PAYMENT SYSTEM IN INDONESIA
:: What is the Payment System?
What is the payment system? The payment system covers the legal and regulatory framework, institutions and mechanisms used to transfer funds in order to settle liabilities arising from economic activities. What, then, are the components of the payment system? Needless to say, there must be payment instruments and a clearing mechanism that includes settlement. Of course, other components are involved, such as the institutions participating in the operation of the payment system. These include banks, non-bank financial institutions, non-bank funds transfer providers, switching companies and even the central bank (see Growth).
:: Evolution of Payment Instruments
There has been very rapid and sophisticated advancement in payment instruments. If we look back to the early days of payment instruments, the barter system was a common practice in ancient times. Gradually, people became accustomed to the use of specific units representing a value of payment, more commonly known as money. Now, money is one of the most widely used payment instruments in society. Payment instruments later advanced from cash-based instruments to non-cash payment instruments, such as the paper-based instruments of cheques and bilyet giro (non-negotiable bank clearing payment orders). Following this, payments took a further step forward to the use of paperless instruments, such as electronic funds transfers and card-based instruments (ATM cards, credit cards, debit cards and prepaid cards).
:: Cash Instruments
Cash exists mostly as banknotes and coins. Cash continues to play an important role, especially in small transactions. In today’s modern society, the use of cash such as banknotes and coins is declining in comparison to payments drawing on demand deposit funds. In 2005, cash accounted for 43.3 percent of the total money supply.
However, cash also has disadvantages in regard to efficiency. Inefficiency arises because of the high costs of cash handling, not to mention loss of time when making payments. For example, one can spend a long time queuing to make a payment at a counter. Also, conducting high value transactions in cash runs the risk of theft, robbery and counterfeiting.
In view of the inconvenience and inefficiency of using cash, BI has taken the initiative to promote the building of a less cash society (LCS).
:: Non-Cash Instruments
Non-cash instruments have become well established and are in popular use. This shows us that non-cash payment services provided by banks and non-bank financial institutions (NBFIs), whether for funds transfers, clearing operations or settlement, are available and operating in Indonesia. High value non-cash payments are processed by Bank Indonesia through the BI-RTGS (Real Time Gross Settlement) system and the Clearing System. The BI-RTGS System is the major channel for settlement of financial transactions in Indonesia.
Almost 95 percent of high value and urgent financial transactions, such as on the interbank money market, the stock market, government transactions, foreign currency transactions and clearing settlement, are processed through the BI-RTGS system. In 2005, the daily turnover of transactions handled in the BI-RTGS system reached at least Rp 82.8 trillion. By comparison, only Rp 4.7 trillion was recorded in daily non-cash transactions using card-based instruments provided by banks or NBFIs.
The importance of the BI-RTGS system to the national payment system means that the continuity and stability of the system must be safeguarded at all times. If at any time the BI-RTGS system breaks down or experiences a technical fault, there will inevitably be highly disruptive impact on the operation and stability of the domestic financial system. This does not even include the material and non-material impact of system breakdown. BI therefore pays very close attention to maintaining the stability of the BI-RTGS, which is categorised as a Systemically Important Payment System (SIPS), one that processes high value, urgent payment transactions.
Bank Indonesia therefore has every reason to take great care in safeguarding the stability of the existing SIPS. To do this, it manages the risks, design, technological reliability, supporting networks and the SIPS rules. In addition to the SIPS, there are also System Wide Important Payment Systems (SWIPS), which are systems used by the public. The clearing system and card-based instruments come within the SWIPS category. BI also pays careful attention to the various SWIPS because of their popular use. Whenever a system experiences disruption, the public interest in conducting payments will also suffer, as will confidence in the system and the payment instruments processed within the system.
BI does not only seek to create efficiency in the payment system, but also equitable access and consumer protection. Creation of efficiency in the payment system is intended to provide convenience to users in which they can select a payment method accessible throughout Indonesia at the lowest possible cost. Equitable access means that BI also considers how equity considerations are applied in the operation of the payment system. Lastly, consumer protection means that operators have the obligation to adopt reasonable consumer protection principles in their system operations.