One of the few upsides of the COVID-19 pandemic for the Indonesian economy has been to transform it away from cash towards electronic payments.
Indonesia has been heavily dependent on cash, but when shops and restaurants had to close during the lockdowns, this forced the population to shop online and order online for home delivery.
Based on a BDRC survey in Indonesia, during the lockdowns 14% of consumers used online shopping for the first time, 47% increased their level of online shopping, and 35% used home delivery from eating outlets.
The switch to online ordering over in-store purchasing prompted many consumers to adopt new payment technologies. Historically, the main beneficiaries of electronic payments have been the card issuers, but in Indonesia only 16% of consumers adopted new cards during the lockdown, while far more moved to other payment technologies, including 23% to Paypal and 54% collectively to the other electronic payment methods, e.g. OVO, GoPay, DANA, etc.
The need to do more online during lockdowns also prompted 25% of consumers to upgrade their mobile plans vs just 8% downgrading them – this was despite financial pressure on families that might otherwise cause them to cut costs.
The progress towards more electronic-payment-based societies over cash-based ones has been well studied. The main benefits are seen in the following areas:
LESS TAX EVASION: Cash-based businesses can hide revenue to reduce their tax bills. Even in developed countries this can amount to billions of dollars of lost tax revenue, but in Indonesia this is even higher. Indonesia has a tax-to-GDP ratio of about 12% – this is lower than most of its neighbours and far lower than in the developed world, where ratios from 25% to 50% are common. Electronic payments are increasing transparency and should help the government to collect more tax revenue if tax collection can be made more effective.
LESS CRIME: Pilfering from staff and robberies can be an issue for many cash-based businesses, particularly in retail, so the more businesses can take in electronic payments, the lower the risk of theft. BDRC’s survey shows that 59% of businesses increased their share of receivables from electronic payments in 2020, with 23% taking all receivables electronically. Only 18% in our survey remain entirely cash-based.
EFFICIENCIES: Businesses that accept electronic payments can have lower transaction costs. There is less labour time spent on counting cash and taking it to the bank.
However, there can be a downside with transaction fees levied by card companies on transactions, but businesses generally recognise the net benefits of electronic over cash. It can also encourage consumers to spend more. For the consumer, paying electronically means they do not end up with small loose change that can often end up in drawers or down the back of the sofa.
Also, with fewer cash payments, less banking infrastructure is needed, e.g. fewer branches. These costs tend to be passed on to customers, and more efficient banking should mean lower banking costs for customers, particularly if there is competition from new players in the financial services industry.
The downsides to electronic payments have also been well documented. Firstly, they can lead to financial exclusion, as many people, particularly in developing countries, cannot access banking services or be issued cards. But new forms of electronic payments, e.g. via mobiles, are addressing these issues at least in part.
Some also see electronic payments as a means of governments and corporations to spy on them. Firms track spending patterns and send targeted marketing – not a great hardship, but more dystopian governments could use this to wield power over their citizens.
For some, cash is a good way to budget and regulate spending, e.g. as a daily allowance. Psychologically, it is easier to spend money electronically without thinking you are overspending – good for retailers, but sometimes bad for the consumer. There can be greater emotional attachment to cash that makes you more conscious of what you are spending; also, receiving an IDR 100,000 note can feel much more satisfying than just getting it credited to your bank account.
But overall, most would agree that electronic payments bring a net benefit to society, and in the last year the health benefits of receiving intangible electronic payments instead of handling dirty notes that can carry viruses has been much appreciated.
For Indonesia another significant benefit of electronic payments will be in boosting its e-commerce sector. The BDRC survey showed that 38% of consumers have second-employment income, often from side businesses. The lockdowns and shop closures prompted 30% of consumers to use retailers who they had not shopped with before, and among these, 87% used new dedicated e-commerce retailers.
With a population of 270 million, the possibilities for e-commerce in Indonesia are huge, in a market where an increasing number of consumers are now able to transact online through a wide range of electronic payment options.