CHAPTER 5 LESSON LEARNED AND CONCLUSION

CHAPTER 5: LESSON LEARNED AND CONCLUSION

5.1. Lesson Learned

Back in 2002, BKM was just another company in Indonesia struggling to

survive and just tried to keep-up to fulfill its operational expenses. It was just only

from one project, the BKM – Telkom agreement for the Telkomsel Autorefill Service

had turned BKM into a profitable operation in the following year and subsequently in

the next years ahead, up until now (2008).

Getting a multi-years service contract for Telkomsel Autorefill was a result of

the passion in seeking and creating business opportunities of the Founder and CEO of

BKM, Rudi Y. Chatab. His creativity and leadership coupled with a strong

determination as an entrepreneur had enabled BKM to secure a long-term business

relationship that has been a routine source of revenue for BKM since 2003.

Arrangements were managed under many high uncertainties such as limited resources

and ability to execute to fulfill according to the BKM-Telkom contract. First, was

financial factor as source of revenue that was to be generated on per transaction basis,

BKM was expected to manage the EDCs as asset rather than selling it to Telkomsel,

and in 2002 BKM did not have sufficient fund nor the required asset for loan

collateral; BKM had to procure 1,800 EDCs with the total value of slightly over

US$1 million. Second, was the limited internal team that BKM had both for technical

application software development and operational, not to mention that BKM was just

51

52

a very small company compared to big giants like Telkom, Telkomsel as one of the

business units under Telkom Group, or BNI.

Being able to finally execute the deal following the BKM-Telkom contract

signing was another major achievement for BKM. The close relationship with local

IT solution provider – ICL (which until early 2003, was also one of the shareholder of

BKM), which at that time was desperate to close EDC deal with BNI, was another

factor for the successful delivery of the signed BKM-Telkom contract. A good

relationship between Rudi and the owner of ICL enabled the business arrangement

between BKM and ICL for electronic refill software application – for ICL to supply

EDC to BNI considering the Telkomsel Autorefill contract that BKM had with

Telkom. Then, it followed by BKM-BNI contract for Autorefill signed in Nov 4,

2003 (profit sharing arrangement) enabling BKM to use the EDC owned by BNI to

fulfill BKM – Telkom agreement for Telkomsel Autorefill service.

An analogy for BKM during 2002-2008 using Timmon’s model on crises and

symptoms during stages of venture growth, can be seen in Table 12: The Journey of

BKM during Venture Growth.

Table 1: The Journey of BKM during Venture Growth

Wonder  Blunder Thunder Plunder Asunder

Crises and Symptoms

Uncertainty of survival

firms stumble and fall

Robust growth and Solid 

management team

Robust cash flow Renew or decline

Stages of Venture Growth, Crucial Transitions and Core Management Mode

BKM in2002

BKM in2003‐2005

BKM in2006

BKM in2007

53

BKM was in Wonder mode in 2002 as the future of company was uncertain;

hence, the company was struggling to survive. By securing a contract with Telkom

for Telkomsel Autorefill service, then later the contract with BNI, BKM moved to

Thunder mode following 2003, and then continued to grow to 2005. During 2003 to

2006, BKM enjoyed a robust cash flow but unfortunately, the industry was changing

as PC-based electronic pre-paid balance top-up services was started to grow. In 2007,

BKM was aware that it needed to find new product and services if the company

would like to maintain or even increase their revenue stream in the future, or the

business will decline in near future.

Since June 2004, Telkomsel had launched about 500 M-KIOS service

locations as an alternative for its customer to do electronic balance top-up with GSM

USSD (Unstructured Supplementary Service Data) command that had been available

in every cellular handset, even on the most outdated types.

With M-KIOS, simPATI balance top-up is done over the air using a cellular

handset equipped with special SIM card for M-KIOS. Customers simply visit to the

location that has M-KIOS facility and pay some amount of money in line with

nominal value to top-up. The officer at M-KIOS location will do the over-the-air

process to top-up the given nominal to a cellular number informed by the customer.

In a few moments, the notification will be sent to that cellular number, informing that

the balance top-up has been successful and the balance will be added according to the

nominal value purchased. Available nominal values for M-KIOS service are Rp.

20,000 and Rp. 50,000 (In 2004, about US$ 2.15 and US$ 5.38 respectively). The

plan was to extend the M-KIOS to 6,000 locations in Indonesia, and more later.

54

M-KIOS enhanced the range of Telkomsel service for simPATI Autorefill that

previously had been available through banks’ ATMs, refill from Telkomsel post-paid

product, mobile banking and a few more mechanisms.

Telkomsel has also started to introduce another service called T-Cash, which

was allowing pre-paid users to have an account at Telkomsel and could top-up their

pre-paid balance from the T-Cash account. This is a direct threat for the continuity of

BKM business in providing Autorefill service for Telkomsel.

5.2. Conclusion

BKM had initiated and orchestrated all the business relationships towards the

successful launch and operation of the Telkomsel Autorefill service. The project was

initiated back in March 2002 when BKM showed the capability to deliver the

voucher-less business to Telkom B2B Project. Then, the two together presented the

proposal to Telkomsel Marketing Director, Mr. Woerjanto, which then agreed to

proceed to five years contract. After long process, a back-to-back contract agreement

between BKM to Telkom, and Telkom to Telkomsel was signed on November 25,

2002. At that time, Telkom was eager to work on any new business development on

non-telephony applications, outside their normal traditional telephony services.

Through indirect business relationship, whereby BKM’s proposal sealed with Telkom

brand, BKM secured the project over Telkom domination (Telkom had majority

ownership share in Telkomsel, 65%). Telkom provided the entire electronic refill

55

application hosting and hardware infrastructure for running the data center operation

for Telkomsel Autorefill service.

