In March, President Joko Widodo (Jokowi) ignited a discussion around financial sovereignty when he urged national and regional governments and state-owned enterprises to stop using Visa and Mastercard for the domestic purchasing of goods and services. Instead, he called on them to shift to the newly launched government credit card system, Kartu Kredit Pemerintah (KKP).
Promoting adoption of the new system, Jokowi said that to maintain its sovereignty, Indonesia must reduce its reliance on foreign payment systems and products. The usually softly-spoken leader of Indonesia cited the sanctions placed on Russia after its invasion of Ukraine, which led to Visa and Mastercard payment restrictions in Russia. He noted how this could be problematic for countries without a national payment system.
Taken at face value, Jokowi’s comments could be interpreted as Indonesia seeking to reduce its strategic dependence on the United States. Or is there more to the story?
Why develop a national payment system?
In fact, the idea of developing a national payment system is not new. Domestic card schemes similar to Indonesia’s KKP already operate in a number of advanced and emerging economies, such as Germany and Portugal.
KKP is part of a broader payments system that Indonesia’s central bank, Bank Indonesia, has been developing through a National Payment Gateway (NPG). NPG is designed to facilitate financial inclusion throughout Indonesia. It will support government financial transactions, such as cashless social welfare disbursements, citizen-to-government payments, and the digitisation of the transportation sector.
Geopolitics aside, there are also economic arguments for the policy. Indonesia has a fast-growing middle-class and its digital economy is undergoing rapid growth. This translates into high future demand for digital payment services, including credit cards. The latter is projected to grow by 12.8% annually until 2026, with annual transaction value reaching US $30.6 billion. A national payments system can therefore help Indonesia reduce imports and capture a piece of the lucrative digital payments industry.
A domestic card scheme can also help create a more competitive financial services industry. Currently, Visa and Mastercard account for over 90% of credit cards in circulation in Indonesia. This duopoly market structure may not be in the best interests of consumers. Local settlement processes may help Indonesians avoid conversion fees and other charges associated with foreign payment systems.
Local payment services could also be better adapted to suit the unique challenges of the Indonesian market. Services can be designed to cater to the specific needs of Indonesian customers, including those at the base of the pyramid, potentially making it easier for them to use and trust credit card payment options. Local currency transactions could also be faster, as settlement can be completed locally.
Finally, Indonesia has been outspoken on the topic of data sovereignty in the past, urging the international community to clarify and strengthen protocols surrounding cross-border data flows. Local payment services are therefore attractive because they give Indonesia greater control over the data of its citizens. Of course, this assumes local payment services have adequate security measures in place to protect users’ personal and financial information, including from the government.
What are the downsides?
There are several risks and drawbacks with the development of a local payments system. First, services are limited to local users. This could disadvantage businesses who want to transact with people outside the Indonesian market, making it harder for Indonesian firms to internationalise and participate in cross-border supply chains.
Second, it may be difficult to harmonise a national payments system with the global economy. Integrating local payment services into websites or apps can be costly and time-consuming and localisation may make it harder for international banks and tech companies to enter the Indonesian market. Similarly, local payment services may be subject to different regulatory requirements than global payment providers. This may add complexity and cost to the cross-border payment process.
Finally, a key risk is whether the Indonesian government has the technical capability to deliver a high-quality national payments system. The system needs to reliably facilitate commercial transactions, guarantee the safety of user data, and prevent and detect fraud. It will not be easy for domestic credit card services to compete with well-established providers, like Visa and Mastercard, which will fight to maintain their market dominance.
Shortages of funding, infrastructure and expertise, and uneven development throughout the archipelago, have made it hard for the Indonesian government to roll out digital systems in the past. To be successful, the system therefore needs private sector buy-in. This may require the Indonesian government to adopt a new role as the facilitator of a local fintech ecosystem, rather than assuming its traditional role as a top-down regulator.
What does this tell us about Indonesia’s place in the world?
Jokowi’s comments on US sanctions could easily be interpreted as a sign Indonesia is reducing its strategic reliance on the US, which has shown an increased willingness to leverage its influence over the global financial system. Greater strategic autonomy is no doubt a key motivation for the development of Indonesia’s national payments system.
However, the geopolitical implications of Jokowi’s comments can easily be overstated. Indonesia’s move to a national payments system is not unprecedented and there are several potential economic upsides for local systems.
Emotional marketing is often deployed to expedite the adoption of new technologies. Viewed from this lens, Jokowi could be seen as exploiting nationalist sentiments to promote the adoption of a major government innovation throughout a bureaucracy that has historically struggled to embrace technology.
The big question mark is whether the Indonesian government actually has the technical ability to deliver a competitive national payments system. If local systems are unable to protect the personal and financial data of citizens, then these policies could have the unintended consequence of undermining Indonesian sovereignty.
Visa and Mastercard are the gold standard around the world. And although Indonesia has emerged as one of Asia’s most vibrant startup ecosystems, the Indonesian government is yet to distinguish itself as an innovator.
Time will tell whether Indonesians embrace the new government payment systems. Government officials and state-owned enterprises may not have a say in the matter, but for everyone else there’s Mastercard.