The Indonesian central bank, Bank Indonesia (“BI“) recently issued BI Regulation No. 19/8/PBI/2017 on National Payment Gateway (“BI Regulation“) as part of its effort to actualize the independency of Indonesia’s national payment system, especially in respect of all financial transactions carried-out in Indonesia. By issuing the BI Regulation, BI started the process to establish the National Payment Gateway (“NPG“) which has two (2) key objectives. First, the interconnectivity of all existing payment channels; and second, the interoperability of various payment instruments which are currently existing and used in Indonesia. The objectives are to achieve the single overarching goal of increasing non-cash transactions in Indonesia. We understand that soon, BI will also issue a Members of Board of Governors Regulation (Peraturan Anggota Dewan Gubernur or “PADG“) to complement and further regulate the implementation of the NPG. The desire to establish the NPG is not unique to Indonesia, other countries sch as China and Singapore have also established their respective NPG.
The NPG is defined as a system which consists of standard, switching, and services functions based on a set of rules and arrangement to nationally integrate payment instruments and channels. In general, the implementation of NPG involves two parties, namely the NPG Organizers and the NPG-Connected Parties. The NPG Organizers comprise of (i) Standard Institution, (ii) Switching Institution and (iii) Services Institution, whereas the NPG-Connected Parties comprise of (i) issuers, (ii) acquirers, (iii) Payment Gateway Organizers, as well as (iv) other parties determined as such by BI.
To be appointed by BI as a Standard Institution, an entity has to submit a written request to BI evidencing fulfilment of the stipulated criteria, inter alia:
Aside from the responsibilities noted above, the Standard Institution is also responsible for (a) managing and carrying out the certification process of payment instrument and/or payment channels’ compatibility with the prevailing Standard, (b) managing and administering vendors and other products related to payment instruments and/or payment channels which have met the Standard, (c) managing and carrying out key management function as the certificate authority and (d) carrying out other duties as may be required by BI. In performing the preceding obligations and responsibilities, the Standard Institution is responsible for ensuring the worthiness of security and information technology that it uses and for maintaining the confidentiality of all data and information it obtains in the course of its business.
Switching Institution has the function and task to domestically process the payment transaction data for interconnectivity and interoperability of payment system. For this purpose, all Switching Institutions are obliged to cooperate with at least two other Switching Institutions and their cooperation is subject to specific Standard set by BI. BI may approve Switching Institutions to cooperate with other switching entities outside of the NPG if such collaboration can enhance the capacity and capability of NPG operations including improvement in expansion acceptance and/or technology transfer. During the collaboration, Switching Institutions shall ensure that all domestic payment transactions are processed through the NPG.
The current measures imposed by BI Regulation on Switching Institution are in line with the current blueprint of the Switching entities regulated by BI. However, the regulation of BI merely sets a new minimum threshold to support the interconnectivity of national payment system.
Given the relatively high capital requirement, it would be interesting to see whether such requirement will hinder the establishment of an Indonesian majority owned Switching Institution. Or whether the high capital requirement is intended to protect existing companies and providing a barrier for new entries. Related to the capital requirement there is also restriction on foreign investment. We should note that the maximum 20% foreign ownership is very strict compared to for example investment in Indonesian conventional banks, which is open to 99% foreign ownership.
In addition to the foregoing, the Services Institutions are also obliged to process the settlement through BI for inter-Switching Institutions transactions, and/or inter-issuers transactions. In the execution of their functions and performance of their obligations, the Services Institution has the authority to set its terms of service, and to obtain access to all payment transaction data and operational activities from Switching Institutions.
Unlike other NPG Organizers, Service Institutions are more extensively regulated. To be approved as a Services Institution, an applicant has to submit a written application to BI evidencing:
We support the attempt of the BI Regulation to simplify transaction processing and create a more secured payment system through the functions of the Services Institution. Primarily by designating the Services Institution to carry payment transaction processing functions, BI Regulation has simplified the payment processing system by consolidating the functions to be carried out by the Services Institution. Furthermore, by specifically tasking the Services Institution to mitigate risk and prevent fraud, the BI Regulation attempts to create a more secured payment transaction processing such as the use of end-to-end encryption and development of other security features. Nevertheless, in this early stage, the financial sector must wait and see how effective the measures stipulated under the BI Regulation in the establishment of an interoperable, interconnected, cost-effective and security risk-averse national payment system.
For Standard Institution, the periodical reports shall be submitted to BI quarterly and annually. While, incidental reports will be required for the following:
Aside from annual and quarterly reports, Services Institution shall also submit annual system information audit report from an independent auditor as one of its periodical reports. For its incidental reports, Services Institution shall report to BI on the following:
For Switching Institution and NPG-connected parties, their reporting obligations are already set out under PBI PTP. Switching Institutions, however, need to also cover its operational activities in its periodical reports, in addition to the points set out under PBI PTP.
AHP Client Alert is a publication of Assegaf Hamzah & Partners. It brings an overview of selected Indonesian laws and regulations to the attention of clients but is not intended to be viewed or relied upon as legal advice. Clients should seek advice of qualified Indonesian legal practitioners with respect to the precise effect of the laws and regulations referred to in AHP Client Alert. Whilst care has been taken in the preparation of AHP Client Alert, no warranty is given as to the accuracy of the information it contains and no liability is accepted for any statement, opinion, error or omission.