1.2.1. Case Part (A)

Long before BKM conducted the proposal presentation to Telkom (before

2002), Telkomsel and BNI, there were discussions between BKM and ICL. The

discussion was on ICL’s experience in providing voucher-less application on EDC

terminals to Excelcomindo (XL), the third largest cellular operator.

Indo ArtaCipta Lestari

(2a-1)To sell

back-endsoftware

applicationfor Autorefill

in EDC

(1a) To establish agreementto provide Telkomsel Autorefill

service with EDC

TelkomselDealers

Telkomsel simPATI customers

Has 65%share

ownership

BKM’sShareholders

(2a.2) to provide & operatebackend software application

Data CenterOperation

(2a-3) Provides & operateshosting & hardware

infrastructure

(2a-4) To install & operate EDC

with standard debit/credit& Telkomsel Autorefill

applications

(2a-5) To operateInformation exchange,

back-end software application with Telkomsel voucher system

Managing

Voucher-based Voucher-less(Autorefill)

(1b) To establish agreement to provideTelkomsel Autorefill

service with EDC

(3b) To arrange 30% of EDC

transaction fee

(3a) To arrange transaction fee = Rp. 1,250

per electronic voucher

Administrative (agreement)

(3c) to arrange 70% ofEDC transaction fee(paid thru Telkom)

established

Operation with Autorefill

Existing (prior to Autorefill)new setup

Operation (financial)

Figure 1: Illustration on Business Arrangements and Operational Relationships to

Provide Telkomsel Autorefill Service, Case Part A

56

To fulfill the BKM-Telkom contract for Telkomsel Autorefill service, BKM

needed to find financing alternatives to procure 1,800 EDC for Telkomsel Autorefill

Service. It could be a new capital injection from shareholders, apply a loan from a

bank / partners, setup revenue sharing with some to-be partners, etc. See Figure 7:

Illustration on Business Arrangements and Operational Relationships to Provide

Telkomsel Autorefill Service, Case Part A.

See Figure 8: Summary of Case Part (A) - Q1-Q4 2002 for the summary of situation

of each party in Case Part (A).

Case Part (A): Q1-Q4 2002 Challenges in pursuing the Telkomsel Autorefill Opportunity

•Telkom– Telkom was a state-owned

Telecommunication company– Telkom was Telkomsel major

shareholder (65%)

•Telkomsel– Telkomsel was market leader in Cellular

Telecommunication Industry– Needed to maintain strategic position

as market leader– One of the initiative was to provide

electronic-refill service for its growing pre-paid customers

• Indo Arta Cipta Lestari (ICL)– ICL was an IT Solution Provider– In early 2002, was in discussion with

BKM to propose electronic refill service to Telkomsel

– Had implemented electronic refill service before for Telkomsel’s competitor: Excelcomindo

•Bumi Kita Makmur (BKM)– In 2002, BKM was a small company, financially

weak, and desperately looking for a sustainable business

• Before, got a few short-term projects as a result from strategic partnership with Telkom.

– In early 2002• Saw the opportunity to provide electronic refill

service (balance top-up) for Telkomsel to manage business relationshipswi

needed financing to procure 1,800 EDCs f

– Then, th multiple parties:• Telkom (through a bi-parties agreement)

– Telkom was very important ‘vehicle’ for BKM to get the Telkomsel electronic refill business

– Telkom to participate to provide hosting and hardware infrastructure

• IT solution provider: ICL– ICL was to provide electronic refill application on

EDC, and back-end software application to BKM for Telkomsel electronic autorefill service

– If Telkomsel decided to go with BKM solution, BKM

or Telkomsel Autorefill Service• Ask for new capital injection from shareholders,?• Apply loan from a bank / partner(s)?• Revenue sharing arrangement with partner(s)?

Figure 2: Summary of Case Part (A) - Q1-Q4 2002

57

1.2.2. Case Part (B)

In part (B) of the case, following the signing of BKM-Telkom for Telkomsel

Autorefill contract, ICL needed to secure EDC sale to BNI Card Center (early 2003).

BKM could easily ask ICL to simply implement the system but realizing that due to

lack of fund to procure 1,800 EDCs, ICL would not do much.

In second quarter of 2003, after having done some thorough discussions,

BKM and ICL agreed to proceed to propose to BNI Card Center, and BKM would

show the Telkomsel Autorefill project as the trigger to speed up the EDC

procurement process to ICL. Then, in just less than two months, while BKM and BNI

working on the project plan, ICL had been granted the purchase order for installation

at 1,800 merchants (translated to 1,800 EDC terminals) for Telkomsel Autorefill

project.

In early 2003, right following the signing of Telkomsel Autorefill contract,

BKM then proved the system up and running by implementing a few terminals in

Jakarta Greater area (called Jabodetabek area; Jabodetabek is an abbreviation of

collection of cities namely Jakarta, Bogor, Depok, Tangerang and Bekasi). The

system was just provided as-is, directly adapted from existing functionalities

developed by ICL engineering team with some modifications on both EDC terminal

application and back end system adjusted with Telkomsel business model. However,

it took a few months to make it run smoothly, following some feedbacks from

Telkomsel. Figure 9: Illustration on Business Arrangements and Operational

Relationships to Provide Telkomsel Autorefill Service, Case Part B shows an

58

illustration summary on overall business arrangements as well as operational

relationships among all parties involved.

