Understanding the System and Types of Payment Instruments in Indonesia

Types of Payment Instruments in Indonesia – The payment system is a system that includes a set of rules, institutions and mechanisms used to carry out transfers of funds to fulfill an obligation arising from an economic activity. Then what is included in the payment system? Check out the full explanation below, Sinaumed’s:

Definition of Payment System

A payment system is a system that includes a set of rules, institutions and mechanisms used to carry out transfers of funds in order to fulfill an obligation arising from an economic activity. The Payment System is a system related to the transfer of a sum of money from one party to another.

The media used to transfer the value of money are very diverse, ranging from the use of simple payment instruments to the use of complex systems involving various institutions and the rules of the game. The authority to regulate and maintain the smooth operation of the payment system in Indonesia is exercised by Bank Indonesia as stipulated in the Bank Indonesia Law. The components that make up the creation of a payment system in society.

  • Means of Payment – An example of a means of payment for cash is money and a means of non-cash payment is a credit card.
  • Interbank Fund Transfer System – This system allows the transfer of funds from one bank to another.
  • Furthermore, what is contained in the payment system component is in the form of an operator, this component is an institution that can ensure the final settlement of all transactions that occur in its use. Payment System Processing Institutions – Institutions that are technical operators in the payment system in Indonesia are Bank Indonesia, the Indonesian Central Securities Depository (KSEI) for the capital market, and Card Payment Instrument Clearing Operators (APMK).
  • Payment channels – Several payment channels in Indonesia are debit cards, credit cards, teller input, ATM machines, mobile banking, internet banking, phone banking, and electronic data capturing (EDC).
  • The regulator is a component that has the authority to regulate the rules of the game, provisions and policies that bind all components in the payment system.
  • Infrastructure – In this component, infrastructure is a physical facility that supports the operational process of the payment system carried out by the person making the transaction.
  • Instruments Next is the instrument component. The component of this instrument is a means of payment made both in cash and in non-cash which is agreed upon by the users in conducting a transaction.
  • User And this last component is the user. This user is a component of the payment system which is a consumer in utilizing the payment system.

According to the CPSS Glossary (2003), Payment Systems are interactions between entities consisting of instruments, procedures, interbank funds transfer systems to smooth the circulation of money.

According to Guitian (1998) Payment System is a tool and facility that is accepted in making payments in general, institutions and organizations that regulate these payments (including Prudential Regulations), operating procedures and communication networks used to initiate and send payment information from payers to payee and complete the payment.

According to Bank Indonesia Law No.23/1999, the payment system is a system that includes a set of rules, institutions and mechanisms used to transfer funds to fulfill obligations arising from economic activities.

Payment System Principles

Broadly speaking, payment systems are divided into two types, namely cash payment systems and non-cash payment systems. The fundamental difference between the two types of payment systems lies in the instruments used.

In the cash payment system, the instruments used are currency, namely money in the physical form of banknotes and coins, while in the non-cash payment system, the instruments used are card payment instruments (APMK), checks, demand deposits, debit notes, and electronic money. Bank Indonesia itself in regulating the payment system refers to four principles, namely security, efficiency, equality of access and consumer protection, with the following explanation, Sinaumed’s:

  • Safe – All risks in the payment system such as liquidity risk, credit risk, fraud risk must be properly managed and mitigated by each payment system operator.
  • Efficient – ​​The principle of efficiency emphasizes that the implementation of a payment system must be widely used so that costs borne by the community will be cheaper due to increased economies of scale.
  • Equality of Access – The principle of equal access means that Bank Indonesia does not want monopolistic practices in the administration of a system that can prevent other players from entering. Finally, it is the obligation of all payment system operators to pay attention to these aspects
  • Consumer protection. Meanwhile, in terms of being an institution that circulates money, the smoothness of the payment system is manifested by maintaining the amount of cash circulating in the community and in a condition suitable for circulation or what is commonly called a clean money policy.
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The Role of the Payment System and Bank Indonesia

In Indonesia, the authority to regulate and maintain the smooth operation of the payment system is carried out by the central bank of Indonesia, namely Bank Indonesia. Regulating and maintaining its own smooth running is carried out as one of the efforts in realizing the objectives of Bank Indonesia, namely to maintain rupiah stability in order to support the improvement of the national economy.

