Indonesia’s central bank pledges major infrastructure changes

Indonesia’s central bank has announced extensive plans to improve the country’s payment infrastructure over the next five years.

The Indonesia Payment System Blueprint 2025, launched on November 28, aims to open up access to financial services for 91.3 million people and 62.9 million small- to medium-sized enterprises.

Currently, 51% of Indonesians are excluded from formal banking services, central bank data shows.

Within the blueprint, Bank Indonesia commits to five initiatives, which it hopes will introduce a “new concept of broad financial economic inclusion”.

“The financial inclusion programme needs to be expanded from being limited to ownership of payment instruments or bank accounts to sustainably accessing financial markets and the goods market as a whole,” the document says.

One of the core components of the central bank’s new strategy will be to build a new real-time retail-payments system and improve API connectivity to ensure a greater number of payment services providers can access the new architecture.

Underdeveloped market

One of the key challenges in implementing the new blueprint will be to ensure traditional banking services do not become too disrupted by new entrants.

“The strengthening of the non-bank’s role in providing payment services, which was followed by a decline in [the] banks’ role, displayed the effect of digital disruption in [the] Indonesian financial industry,” the central bank says.

Recent research from Bank Indonesia noted the country’s banking system is very underdeveloped in terms of adoption of new technology. In a survey conducted in 2018, the central bank found 30 domestic banks were found to rely on old legacy systems and processes.

Technological innovation and the shift of consumer behaviour urge the central bank to reform its policy paradigm

Bank Indonesia

In contrast, the central bank noted foreign affiliated banks were generally “more progressive” in their transformation, on a par with non-bank players who are usually more open and quicker to adopt digital technology.

These institutions have been quick in the uptake of cloud technology, artificial intelligence and modern operational infrastructure, and could provide customers with a broader range of services.

As a result, Bank Indonesia noted fintech transaction performance is starting to approach that of banks, and the use of these firms for e-commerce transactions has already begun to reduce the share of digital banking services.

As of September, the central bank recorded 272 fintech players and 200 e-commerce platforms active in Indonesia.

“Technological innovation and the shift of consumer behaviour urge the central bank to reform its policy paradigm,” the blueprint notes.

Evolving proposals

One of the core components of the central bank’s new strategy will be to strengthen the country’s retail payment system. Within the next five years, the central bank says it will build BI-Fast, a new real-time retail-payments system that will process all forms of transactions.

“Through this initiative, Indonesia’s financial market infrastructure is expected to be able to operate according to standard best practices and provide support for optimal policy makings,” the central bank says.

The new architecture will connect to the country’s clearing system and the national payment gateway. Plans are also under way to modernise the central bank’s own real-time gross-settlement system, its scriptless securities settlement system (BI-SSSS) and electronic payment platform.

The central bank aims to develop ISO 20022 standards for BI-RTGS, BI-Fast and BI-SSSS. It also aims to develop multicurrency features for BI-RTGS to help streamline cross-border transactions.  

Bank Indonesia will also look to increase the number of financial institutions that have access to the core payment infrastructure.

“This initiative will be achieved through an open application programming interface (API) standardisation setup,” the plan said. “This step enables the disclosure of financial information, and interlinks between banks and fintechs.”

Public data hub

Some of the central bank’s initiatives in the plan were explained in less detail than others. One will involve the central bank creating a new public data hub, based on transaction data pulled from customer Payment ID. While it will aim to improve transparency, the central bank has yet to say how the data will be used.

The plan also promises a new licensing regime and changes to payment regulation, with the aim of giving a greater number of participants access to the new payments architecture.

While no specific details have been provided at this time, Bank Indonesia said it would implement a new regulatory structure that would cover frameworks for personal data protection, cybersecurity, integrated entry policy and supervision, including the use of regtech and suptech products.

The central bank has also signalled it would ensure the regulatory framework will be aligned with its over-the-counter derivatives-reform agenda. Central counterparty clearing houses will be standardised to meet the European Securities and Market Authority’s standards, the blueprint said.