Case Part (B): After Nov 25, 2002

Indo ArtaCipta Lestari

CV. SMS

(2a-1)Sells back-end

softwareapplicationfor Autorefill

in EDC

(4) Sells EDC withTelkomsel Autorefill application

establishes

(1a) Establishes agreementto provide Telkomsel Autorefill

service with EDC

TelkomselDealers

Telkomsel simPATI customers

Has 65%share

ownership

BKM’sShareholders

(6b) Informationexchange,

EDC with backendsoftware application

Data CenterOperation

(2a-3) Provides & operateshosting & hardware

infrastructure

(2a.2) Provides & operatesbackend software application

established (2a-4) Installs & operates EDC

with standard debit/credit& Telkomsel Autorefill

applications

(2a-5)Information exchange,

back-end software application with Telkomsel voucher system

Manage

Voucher-based Voucher-less(Autorefill)

(3b) 30% of EDC transaction fee

(7) 40% of BKM portion of EDC transaction fee

(3a-2, 6a) Uses EDC

(10) 100% ofPC transaction fee

(3a) Transaction fee = Rp. 1,250per electronic voucher

(1b) Establishes agreement to provideTelkomsel Autorefill

service with EDC

Operation with Autorefillnew setupExisting (prior to Autorefill)

Operation (financial)

Administrative (agreement)

(9) Provide PC withTelkomsel Autorefill

application

Establishes agreement to provideTelkomsel Autorefill service with EDC(5)

(8) Establishes contract addendumto provide Telkomsel Autorefill

service with PC

(3c) 70% ofEDC transaction fee(paid thru Telkom)

Figure 3: Illustration on Business Arrangements and Operational Relationships to Provide Telkomsel Autorefill Service, Case Part B

In August 2003, nine months after contract signed with Telkom, BKM had

started to deploy EDC terminal with three stages, 400 units, 800 units and 400 units

in less than 18 months. (initially before the BKM-BNI contract was signed, the EDC

was on loan by ICL to BKM to fulfill Telkomsel Autorefill contact). Then, after

BKM-BNI contract, EDC was officially provided by BNI Card Center.

59

In early 2004, following slightly after one year of operation, BKM saw the

opportunity to provide the Autorefill service with a software application to be

installed at PC instead of EDC (communicated with the back-end software

application through public network – Internet). As long as dealer outlet has an

internet connection dial-up or constant connection, they can use PC application to

top-up Telkomsel airtime.

Timeline of key events

2002

Case Part (A) Case Part (B)

2004March Nov 25 Nov 4

Signing ofBKM – TelkomAgreement for

Telkomsel Autorefill(Revenue Sharing)

Signing ofBKM – BNI

Agreement forTelkomsel Autorefill(Revenue Sharing)

Signing ofTelkom – Telkomsel

Agreement forTelkomsel Autorefill(Revenue Sharing)

BKM,Telkom B2B ProjectPresented Autorefill

Business Plan to Telkomsel

Jatis Presented Mobile BankingBusiness Plan to Telkomsel

August

BKM Started to ProvideEDC-based

Telkomsel AutorefillImplementation

(1,200 unitsin less than a year)

Early2nd Qtr

BNI Card CenterStarted Assessing

to Expand EDC Services

ICL Started to ApproachBNI Card Center

to Sell EDC with Standard Debit/Credit Applications

In May – July 2003,BKM ApproachedBNI Card Center

Offering to PackageTelkomsel Autorefillinto Standard EDC

Debit/Credit Applicationswith Revenue Sharing

In Q1 2003, BKM Setup and OperatedSmall Scale Autorefill Systemwith 14 EDCs in 14 Locations

1st

Qtr

How BKM be able to Fund theEDC Procurement?

- Ask Shareholders to Inject Capital? - Apply for a Loan?- Revenue Sharing?

2003 2005

Signing of addendumBKM – Telkom

to providePC-based

Telkomsel Autorefill

June August

BKM Started to Provide PC-basedTelkomsel Autorefill

BKM had Initial Discusision with ICLon Providing Autorefill Solution

that ICL had Implementedin Excelcomindo

In Early 2003,BKM on Intense Discussion

with ICL on ProvidingTelkomsel Autorefill Solution

BKM conductedOffline Autorefill System demonstration,

Draft contract preparation:BKM-Telkom, Telkom-Telkomsel

Figure 4: Timeline of Key Events for Providing Telkomsel Autorefill, 2002-2005

This demand was actually created by dealers, which had ‘call center’. This

meant providing many channels as the extension to grab end customer. Through those

selected channels, they could access call center through various type of access

60

communication such as SMS, handy talky and others. By implementing this method,

each terminal could easily make hundreds of transactions a day. The opportunity to

provide alternative for the EDC was triggered as a few locations had high number of

daily transactions, about 300-400 transactions per day. Then those dealers ask for

more flexible terminals to speed up the transaction process. Finally PC application

came across since that could easily handle lots of transaction at once, compare to

those EDC which only capable of doing transaction one by one.

A few owners of BKM then founded CV. SMS. The reason of doing so was

mainly to tap the opportunity due to identified high transaction volume on several

outlets. Then CV. SMS supplied 50 unit EDC terminals to cover those. An addendum

to existing BKM – Telkom agreement was agreed and signed in June 2004 for

providing PC as Autorefill terminal. Starting in August 2005, BKM applied the

similar business model for BNI and CV. SMS. CV. SMS then supplied 50 unit

terminals, meaning that each transaction would follow BNI revenue stream.

BKM then started to provide Autorefill service for Telkomsel with PC, in

addition to EDC already provided through BNI. Then, for certain locations, EDCs

were replaced by PCs equipped with smart card and reader supplied by BKM. The

EDCs (owned by BNI) were relocated to other locations. See Figure 10: Timeline of

Key Events for Providing Telkomsel Autorefill, 2002-2005 on sequence of important

events during 2002-2005.

See Figure 11: Summary of Case Part (B) - After November 25, 2002 for the

summary of situation of each party in Case Part (B).

61

In the beginning, there were only three kinds of electronic vouchers: with

nominal value of Rp. 50,000, Rp. 100,000 and Rp. 150,000 respectively. The lowest

nominal value was the most demanded one. Total business generated for BNI (net

income) from Telkomsel Autorefill service alone was about Rp. 3 billion in 2005 and

2006. It was a very significant achievement as those portions contributed to about

50% of total income for BNI Card Center.