To find out more about the history of Bank Indonesia, which has been the central bank in Indonesia since 1828, the book From De Javasche Bank to Bank Indonesia, Fragments of the History of Central Banks in Indonesia can be an appropriate reference.

Based on this authority, Bank Indonesia has the right to determine and enforce payment system policies in Indonesia through the Bank Indonesia Law in Law Number 23 of 1999 which was later revised in Law Number 6 of 2009. The role of Bank Indonesia in the payment system includes :

  • Authority as the operator of the interbank clearing system for certain types of payment instruments through the Bank Indonesia National Clearing System or SKNBI.
  • Authority to give permission and approval to payment service providers to participate in the payment system (Anyone who can issue or process these payment instruments)
  • Determine certain standards for payment instruments and determine what payment instruments can be used in the payment system in Indonesia.
  • Regulate and oversee which institutions may administer payment systems (both banks and non-bank institutions).
  • Risk control policies, efficiency, governance, and others
  • Authority in running the Bank Indonesia system – Real Time Gross Settlement or BI-RTGS. BI-RTGS itself is used to make large-value non-cash transactions.


Types of Payment Instruments

The evolution of Payment Instruments developed very rapidly, beginning with the barter system between traded goods which was common in the pre-modern era. In its development, certain units have become known which have a payment value that is better known as money. Until now, money is still one of the main means of payment in society.

Furthermore, payment instruments continued to evolve from cash-based payment instruments to non-cash payment instruments such as paper-based payment instruments, for example, checks and giro bills. Besides that, paperless payment instruments are also known, such as electronic fund transfers and card-based payment instruments (ATMs, Credit Cards, Debit Cards and Prepaid Cards). Here’s a more complete explanation:

1. Cash Payment Tool

Cash payment instruments use more currency (notes and coins). Currency still plays an important role especially for transactions of small value. In today’s modern society, the use of cash payment instruments such as currency tends to be smaller than demand deposits.

However, it should be noted that the use of currency has constraints in terms of efficiency. This can happen because the cost of procurement and management (cash handling) is relatively expensive. Not to mention accounting for inefficiencies in payment timing. For example, when waiting to make a payment at a payment counter which takes a relatively long time due to long queues.

Meanwhile, when making transactions in large quantities it also invites risks such as theft, robbery and counterfeiting of money. Recognizing the inconvenience and inefficiency of using currency, BI took the initiative and will continue to push to build a society that is accustomed to using non-cash payment instruments or the Less Cash Society (LCS).

2. Non-cash Payment Instruments

Non-cash payment instruments have developed and are increasingly commonly used by the public. Non-cash payment transactions with large values ​​are organized by Bank Indonesia through the BI-RTGS (Real Time Gross Settlement) system and the Clearing System. In addition to efficiency in paying large amounts of transactions, non-cash payment instruments have a small theft risk because the transactions can be tracked.

In addition, the people involved in the transaction do not need to count the money because the nominal value is clearly stated so that the checking process does not take a long time. Accepted payments also have an unlimited amount. Included in non-cash payment instruments include:

  • Check – is proof of the customer’s request to the bank to disburse funds according to the amount and name of the recipient written on the check.
  • Giro – is proof of a request to transfer an amount of money from one person’s account to another customer’s account according to the amount and name written.
  • Debit note – is proof of a transaction to reduce business debts that must be repaid.
  • Credit Card – is a means of payment in the form of a card issued by a bank where the bank first lends money to customers to make payments.
  • Electronic Money – is a substitute for cash, customers deposit their cash into electronic money.

In order to make good use of credit cards, there are a number of things that Sinaumed’s must know beforehand, such as the various types, functions, and benefits of credit cards. Everything is discussed in detail in the Smart Book Surviving the Credit Card Trap.


