Indonesia Gears Up For Contactless

  The Indonesian prepaid card market is fragmented with retailers operating many proprietary, closed-loop card programs. A local bank, aided by the contactless chip card technology of an international card brand, is working to bring more open-loop prepaid products to Indonesia.
  Bank Negara Indonesia Tbk, one of the largest banks in Indonesia, and MasterCard Worldwide have entered into an agreement in which Bank Negara Indonesia is issuing prepaid and credit cards in Indonesia with MasterCard’s PayPass contactless technology.
  Cobranded prepaid cards are starting to catch on in Indonesia. Euromonitor, a London-based global research firm, estimates that Indonesian financial institutions have issued some 925,000 open-loop prepaid cards, with Permata Bank and Bank Negara, the two primary card issuers, together accounting for about 20% of all prepaid cards issued.
  Robert Walls, MasterCard vice president of debit product management and development for Asia Pacific, Middle East and Africa, says alliances with top card brands can help build the value of the card and expand prepaid card-distribution networks.
  The issuers want to provide PayPass contactless functionality to prepaid cards for the same reasons they are adding it to credit and debit cards.
  â€œMasterCard PayPass is specially designed to replace cash payments and is well-suited for quick-pay environments where speed is important,” Sigit Pramono, Bank Negara president director, said in a statement. Among the ideal locations, he says, are supermarkets, convenience stores, drive-through outlets, take-away outlets, toll gates, movie theaters, restaurants and mass transport.
  Building retailer acceptance will be critical to the success of contactless payment systems in Indonesia, according to Yumiko Manchu, a Tokyo-based analyst with Celent LLC, a global research company.
  â€œAs for the benefits of PayPass cards, they will be convenient for the consumers in the respect that they will not have to carry cash wherever they go, and even if they, unfortunately, lose them, the loss will be limited,” says Manchu. “Moreover, credit card companies will also benefit by being able to provide a low-risk settlement method.” Prepaid cards are a low-risk alternative to credit cards because no credit is extended to consumers, Manchu says.
  Whether Indonesia will follow the other Asian market trends in supporting prepaid cards remains to be seen, Manchu says. “The traditional payments would dominate the market for quite a while,” says Manchu. “At this phase, it all depends on how much convenience and benefit providers are able to show the customers.”
  MasterCard launched PayPass globally in 2003 and has made significant headway with contactless payments. PayPass products currently are being tested or put into use in 20 countries, including the United States, South Korea, Taiwan and Canada.
  Since the contactless transactions still are new, Bank Negara is issuing MasterCard PayPass cards in several stages while focusing first on educating consumers, Pramono says. As of C&P’s deadline, the bank had not responded to requests for comment.
  As of the end of November 2007, financial institutions globally had issued 20 million PayPass cards and devices, which were accepted at 80,000 merchant locations worldwide, including vending machines, MasterCard says. MasterCard would not to release PayPass data specific to Indonesia.
  Unification Push
  Indonesia’s prepaid card market could face dramatic growth if the country’s central bank successfully convinces prepaid card operators and transportation-network and toll-booth operators to create a consortium to unify their payment networks. “The toll operator is thus the lynchpin for success,” says Sunil Devmurari, Euromonitor research analyst. “However, concerns remain about the settlement of transactions between different operators.”
  Bank Negara may be launching its contactless-payment program with prepaid cards, but that is not the trend worldwide. Nearly all the contactless cards or tokens issued by banks affiliated with Visa Inc. or MasterCard carry only credit or debit applications.
  MasterCard in July announced plans by Italy’s postal bank to launch a PayPass trial on prepaid cards, one of its first real tests for contactless in the prepaid card market.
  BancoPosta, the financial services arm of Poste Italiane, said it would launch the trial by the end of 2007, offering prepaid cards to new cardholders with the PayPass application, according to MasterCard. Cardholders would tap to pay at a relatively small number of merchant locations in Rome and Milan during the six- to eight-month trial. BancoPosta had issued 3 million conventional prepaid cards as of last summer, MasterCard says.
  Any prepaid cards Bank Negara issues also are likely to follow the international EMV chip card standard. EMV is designed to reduce fraud because cards are more difficult to counterfeit.
  High card-fraud rates in Malaysia prompted a push for smart cards, says Rajendra. Malaysia finished its migration to EMV-compliant cards in 2004, spiking fears that fraudsters would move on to neighboring countries, such as Indonesia. Indonesia started the migration process to EMV in 2005 but still has a ways to go, Rajendra says.
  â€œMany of the neighboring countries are now also in the process of migrating to smart cards for fear of the fraud migrating to their regions,” he says.
  Euromonitor’s Devmurari says the perceived high costs to issue EMV-compliant cards and to establish an acceptance network have held back the EMV migration in Indonesia. However, given Indonesia’s relatively high levels of card fraud, the central bank is requiring issuers to draft plans on their readiness to migrate existing cards to EMV compliance, he says.
  The central bank’s new deadline for conversion of credit cards to EMV compliance is the end of 2009.
  (Dan Balaban, C&P international bureau chief in Paris, also contributed to this story.)
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