Case Part (B): After Nov 25, 2002Challenges in Execution

• Bumi Kita Makmur (BKM)– Nov 25, 2002

• Signed Telkomsel Autorefill contract with Telkom collaborated with ICL

BKM signed TelkomselAutorefill contract with BNI

– BKM– August 2003: Started deployment of Telkomsel

Autorefill, with EDC (EDC was a ‘loan’ from ICL)– Nov 4, 2003:

– June 2004: signed addendum with Telkom to expand Telkomsel Autorefill EDC-based services to PC-based

– August 2005: started to provide PC-based Telkomsel Autorefill service

• Bank Negara Indonesia (BNI)– Early Q2 2003: looking to expand its EDC

services– Saw a bigger market opportunities if EDC

packaged with additional balance top-up application: Telkomsel Autorefill

– May-July 2003: Approached by BKM– Nov 4, 2003:Signed Telkomsel Autorefill

contract with BKM• To provide EDC to BKM for Telkomsel Autorefill

service

• Telkom– Nov 25, 2002:

• Signed Telkomsel Autorefill contract with BKM

• Signed Telkomsel Autorefill contract with Telkomsel

• Telkomsel– Nov 25, 2002:

• Signed Telkomsel Autorefill contract with Telkom

• Indo Arta Cipta Lestari (ICL)– Eearly Q2 2003: was pursuing to

close EDC sale for BNI, with standard debit/credit application

– Saw opportunity to speed-up EDC sale when approached by BKM to provide Telkomsel electronic refill application

– ICL Partnered with BKM– To provide EDC devices for BNI with

electronic refill application, in addition to standard debit/credit applications

– To provide back-end software application for BKM to manage electronic autorefill service

Figure 5: Summary of Case Part (B) - After November 25, 2002

62

5.3. Industries, Courses Fit for Lecture

1.3.1. Industries Fit

• Banking

• Telecommunication

• Payment

1.3.2. Courses Fit

The author sees that the students of the following management courses would

benefit from learning this case study.

• Entrepreneurship

• Internet Business Strategy and Implementation (e-business)

5.4. Updates for lecture note, 2003-2008

1.4.1. Bank Indonesia, Regulator of Banks and Financial Institutions

Fund transfers are seen as a simple process, where money is transferred from

one account to another held at a different bank, either domestically or abroad.

However, the process of funds being transferred to a beneficiary account is a complex

procedure organized into one system called the payment system. This payment

system mechanism regulates how the funds can be transferred quickly and securely.

63

The payment system (Bank Indonesia, 2008) covers the legal and regulatory

framework, institutions and mechanisms used to transfer funds in order to settle

liabilities arising from economic activities. What, then, are the components of the

payment system? There must be payment instruments and a clearing mechanism that

includes settlement. Of course, other components are involved, such as the

institutions participating in the operation of the payment system. These include

banks, non-bank financial institutions; non-bank funds transfer providers, switching

companies and even the central bank. Central bank in Indonesia is Bank Indonesia

(Bank Indonesia, 2008).

Bank Indonesia is the sole institution authorized to issue and distribute Rupiah

(Rp.) currency and to withdraw the currency from circulation whenever deemed

needed. Bank Indonesia is also authorized to arrange and operate inter-bank clearing

system both in Rupiah and in foreign currency. Bank Indonesia directly functions in

guaranteeing a smooth payment system. An efficient, fast, secure and reliable

payment system is the most important factor in creating a healthy banking system,

which in turn will support economic activities.

A new chapter in the history of Bank Indonesia as an independent central

bank was initiated when a new Central Bank Act, the UU No. 23/1999 on Bank

Indonesia, was enacted on May 17, 1999. The Act confers Bank Indonesia the status

and position as an independent state institution, which is free from interference, by

either the Government or any other external parties.

64

As an independent state institution, Bank Indonesia is fully autonomous in

formulating and implementing each of its task and authority as stipulated in the Act.

External parties are strictly prohibited from interfering with Bank Indonesia's

implementation of its tasks, and Bank Indonesia has the right to refuse or disregard

any attempt of interference in any form by any party.

In order to further assure its independence, the Act confers Bank Indonesia a

special position within the civil structure of the Republic of Indonesia. As an

independent state institution, the position of Bank Indonesia is not similar with other

state high offices. In addition, the position of Bank Indonesia is not the same as that

of other Government Departments, meaning Bank Indonesia exists outside of the

Government.

Such unique status and position are necessary so that Bank Indonesia can

implement its role and function as monetary authority more effectively and

efficiently.

1.4.2. Banks in Indonesia

Banks must run business based on prudential principles. The functions of

banks in Indonesia are as financial intermediary that take deposits from surplus units

and channel financing to deficit units. According to Indonesian banking law,

Indonesian banking institutions are typically classified into commercial and rural

banks. Commercial banks differ with rural banks in the sense that the latter do not

involve directly in payment system and have restricted operational area. In term of

65

operational definition, bank in Indonesia are classified into non-syariah and syariah-

based principles commercial banks (Worldbank, 2003).

Since the start of the Megawati Government in 2001, the IMF supported

program has been on track. This is a stark contrast with the last year of the Gus Dur

government, which went by without a regular review. As already noted,

macroeconomic policies did particularly well, and structural reforms also accelerated,

albeit some with considerable delay compared to the original timetable.

