South East Asia Could Leapfrog More Advanced Markets for Consumer Payment

South East Asia Could Leapfrog More
Advanced Markets for Consumer
Payment
A Perspective by Paul Brisk – Managing Director of Pembayaran Digital Indonesia, and Co-
founder of Digital Payments Asia -Pacific

7 December 2017

I was in New Zealand during October for a 3-week break. While there, I managed to survive without ever
using cash. Not once did I go to an ATM to make a withdrawal. In fact, I was so confident of not being
caught out when shopping, I spent the whole 3 weeks without a single note or coin in my wallet. No
matter where I shopped, no matter what I wanted to buy, I was able to use either my debit or credit
card.

And for fun, I loaded my credit card into my mobile Android-Pay wallet and for about half my purchases,
I simply turned on my mobile phone and tapped it to a contactless reader to make my payment.

I have been living in Malaysia for the past 3 years, and have recently moved to my new home in Jakarta.
When I compare my payment experience in New Zealand with the way I must shop in South East Asia, it
is clear New Zealand is streets ahead in terms of achieving a cashless marketplace. Certainly, it is
possible to exist for most of the time, at most retail outlets, without cash. Not so in Malaysia or
Indonesia, where it is simply not possible to get by without cash on a day to day basis, unless one spends
all the time shopping and eating at the high end of the market. Once you leave the shopping malls and
luxury hotels and mix it out on the street, cash still rules.

When you visit a country like New Zealand it is easy to believe the Kiwis have already achieved the so-
called payment system Nirvana of a cashless society, and that the markets of South East Asia are a long
way behind, with a long way to go. At face value that is certainly true, but look beneath the covers and I
believe there is more to the story, and perhaps even something to learn from what is happening in the
South East Asian payment space for developed payments markets like New Zealand.

Cashless in New Zealand
New Zealand has delivered a close to cashless marketplace on the back of plastic payment cards and
internet banking. This has happened slowly and surely over the past 3 to 4 decades and owes much to
good strategic thinking and management on the part of the local banks and regulators.

The success of plastic payment cards can probably be summed up by two key initiatives – the take-up of
domestic debit cards known locally as eftpos, and the deployment of point of sale terminals at virtually
every retailer, no matter how large or small. Both achievements were accomplished by ensuring that
costs to the end user were kept to an absolute minimum, and the result is that the cost of accepting
eftpos cards to a retailer is minimal when compared with most debit card schemes in other markets, and
certainly much cheaper than accepting credit cards.

There is perhaps another reason why cards and terminals have become ubiquitous and that lies in the
demographic profile of New Zealand. Culturally the country is fairly homogenous, and the minimum
levels of education are high and relatively equal. While wealth is by no means distributed evenly, the
wealth is spread sufficiently wide, and the minimum income levels sufficiently high, such that everyone
can participate in a digital payment ecosystem with at a minimum, an eftpos card. All retailers can afford
a point of sale terminal. This has meant that during the period of the last few decades where plastic
cards were deployed to replace cash, there has been a “one solution suits all” effect which has seen
virtually all consumers adopt cards, and all retailers able to afford to accept cards.

The end result has been New Zealanders use cards to purchase everything, from an ice-cream at the
local corner store, known colloquially as the local dairy, to the most expensive of house-hold purchases.
New Zealand is a majority debit card market, but just as in other markets, credit cards will be the card of
choice for those with greater spending power, and therefore able to take advantage of reward
programs, or used by those consumers who by necessity or desire, need to take advantage of a line of
credit to purchase those more expensive items now, rather than save and buy later.

Of course, there are reasons to make a payment other than a purchase for goods or services from a
retailer in a shop, whether it be bricks-and-mortar or online. It is not possible to pay another person
using a plastic payment card, and while it is possible to pay most bills with cards in New Zealand, this is a
relatively recent development. As in other markets, these types of payments have traditionally been
addressed with cash and cheques.

