developing countries such as Indonesia where there are only 1.3 ATMs per 100sqkm and only 22 per 100,000 of the population. Contrast this with Hong Kong where there are over 80 ATMs per 100,000 of its population.
Card Payment As National Development
The benefits of payment cards can be quantified. Moody's Analytics indicates that increases in private consumption that are attributable to card usage can help drive in GDP growth. Their study of 51 countries noted that card usage increased consumption by an average of 0.79% from 2003 to 2008. (For Indonesia this figure was 0.35% over the period but was from a base of 0% in 2003. In 2008 the impact was 0.65 %.) This increased consumer spending has a positive impact on GDP such that 1% more card usage translates to an average of 0.024% increase in GDP. As card usage is increasing rapidly in Indonesia, this could have a profoundly positive impact on the country's GDP.
For a developing country like Indonesia, card payment contributes to national development by expanding the customer market. Increasing the existing share of e-Payments in a country by 10% will generate an increase of 0.5% in consumer spending. Card usage broadens the access of greater population to the banking system. Cards are a gateway to the financial system for the 70% of the world's population which is currently unbanked (which is also in line with estimates for Indonesia). They also offer a source of working capital for start-ups. The small and medium-size enterprise sector in emerging countries can face difficulty accessing financing given the lack of angel investors and other forms of seed capital - credit cards can be an alternative financing source.
Other notable benefits of less cash and more cards usage include the reduction in the gray economy - cash payments are sometimes left undeclared as income, there is risk of replica bank notes and theft. Furthermore, cards can increase taxable income by creating an electronic audit trail. With an electronic audit trail comes a reduction in the risk of fraud - inherent in many e-Payment networks is the guarantee of payment for merchants and liability protection for cardholders in the case of fraud. These protections bolster confidence in the economic system, which can lead to greater overall consumption, particularly for high-value transactions.
Understanding the positive link between payment cards and economic development is reflected in the global penetration rates, as shown in the chart below. It shows the positive and sizable relationship between credit card penetration and economic development, as measured by per capita income. That is, countries with higher levels of economic development also have more credit card usage. The link between card usage and GDP per person is a correlation with a two-way causal relationship where higher economic growth encourages greater electronic payments usage which in turn, offer substantial micro and macroeconomic benefits that promote further economic development.
Indonesian Card Payment - Today And Tomorrow
When considering the conditions necessary for a truly successful card payments network, it appears that Indonesia is a country where there is high, but as yet unrealised, potential. We have seen that penetration is low. In 2010 there were only 13.6 million credit cards (around 5% of the working population) and 46 million ATM/debit cards (20% of the working population). The low penetration of the Indonesian market stands in contrast with many of its Asian peers. Indeed, at a growth rate of 20%, penetration will only be equivalent to one card per person in 2020 and a further five years before the equivalence to Hong Kong is achieved.
However, as is often the case with critical technological adoption, the uptake can be much quicker than the steady increase. When such a boom may occur is unpredictable. What is predictable though is that there will be very strong growth in the next few years, fuelled by a combination of growing purchasing power, greater availability and use, as well as governmental encouragement given their role in economic development.
Analysing the growth factors of nationwide card payment infrastructure, Indonesia is ripe for a period of rapid adoption. These factors include supporting regulatory framework from Bank Indonesia, the establishment of a National Credit Bureau, increasingly better telecommunication network coverage, and improving consumer education. However, looking at the card acceptance infrastructure, such as POS terminals, ATMs, bank branches, the Internet, mail order or telephone merchants, Indonesia still has a vast room to grow. Its 250,000 payment terminals (estimated as at end of 2011) is equivalent to slightly over 100 per 100,000 people. Hong Kong has over 10 times the penetration density, and the US around 3,250 terminals per 100,000 people. Applying an aggressive 20% annual growth rate of penetration in Indonesia, and only 5% in the more mature Asian countries, it will take two decades to reach a comparable density network, at approximately the maturity of the current US market.