In April 2008, there were 128 commercial banks in Indonesia with 10,072

total number of bank offices, including branches (Bank Indonesia, 2008). The

commercial banks consisted of 5 state banks and 123 private national banks. Private

national banks consisted of 26 Regional Government banks (locally called as BPD,

Bank Pembangunan Daerah), 94 Private National banks and three Islamic

Commercial banks. Out of 94 Private National banks, 24 banks had Islamic Banking

Unit. Then, there were 28 foreign banks & joint banks. In addition there were 1,930

very small banks namely Rural Credit Bank (locally called as BPR, Bank Perkreditan

Rakyat) that provide S&L (Saving & Loan) to limited area where they operate,

mostly only have 1 or just a few branches. Rural Credit banks consisted of 1,812

Rural Credit banks and 118 Islamic Rural credit banks. See Figure 12: Banking

Institutions in Indonesia, April 2008 (Source: Bank Indonesia) for the summary of

banking institution in Indonesia as of April 2008. Major Private national bank such as

BCA had over 8 million customers, while the rural credit banks had only a few

hundreds to a few thousands customers. Also as in Q4 2006, Indonesia had about 210

finance companies (Indonesian Financial Services Association, 2008).

66

Figure 6: Banking Institutions in Indonesia, April 2008 (Source: Bank Indonesia)

1.4.3. Electronic Banking Delivery Channels

Bank’s branches had served as traditional bank’s delivery channel for years.

Banking electronic delivery channels (e-channels) have been very popular in the

society, especially ATM (Automated Teller Machine) since introduced publicly with

extensive customer education on June 28, 1997 (BCA, 2008) by one of the major

private bank: BCA (Bank Central Asia). It was communicated consistently to public

through its weekly television program called Gebyar BCA, socializing bank’s product

and services to the public that delivered through entertainment (song performance,

then followed by e.g. commercial on how to use ATM, introduction of new BCA

products and services, light interview with consumers, etc). Then there was Internet

banking (where consumer can access non-cash banking services securely at anytime,

anywhere as long as there is a connection to the Internet) has been around for years,

starting with a few banks in late 1990s. Other banking e-channel is Kiosk, which is an

67

ATM without dispensing capability (Kiosk has all the features that ATM has, except

dispensing cash).

Another banking e-channel, which is installed in merchant, is Electronic Draft

Capture (EDC); it enables consumers to do shopping and paying the merchandise

electronically using debit or credit card. In short, EDC can be defined as ‘the use of a

point-of-sale device to authorize and settle credit card transactions’. For debit card,

consumer’s account at the bank is usually debited at the point of paying the

transaction. EDC devices are usually installed at merchants site (the point of sale).

EDC device mostly installed in retail industry and supermarkets (55%), and installed

in services bureau (21.18%). The rest distributed at another merchants like

restaurants, non self-service shops, transportation companies, insurances, gas stations

and other companies (Hartoyo, Achsani, 2006).

EDC is typically provided by the Bank, whether directly (managed as bank’s

asset) or outsourced (an outsourcing company provides EDC, software application, as

well as operation and maintenance for the bank). Merchant is typically charged by the

bank (commission fee), known practically as MDR (Merchant Discount Rate). This

fee varies depending on negotiation between merchant and the bank, usually between

2-2.7% from nominal value of generated transaction (Hartoyo, Achsani, 2006). Part

of the fee typically goes for interchange fee (e.g. Visa / Master) about 1.6-1.8% (case

writer estimates based on experience), and then the rest of fee would be for the bank.

In the case of the bank outsourced the EDC operation to an outsourcing company (see

Exhibit 10: Technology Perspective – Acquirer, Switch and Issuer and Exhibit 11:

Technology Perspective - Processing an EDC-Based Transaction), then the bank

68

would need to share the rest of the fee with the outsourcing company (from 40%:60%

to 60%:40% depending on negotiation). This is also based on case writer estimates,

based on experience.

1.4.4. Bank Negara Indonesia (BNI)

BNI is one of Indonesian state bank established in 1946. BNI is the oldest

commercial bank in the history of Republic of Indonesia (Bank Negara Indonesia,

2003). In 2003, with over 900 branches offices in Indonesia, Bank BNI served

customers in Indonesia and overseas (It was a full licensed banking operation in five

overseas locations namely Singapore, Hongkong, Tokyo, London, and New York.

Total assets, equity to asset ratio were Rp. 131.49 trillion (US$ 15.54B) and 7.62%

(Bank Indonesia, 2003) respectively. Net operating income was Rp. 315.51 billion

(US$361.96M).

According to the company profile, the government banking recapitalization

program that was launched after the economic crisis in 1999 provided Bank BNI with

additional capital of Rp. 61.2 trillion (US$8.62B). In the same year, Bank BNI

received ISO 9002 certification, recognition of the quality standards of its credit

processes conducted through the Joint Processing Unit. See Exhibit 20: BNI Selected

Financial Data, 2002-2006.

Following the recapitalization program, Bank BNI conducted a thorough

operational restructuring. Bank BNI began the implementation of both prudent

banking and good corporate governance practices.

69

In 2002, the recognition of Bank BNI performance and service quality

standards was reflected through number of Awards obtained. Awards included ‘The

Top 200 Emerging Market Companies’ from Business Week magazine, ‘4th rank IB

200 Indonesian Stock 2002 (Performance in Indonesia Capital Market/JSX) from

Indonesian Bisnis magazine, ‘The Indonesian Most Admired Companies (IMAC)’

award from Tempo magazine and Frontier Marketing Research and Consultant.

According to the company profile, in 2004 Bank BNI continued to carry out

improvement in order to regain public trust and to improve its performance. The

change was highlighted with the formulation of a blue-print of Bank BNI’s

restructuring program (also known as Navigation Map), covering the phases of

stabilization, recovery and transformation into a dynamic and highly-regarded

organization. The Bank also introduced a new logo, while the nickname ‘Bank BNI’

was shortened into ‘BNI’.