3. International Payment Instruments

We know that every country has a different currency used in every transaction. For example, Indonesia uses Rupiah, Singapore uses Singapore Dollars, Japan uses Yen, China uses Yuan, America uses US Dollars, the European Union uses Euros, and so on.

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The question is how to pay for international transactions such as export and import activities, bearing in mind that each country has its own currency and has different exchange rates. International payments can be made in various ways, both cash and non-cash.

An example of an international cash payment is when a foreign tourist makes a cash transaction in another country. While non-cash payment instruments can be in the form of:

  • Check – The buyer can pay the amount paid by check through the seller’s bank in the seller’s country.
  • Wesel – Postal Orders Buyers can use the services of banks that have postal money orders to send money from within the country to abroad according to the name and nominal value written on the money order. One of the largest international postal money order companies is Western Union.
  • Credit Card – Shoppers can use credit cards according to the card network (Union Pay, MasterCard, Visa, and others). The use of a credit card is suitable for doing online shopping with shipments from abroad such as Amazon, eBay, ASOS, and others or paying for foreign travel such as hotel payments. The card network will convert the domestic currency into the currency used in the seller’s country in accordance with the exchange rate regulations of each network.
  • Online Payment – ​​In addition to credit cards, buyers can use online payment tools to make international payments. This online payment is similar to electronic money where customers can top up cash into a customer’s account or connect their online payment account with a credit card. One of the largest online payment companies is PayPal.
  • Cryptocurrency – Recently it has become a digital means of payment where transactions are carried out online. This tool is compiled based on complex digital codes, making it different from most. Several countries have accepted payments using cryptocurrency as a payment instrument. Cryptocurrencies themselves are believed to be almost unhackable which allows for security in these currencies which Sinaumed’s can also learn more about in the book Why? Cryptocurrencies & Blockchain.

However, in Indonesia, Bank Indonesia stated that BI did not recognize Cryptocurrency as a legal tender because it was not in accordance with Law no. 7 concerning Currency. In addition, cryptocurrencies have high risks such as the difficulty of tracking transactions (so they can be used to carry out illegal transactions such as purchasing illegal goods), fluctuating values, and there is no authority responsible for the circulation of this currency. One type of cryptocurrency that is well known in the world is BitCoin and Ethereum.

The presence of BitCoin itself shakes the world because it is an alternative way of payment and investment systems that are of public interest. Learn the history and concept of money and how BitCoin with its technology can provide benefits in the future through the book Is Bitcoin the Future Money Standard?


Payment System in Indonesia

In the journal article Development of Payment Systems in Indonesia (2006) by Vera Intanie Dewi, it is explained that there are two types of payment systems in Indonesia, namely:

1. Retail payment system or small value (Retail payment system/small value)

This payment system is usually used for types of transactions under one hundred million, such as individual transactions (checks, giro slips, transfers), credit card or debit card transactions, and bulk transactions. Retail payments usually use cash payment instruments.

There are also those who use non-cash payment instruments, but the number is small. While settlement of payments is usually done through the clearing process. Clearing is the exchange of electronic financial documents or data between banks, both on behalf of the bank and the customer, the calculation results of which are completed at a certain time. The clearing process is organized by Bank Indonesia as the central bank.

The clearing organized by Bank Indonesia is referred to as the Bank Indonesia National Clearing System (SKNBI). SKNBI is Bank Indonesia’s clearing system which includes debit clearing and credit clearing, the final settlement of which is carried out nationally. The purpose of implementing the SKNBI is to increase the efficiency of the retail payment system and to comply with risk management principles in clearing operations.

2. High value payment system

This payment system is usually used for types of fund transactions above one hundred million rupiah, transactions of an urgent nature, as well as transactions in the capital market, foreign exchange and money market. Large value payments tend to use non-cash payment instruments.

Meanwhile, the payment settlement process uses the Bank Indonesia-Real Time Gross Settlement (BI-RTGS) system. BI-RTGS is a transaction settlement process that is carried out per transaction and is real time. The difference between the clearing system and BI-RTGS lies in the final transaction settlement time. In the BI-RTGS system this is done for every transaction, while in the clearing system it is done at the end of the transaction day.

Source: from various sources