Therefore, in order to enable mass adoption of cashless payment, which will support Indonesia's national development initiatives, the country needs concerted effort to rapidly establish a nationwide acceptance network. Only when the acceptance network and cashless payment adoption are reaching a certain point of maturity, then new payment technology advancements may create meaningful impact in a macroeconomic level. For example, NFC technology is already changing the way millions of people make payments. Leading payment providers such as VeriFone has started pushing NFC-enabled payment terminals. Approximately 10% of POS terminals shipped worldwide in 2010 had the NFC function. Growth is expected to be fast with NFC expected to increase to 33% by 2012 and 85% by 2016, with the growth driver being terminals that are integrated with smartphones. With NFC, the use of virtual card payment will become increasingly casual with micropayments - small transactions further replacing and reducing the use of cash in the society.
Mens et Manus – mind and hand is the motto for MIT Sloan School of Management and something that is taken particularly seriously at the schools' Global Entrepreneurship Lab. "Students aren't thinking so much about getting a job in a big company, they are thinking about how to apply the skills they are learning" says Michellana Jester, manager of the action learning programmes at MIT, and they are able to do this to great effect through the G-lab.
The first steps to the internationalization process
The first contact that Kimberlit had with the Global Entrepreneurship Laboratory from the Massachusetts Institute of Technology, or G-Lab, was by Endeavor, an international nonprofit and that encourages new business.
"Endeavor gave us advice and told us about the program," says Antonio Carlos de Gissi Junior, CEO of Kimberlit, which operates in fertilizers market.
With its new product, which uses a lower quantity of product with an increase in its effectiveness, the goal for Gissi Junior was to enter the Chinese market, a large consumer of fertilizers.
The company has been in business for 22 years, but thought about the idea of going international until last year. With the help of four students, Gissi could develop three potential business models: export, in-country factory or a joint venture with a Chinese company. "In the beginning the most appropriate option would be starting to export and setting up an office in China," said the CEO.
The project ended in February and will be deployed in 2013, after many months of research and planning by Kimberlit, "They've understood the company's culture and the consultancy exceeded our expectations," says Junior Gissi.
Boo-Box is over the "hands" at MIT on two occasions: in 2009 and again this year. Mark Tanaka, CEO of the startup which specializes in advertising on social networks, says that MIT's program is extremely important for small and medium enterprises, not only because of the quality of the service offered, but because of the inability of companies to hire consultants. "A strategic consulting project for three months may come at a cost of millions of dollars," explains Tanaka.
The project developed this year is still a secret strategy for the company, but in 2009 the project was focused on an international plan for Latin America in countries like Chile, Mexico and Colombia. They started working from a new office in Argentina last July. "In 2009 it was only a dream, we had no way to do the internationalization," says Tanaka. "It was a job well done. It's the kind of consulting that companies need in markets that are complex and require deliberation before making the decision," he says.
MIT analyzed the business model in Trujillo
MBA students from MIT Sloan School of Management, one of 10 most important educational institutions in the world, went to the valley of Chao in the south of Trujillo, to analyze the business model developed by Fairtrasa and about 1,000 farmers in the area.
This visit was part of the agreement signed between the MIT Sloan and Fairtrasa. They want to see how to replicate the successful model in other parts of Peru and Latin America.
The agreement runs through the international internship "Global Entrepreneurship Lab (G-Lab)" which brings together students from different careers like management, engineering and science with emerging market producers, so they can share experiences and help them to meet the challenges of international trade, financing and negotiation.
Fairtrasa started operations in our country in 2009 and in 2011 they have reached about U.S. $ 10 million in sales. Currently, they are working in Trujillo with two small producer associations, which operate within the standards of Organic and Fair Trade Certification.
Patrick Struebi, Fairtrasa's founder, says that in Mexico, where production began, the gain of small producers has not been as high as in Peru. "The producers told us that they used to sell their avocados for S/. 1 per kilo and we could pay S/. 4. This is a significant increase," said Struebi.
The students came with the teacher in charge of G-Lab, Caroline Flammer, PhD in Economics from the University of ST.Gallen. They will analyze the Fairtrasa system to see what is the best way to replicate this model in other cities of Peru and other countries in Latin American.