In 2005, BNI managed to complete two restructuring phases and entered the

final transformation phase, which was to be conducted gradually during a period of

15 years. The period was set in compliance with the Central Bank’s concept for

future Indonesian Banking Architecture (Arsitektur Perbankan Indonesia – API).

BNI’s performance and services received more recognition at both national and

international levels, through a number of awards obtained throughout the year 2005.

1.4.5. The Cellular Telecommunication in Indonesia

Communication among society in Indonesia using mobile terminal (cellular

phone) has been ubiquitous in most of the cities for the last few years especially since

70

payment mechanism through pre-paid voucher was introduced in early 2000 in which

users do not have to pre-register to use the facility anymore, it created a very

significant increase in number of subscribers/customers. Prior to that, subscribers

were only allowed to use the facility only thru post-paid, meaning that they can use

the facility and would be invoiced later for the usage. The proportion of Post-Paid to

Pre-paid was about [10%:90%]. We can see the numbers of pre-paid subscribers was

far beyond the number of post-paid subscribers.

According to 2002 Indonesia information technology and communication

report, the total cellular subscriber in Indonesia in 2001 was estimated at 7.4 million

(Saifullah, Basir, Saraswati, Santoso, Ruswendi, Supriatna, Darwadi, 2002). Pre-paid

product has started to penetrate the Indonesian market since 1988; the basic reasoning

was that customer would be able to better control their usage compared to Post-paid

product.

In 2002, the market share of GSM cellular subscribers was over 11.38 million,

divided into 2 main products: Post-paid and Pre-paid. Telkomsel was the market

leader, covering 52.8% with the total number of subscribers about 6.01 million, 85%

of the total was Pre-paid or about 5.09 million subscribers. With the similar

composition applied to the whole market, it means 85% of GSM cellular’s

subscribers were 9.68 million.

Along with advancement of data service from cellular telecommunication

operators such as GPRS (a data service in GSM network), banks can utilize this new

network infrastructure for operating their e-banking channels, e.g. to migrate current

71

fixed-line dial-up or leased-line ATMs, EDCs and Kiosks network to a wireless-

based network.

In early year 2006, the total number of subscribers was already more than 40

million, which cover all type of networks, both in GSM & CDMA. Table 13: Number

of Cellular Telephone Subscribers in Indonesia in 2006 shows the data as of March

2006 (detik.com, 2008).

Table 2: Number of Cellular Telephone Subscribers in Indonesia in 2006

Mobile Operator Product # of Subscribers

(x000) MarketShare

A. GSM (Global System for Mobile Telecommunication)

Telkomsel KartuHalo, Simpati, Kartu As 24,940 49.76%

Indosat Matrix, Mentari, IM3 13,600 27.14%

Excelcomindo Explore, Bebas, Jempol 7,091 14.15%

GSM Total 45,631 91.05%

B. CDMA (Code Division Multiple Access)

Indosat StarOne 2 0.00%

Bakrie Telecom Esia 509 1.02%

Telkom Flexi 2,825 5.64%

Mobile-8 Fren 1,150 2.29%

CDMA Total 4,486.000 8.95%

ALL TOTAL 50,117 100%

During the Indo Wireless 2006 seminar held during March 7-9, 2006, which

was officially opened by Dr. Sofyan A. Jalil, the Indonesian former Ministry of

Communication & Information, it was mentioned by one of the speakers that the total

number of total subscribers would be reaching to 60+ million in 2007. In fact, it was

already 63.4 million in December 2006, and grew 51% to be 96.41 million

72

subscribers in December 2007 (Skm, 2008). One of the reasons was due to new 3G

licenses given by the government to three major GSM operators (Telkomsel –

products: post-paid kartuHALO, pre-paid simPATI, pre-paid Kartu As;

Excelcomindo – products: post-paid Xplor, pre-paid Bebas, pre-paid Jempol; and

Indosat – products: post-paid Matrix, pre-paid Mentari, pre-paid IM3) plus two

existing smaller operators. Another reason, the operators kept expanding their

network infrastructure to increase the network coverage throughout Indonesia’s

region and did extensive promotion to cover lower segment of the market, which had

lower in Average Revenue Per User/month (ARPU) (Wikipedia, 2008) but with

majority of share in term of number of users.

1.4.6. Telkom

According to Telkom 2007 Annual Report, Telkom provided information and

telecommunications (“InfoComm“) services. Telkom was the largest full-service and

network provider in Indonesia by providing fixed wireline and fixed wireless

telephone, mobile cellular, data and internet, network and interconnection services

directly or through associate companies.

As of December 31, 2007, Telkom served 63.0 million customers, consisting of 8.7

million fixed wireline telephone subscribers, 6.4 million fixed wireless telephone

subscribers and 47.9 million mobile telephone subscribers. Telkom’s customer base

grew 29.9% in 2007.

As of December 31, 2007, Telkom’s shares were owned by the Government of the

Republic of Indonesia (“Government”) (51.82%) and the general public (48.18%).

73

Telkom’s shares were listed on the Indonesia Stock Exchange (“IDX”), New York

Stock Exchange (“NYSE”), London Stock Exchange (“LSE”) and Tokyo Stock

Exchange (without listing). Telkom’s share prices at the IDX by the end of December

2007 increased 0.5% to Rp.10,150 from Rp.10,100 in the same period of 2006.

Telkom’s market capitalization by the end of 2007 reached Rp.204,624 billion or

10.3% of the market capitalization of IDX.

1.4.7. Telkomsel

Telkomsel provides GSM cellular services in Indonesia, through its own

nationwide dual band 900/1800 MHz GSM network, and internationally, through 268

international roaming partner in 155 countries (end of 2006). In September 2006,

Telkomsel became the first operator in Indonesia to launch 3G services.

The company provides its subscribers with the choice between two pre-paid

cards-simPATI and kartuAs, or the post-paid kartuHALO service, as well as a variety

of value-added services and programs.