Just as with cards, New Zealand banks have been successful in pushing online banking services and
mobile banking applications to most of their customers to digitise these payments, thereby significantly
displacing cheques and cash. In 2012, a Lipis & Lipis study found that New Zealand had the highest
electronic funds transfer (EFT - i.e. credit transfers and direct debits) rate in the world, at 125 per year
per capita. Again, the homogenous nature of New Zealand demographics, where a large percentage of
the population has high financial literacy, coupled with relatively sophisticated financial requirements,

has meant that most payers have taken to using bank provided EFT services to make payments to other
people, or to pay service provider bills.

I should note however, that most person-to-person and bill payments are not real-time payments. New
Zealand has achieved intra-day payments between bank accounts with the introduction of the
Settlement-Before-Interchange (SBI) platform between participating account providers. SBI was fully live
in early 2012 and it means that that payment usually reaches the destination account within a couple of
hours. Some person-to-person payments can be truly real-time if the accounts reside within the same
bank.

Comparing and Contrasting NZ, Malaysia and Indonesia
In comparing the payment environment in New Zealand with the environments in Malaysia and
Indonesia, there are significant differences. The first of course, is the degree to which cash is used. While
it is very difficult to track the breakdown of payments within a market that are cash versus digital, due
largely to the anonymous and potentially untraceable nature of cash payments, one useful comparison
is the cash in circulation as a percentage of Gross Domestic Product (GDP). We must be wary of using
this ratio as an absolute measure to compare markets in terms of the degree to which they are cashless,
because there are other factors at play that can impact this ratio such as the rate at which central banks
print and inject money into the economy, and the degree to which consumers hoard cash as opposed to
spending it, the following statistics are of interest.

                         Cash-in-Circulation as a Percentage of GDP (2015)
                  16%

                  14%

                  12%

                  10%

                   8%

                   6%

                   4%

                   2%

                   0%
                                 NZ                  Malaysia               Indonesia
                                                                                Source : Central Bank Reports

The “one size fits all” effect that allowed New Zealand to deploy payment cards and internet banking
over the past few decades to the point where digital payment is close to ubiquitous, has just not been
possible in Malaysia and Indonesia. These countries certainly do not have the degree of equality that
New Zealand enjoys. Diversity is a feature of these markets, from wealth distribution, to education
levels, to financial literacy, and even extends to values and culture. While Malaysia is over 90% banked,
Indonesia has the added challenge of 64% of the adult population is unbanked1. There is extreme wealth

1
    World Bank 2014 Global Findex Database

in both South East Asian markets, but at the other end of the spectrum, a very large part of the
population simply cannot afford to participate in a digital economy and so have no choice but to use
cash. In Indonesia, it is estimated that close to 90%2 of payments are made with cash.

This point is nowhere better illustrated than in examining the retailer profile in both markets. Kuala
Lumpur and Jakarta support some of the most lavish shopping malls in Asia. The top tier retailers to be
found in these consumer palaces all have POS terminals, accept cards, and this alone supports very
profitable credit and debit card business for the local banks. But these retailers are just the tip of an
iceberg. Look below the waterline where the real volume of retailers is to be found, and here you will
find solo traders, hawker stalls, travelling food carts, roadside eateries and all manner of small to micro
businesses. All the colour and excitement of traditional Asian commerce, and these retailers cannot
afford the high cost of a point of sale terminal or the fees paid to the banks to accept cards. So, for now
they remain a cash business.

The Drive to Digital Payments in South East Asia
The markets of South East Asia are driving hard to displace cash and increase digital payments. The rate
of change is truly impressive. A combination of forces including regulator focus, emerging middle-class
consumer demand, evolving and converging technologies, and new non-bank players exploiting
developing opportunities are pushing the transformation to digital payments at a rate of change not
ever seen in western markets. According to the “World Payments Report 2017”, published by Capgemini
3
  the volume of digital payments in the emerging markets of Asia is set to grow 30.9% over the next 3
years, compared to a global growth rate of 10.9%.

So how is this going to happen, given it is unlikely this will be achieved on the back of credit and debit
cards as was the case in New Zealand.

