• The early adoption of mobile payments in Indonesia compares favorably with the take-up of earlier cashless payment systems, suggesting consumer enthusiasm.
• A supportive regulatory environment has spurred open competition and the use of different technologies.
• The adoption of QR codes will boost access to financial services in 2018.

Billed as the fastest growing mobile-commerce market in the world, Indonesia is poised to benefit from an explosion in mobile payment use next year. There are three main factors behind the coming surge.

First, consumers are ready. FT Confidential Research's latest survey of 1,000 urban consumers in 25 Indonesian cities revealed about a third used mobile payments at least once in the three months to the end of September. As expected, the adoption rate is higher in Java, the island that generated almost 58.5 per cent of Indonesia's GDP in 2016, compared with the rest of the country (see chart).

Income levels also influence the use of mobile payments. Consumers in the middle income category and above - those who earn more than Rp60m ($4,400) a year - had an adoption rate of more than 46 per cent (see chart).

The overall adoption rate is promising, considering that mobile payment systems only became widely available in the past two years with the launch of Go-Pay and T-Cash, the e-wallet services from, respectively, Go-Jek, Indonesia's first unicorn start-up, and Telkomsel, the country's largest mobile phone operator.

Three-way competition

Second, all the necessary regulatory support is in place for open competition between banks, telecoms companies and tech start-ups.

As the sole authority on payment systems, the central bank, Bank Indonesia, has been quick to adapt. So far it has given licences to issue e-money to 26 institutions. That only 11 of these licences went to banks, with the rest to fintech companies, is testament to Bank Indonesia's accommodative stance towards tech.

Its openness is driven by a goal set by President Joko Widodo to achieve 75 per cent financial inclusion by 2019, a target that is unlikely to be met by relying solely on traditional banks. In 2014, the World Bank estimated only 36 per cent of Indonesians aged 15 and over had bank accounts.

Bank Indonesia has approved a variety of technological platforms for financial transactions, such as Electronic Commerce Modelling Language, near-field communication (NFC) protocols and machine-readable QR codes. This has allowed banks and fintech companies to experiment and develop new technological solutions.

It plans to issue regulations for the National Payment Gateway (NPG), which should be fully operational next year. This will make the interconnection of all forms of electronic payments cheaper and more efficient, and should help the sector to expand quickly.

There is no official figure on the value of the mobile payment transactions in Indonesia. However, global market research company Research and Markets expects transactions to be worth $1.6bn this year and to reach $14.5bn by 2021.

Technological consensus

Finally, fintech companies and, to a lesser extent, banks are close to amassing the technological know-how and experience to push for mobile payments beyond their internal networks. T-Cash is the first mobile payment service to widely accept transactions at traditional cash registers or points of sale using NFC.

Our survey found that T-Cash was used by 31.1 per cent of mobile payment users, fourth most common after Go-Pay, PayPal and GrabPay, the e-wallet service of pan-Southeast Asian ride-sharing app Grab (see chart). Their popularity compares favourably with other cashless payment systems that have been around for far longer, such as debit and credit cards, and T-Cash is now available at approximately 40,000 retailers in the country.

Unlike T-Cash, Go-Pay and GrabPay do not allow transactions beyond their own networks. This will change next year as they expand their e-wallet services to include transactions at points of sale. Meanwhile, PayPal is only available for purchasing goods online and mostly from foreign e-commerce sites.

T-Cash is still leading the tech race and is currently testing QR codes at 1,800 retailers, ahead of full deployment next year. Go-Pay and GrabPay, as well as major banks such as Bank BCA and BRI, are also expected to deploy QR code operations next year. This suggests players are converging on QR codes as the dominant technology, a move that will make the public adoption of mobile payments easier and allow for greater financial inclusion.

Challenges remain

While the regulatory environment has generally been supportive, it is not perfect. At least five e-wallet services have temporarily stopped accepting bank transfers to top-up e-wallet credits due to a lack of regulatory clarity.

E-wallet providers had been operating under the impression it was legal to conduct transactions as long as they were carried out within their own network. This changed last month when Bank Indonesia clarified that only e-money licence holders could operate e-wallet transactions. GrabPay and three e-wallets from Indonesia's top e-marketplaces - TokoCash from Tokopedia, BukaDompet from Bukalapak and ShopeePay from Shopee - have since been banned from accepting top-ups. These companies are seeking to obtain e-money licences and are expecting full compliance by the end of the year.

Also, Bank Indonesia has not addressed the unfair competition created by subsidies, which private companies can offer but banks, tightly regulated and publicly listed, cannot. Go-Pay and GrabPay offer discounts for items such as taxi rides and food delivery bought using their platforms, while T-Cash uses subsidized transactions to gain new users.

Meanwhile, all electronic payments through the coming National Payment Gateway will have to be processed by networks that are at least 80 per cent domestically owned. This will stifle foreign competition and therefore hinder technological advances, and make it harder for Indonesians to use mobile payments to purchase goods and services abroad.

This article was first published on November 22 by FT Confidential Research.