Telkomsel has the largest network coverage of any of the cellular operators in

Indonesia, providing network coverage to over 90% of Indonesia's population and is

the only operator in Indonesia that covers all of the country's provinces and

counties, and all sub-counties ("kecamatan") in Sumatra, Java, and Bali/Nusra. The

company offers GSM Dual Band (900 & 1800), GPRS, Wi-Fi, EDGE, and

3G Technology.

74

Telkomsel has always been the market leader. In 2003, it had 9.5 million

subscribers, with ARPU Rp. 136,000 (US$16.07). Gross operation revenue was Rp.

11.15 trillion (US$ 1.31B), EBITDA Rp. 8.03 trillion (US$948.61M), Net Income

was Rp. 4.24 trillion (US$500.89M) with additional new subscribers 3.57 million

since previous year.

Table 3: Number of Cellular Telephone Subscribers in Indonesia as of March 2008

(Forsel Magazine, 2008)

# of subscribers(x000)

Market Share

Telkomsel 51,000 48.11%

Indosat 26,000 24.53%

Excelcomindo 15,000 14.15%

Hutchison 2,000 1.89%

GSM Total 94,000 88.68%

Bakri Telecom 3,300 3.11%

Telkom 6,500 6.13%

Mobile-8 1,500 1.42%

Indosat 700 0.66%

CDMA Total 12,000 11.32%

ALL TOTAL 106,000 100%

B. CDMA

A. GSM

Telkomsel had more than 44 million subscribers at the end of Q3 2007

(Telkomsel, 2007). Gross operation revenue was Rp. 31.68 trillion (US$3.36B),

EBITDA Rp. 18.52 trillion (US$1.97B), Net Income was Rp. 9.71 trillion

75

(US$1.03B) with additional new subscribers 8.9 million for the last 9 months. See

Exhibit 18: Telkomsel Selected Financial Data, 1997-2006 and Exhibit 19: Telkomsel

Selected Operation Data, 2001-2007 for updated financial report summary as well as

operation data.

In December 2007, according to Dr. Mohammad Nuh, Indonesian current

Ministry of Communication & Information, the number of total subscribers had

reached 96.41 million; market share leader was still Telkomsel (50+ million),

followed by Indosat (25+ million), Excelcomindo (15+ million), and then other

smaller operators which have only a few hundreds to a few million subscribers.

Recent data as published by Forsel magazine is shown in Table 14: Number of

Cellular Telephone Subscribers in Indonesia as of March 2008 (Forsel Magazine,

2008).

1.4.8. Payment System in Indonesia

There has been very rapid and sophisticated advancement in payment

instruments. In the early days of payment instruments, the barter system was a

common practice in ancient times. Gradually, people became accustomed to the use

of specific units representing a value of payment, more commonly known as money.

Now, money is one of the most widely used payment instruments in society.

In 2003 (Bank Indonesia, 2003), there was an increased activity in the use of

card-based payment instruments, namely, credit cards, debit cards, and ATM cards.

Such an increase was due to, among others, the widening network of ATM service,

76

resulted from the rise in the number of both machines and banks becoming the

member of switching ATM. Out of the three kinds of card-based payment instrument,

ATM was the one with the highest activity, representing as much as Rp. 342.9 trillion

(US$40.51B) (Bank Indonesia, 2003). In the meantime, transaction value of credit

cards and debit cards reached Rp. 25.0 trillion (US$2.95B) and Rp. 9.8 trillion

(US$1.16B) respectively. This is because ATM is card-based payment instrument

that has the most similar function as money, such that it allows ATM to have the

potential increased activities in comparison with the other card-based payment

instruments. See Exhibit 29: Indonesia Payment System, 2007.

Payment instruments later advanced from cash-based instruments to non-cash

payment instruments, such as the paper-based instruments of cheques and bilyet giro

(non-negotiable bank clearing payment orders). Following this, payments took a

further step forward to the use of paperless instruments, such as electronic funds

transfers and card-based instruments (ATM cards, credit cards, debit cards and pre-

paid cards). See Exhibit 26: Card in Circulation in Indonesia, 2006-2007, and Exhibit

27: Credit Card Transactions in Indonesia, 2006-2007 as well as Exhibit 28: Debit

Card Transactions in Indonesia, 2006-2007.

As stated earlier, ‘An efficient, fast, secure and reliable payment system is the

most important factor in creating a healthy banking system, which in turn will support

economic activities.’ For this reason, Bank Indonesia continually develops the

national payment system (SPN, Sistem Pembayaran Nasional) that can create a

comprehensive and integrated payment system, which is effective, efficient, safe, and

77

reliable and bears low risk. Thus, Bank Indonesia is expected to fulfill public needs of

transaction, either small or large transaction, using different medium of payments,

such as electronic-based medium, cards, papers, notes and others. Bank Indonesia

also provides DVP (Delivery versus Payment) facility, which is used in the inter-

currency settlement. Aside from fulfilling the national scale needs, the payment

system that Bank Indonesia performed also needs to be integrated with other

countries' system of payments, especially to lower the settlement risk across different

currencies.

In serving the public, Bank Indonesia continuously strives to increase an

efficient system of payment, to strengthen its monitoring system and to further create

a consumer protection for the system of payment in Indonesia, SPN. The SPN

development programme among others include the Jakarta Electronic Clearing

System, T+0 Clearing Scheduling, Bank Indonesia's Inter-bank Electronic

Transaction and Information Service System (BI-LINE), Real Time Gross Settlement

System (RTGS) and U.S. Dollar Fund Transfer System in Indonesia.