South East Asian markets, following the lead of China and India, are seeing the emergence of mobile
application providers with a compelling proposition for end-users that is outside of payment. Real-time
payment function has then been provided as a natural extension to the existing application, allowing
users to execute payment within the application. The most notable examples include:

    ➢   WeChat (China) – social media and chat application
    ➢   Alipay (China) – online shopping
    ➢   Grab (South East Asia) – booking personal transport
    ➢   GoJek (Indonesia) – booking personal transport and related “delivery” services

These providers are probably the biggest players to have emerged in the region, supporting millions of
active users who are very much in the habit of using the respective application on a regular if not daily
basis. As a result, these non-bank providers have been presented with a unique opportunity to leverage
their very large active user bases to enable real-time payments for person-to-person and to shop at
retailers by simply scanning a QR code.

2
  https://en.tempo.co/read/news/2015/04/24/056660543/BI-Cash-Transactions-Still-More-Popular-than-E-
payments
3
  https://www.capgemini.com/gb-en/news/digital-payments-volumes-continue-to-rise-globally-as-new-payments-
ecosystem-emerges/

What is even more significant, is that these non-bank mobile payment providers typically charge a zero
or negligible fee to the end users for both person-to-person, or to the retailer for accepting a payment.
They make their revenue from other services associated with the provision of their platform.

As previously noted, those retailers who have found it too expensive to install a payment terminal, and
pay the fee for accepting cards to acquiring banks have remained cash only. It is this cash only segment,
where cards have not penetrated, that the non-bank mobile payment providers are looking to penetrate
by using their applications to enable real-time payments for person-to-person and to shop at retailers by
simply scanning a QR code. Their strength is that they can deliver millions of active customers using their
mobile platforms for “in-application” payment today.

There may be a very real threat to the banks if the non-bank providers are successful in converting a
critical mass of retailers who today are cash only, to accepting real-time mobile payments by QR code
for zero or negligible fee, and establishing a critical mass of consumers who are prepared to shop using
their mobile application, thereby developing a habit of shopping with these mobile platforms. This is
already the reality in China where Alipay and WeChat have, in the space of 3 to 4 years, transformed
what was largely a cash market to one where in 2016, 40%4 of all retail payments were made with one
or other of their mobile applications.

Retailers who do accept cards, might then compare the fees they currently pay for card acceptance,
versus the negligible fees enjoyed by retailers who accept real-time mobile payment via QR code, and
the banks could see their card business disrupted. An interesting question remains as to how the banks
in the South East Asian markets will respond. This question has perhaps already been answered in
markets such as Thailand, Singapore and Indonesia, where many of the banks are already launching
mobile payment applications of their own, and deploying QR codes at retailers.

Fast Forward to the Future
It is this competitive environment involving banks and non-banks that might see a rapid acceleration in
South East Asian markets of the deployment of real-time mobile payments for person-to-person and
shopping. It is not beyond the realms of possibility that this will allow these markets to significantly
displace cash and cheques in just a few short years, bringing many benefits such as auditable
transactions, reducing corruption, increasing tax take, allowing more citizens to participate in the
economy for financial benefit, and generally leading to more stable, secure and efficient economies.

New Zealand’s current leadership position as a virtually cashless society with very high penetration of
digital payments has been achieved largely on the back of 70-year-old card technology that has
underlying and inherent costs, and EFT platforms that were upgraded in 2012 to achieve intra-day
payment, but just before the latest systems that enable real-time payment.

As things stand today, it seems that New Zealand is streets ahead of Malaysia and Indonesia where cash
still dominates, EFT penetration, while expanding is still low, and card deployment is struggling to get
beyond the top tier retailers because smaller retailers cannot afford a terminal, or pay merchant service
fees.

4
    http://knowledge.ckgsb.edu.cn/2017/10/11/digital-economy/will-china-first-cashless-society/

Ironically, this leaves these markets unshackled by older, incumbent and expensive technology and
possibly able to leapfrog markets such who achieved digital payments on the back of plastic payment
cards. South East Asian markets able to quickly deploy truly real-time payment systems at a much lower
cost to payers and payees when compared with card based systems, thereby delivering more cost
effective and efficient payment ecosystems.

The question then becomes, how will New Zealand, and other similar markets, unravel and replace
existing slower and more expensive payment systems to keep pace?