Among more than 222.19 million residents in Indonesia (Biro Pusat Statistik,

2007), the existing 96 million subscribers contributed to ARPU value of Rp. 80

thousands/month (US$ 8.7 at the exchange rate of Rp. 9,200 per one US$). Current

number of subscribers is significant for potential additional services instead of voice

communication, such as building business relationship with banks to enable data

services on electronic banking. For electronic banking, it is especially related to

payment services like mobile banking for balance inquiry, transfer (intra-bank, inter-

78

bank), top-up (refill), bill payment (credit card, school tuition fee, utilities: electricity,

water), etc as long as it is a non-cash transaction.

Nowadays, EDC does not only accept credit card, but also debit card whether

it is a magnetic-stripe based plastic card or the Europay MasterCard Visa (EMV)-

based chip plastic smart card. The transaction, whether it is initiated from a magnetic-

stripe card or a chip card, is called card-based initiated transaction (See Exhibit 25:

Infrastructure for Card Based Payment Instruments, 2006-2007). Recent

advancement in technology gives the option to either swipe a card to a Point-of-sale

device (contact) or just touches a card within certain proximity (contactless) such as

Visa PayWave and MasterCard PayPass.

1.4.9. Micropayment in Banking Industry

In May 17-18 2006, Bank Indonesia has conducted an international two days

seminar discussing on “Towards Less Cash Society”. Both domestic & international

speakers that were considered expert in their fields came to share their views. They

were coming from different perspectives and industries such as government, payment

regulators, academia, private companies, payment system providers, cellular

operators, and merchants (Bank Indonesia, 2006).

According to speakers, the success on less cash society would be very much

dependent on the availability of established laws and regulations in the country as

well as security of doing the electronic transactions. This would convince the society

in using variety of non-cash payment instruments conveniently. All parties including

79

government, the central bank, private institutions and banks were collectively

responsible to promote the activities of less cash society.

Recently, micropayment as one of the payment mechanism towards less cash

society has been started to be introduced to Indonesian market. Micropayments are

means for transferring very small amounts of money, in situations where collecting

such small amounts of money with the usual payment system impractical, or very

expensive, in terms of the amount of money being collected. "Micropayment"

originally meant 1/1000th of a US dollar, meaning a payment system that could

efficiently handle payments at least as small as a mill, but now is often defined to

mean payments too small to be affordably processed by credit card or other electronic

transaction processing mechanism. The use of micropayments may be called micro

commerce.

According to Bank Indonesia regulation, for micropayment related service,

the maximum nominal valued that can be stored in the ‘electronic wallet’ is Rp.

1,000,000 (US$106.17-- using Bank Indonesia’s mid rate December 2007).

In Kontan Article (Prabowo, Daniel, 2008), It is said that Bank Central Asia

(BCA) has already had micropayment product called Flazz BCA, officially launched

recently in June 2008. Their promotion says ‘This is your new form of money’.

Participating merchants include Indomaret (mini markets chain), Alfamart (mini

markets chain), Carrefour (super markets chain), Hypermart (super markets chain),

McDonald’s (fast food restaurants chain), KFC (restaurants chain), Pizza Hut

(restaurant chain), Baskin Robbins (ice creams chain), Disc Tarra (musical stores

chain), Gasoline Gas Stations, etc. Current target market focus is in Jakarta Greater

80

area. Distribution of Flazz BCA has already achieved 40,000 cards. One million cards

are targeted to be distributed until the end of 2008. New card is sold at Rp. 25,000

(US$2.65) with minimum top-up value of Rp 100,000 (US$10.62). Maximum top-up

value is set at Rp. 1,000,000 (US$106.17) following the rule set by Bank Indonesia.

Top-up can be done through thousands of ATM BCA, currently only available in

Jakarta greater area. There is a plan to provide top-up service through cellular phone,

as part of BCA mobile banking service.

Flazz BCA is a contactless payment card; there is no need to swipe the card

into the EDC machine as customers used to do with their magnetic-stripe-based debit

or credit card. Customer can just touch the Flazz BCA card to the contactless reader

attached to EDC when making a payment.

Table 4: The Best Bank Service Excellence 2007-2008 (Selected Data on Electronic

Delivery Banking Services)

 Banking Hall Equipment 

 Automated Teller 

Machine 

 Phone Banking 

SMS Banking  Mobile Banking 

 Internet Banking 

Mandiri 1                     1                    ‐               1                   10                 3                     3                   Danamon 2                     4                    5                   4                   9                   1                     ‐               Bank Niaga 3                     2                    1                   8                   6                   4                     4                   NISP 4                     5                    7                   2                   7                   ‐                 ‐               BII 5                     7                    3                   ‐               ‐               ‐                 ‐               BNI 6                     3                    ‐               9                   8                   ‐                 7                   BCA 7                     6                    ‐               10                 ‐               7                     2                   Bank Bukopin 8                     ‐                10                 ‐               2                   ‐                 5                   PermataBank 9                     8                    6                   5                   1                   5                     1                   Citibank 10                   10                  8                   7                   ‐               ‐                 9                   

 Service Excellence 2007‐2008 

Best Performance Rankelectronic delivery channels (2007)

81

On general banking update (see Table 15: The Best Bank Service Excellence

2007-2008 (Selected Data on Electronic Delivery Banking Services)), Infobank

Magazine, the leading bank monthly magazine in Indonesia published a special report

titled ‘The Best Bank Service Excellence 2007-2008’ in their April 2008 edition for

the recent published survey of the banking service excellence.

1.4.10. Micropayment in Cellular Telecommunication Industry

In Kontan article (Fauzie, 2008), Telkomsel had already supported the less

cash society service by introducing Telkomsel T-cash. T-cash service that was

launched in November 2007 can be considered as the pioneer in mobile-wallet

service in Indonesia. Telkomsel cellular customers has started to be able to use the

service in several merchants namely Indomaret (minimarket, about 1000 outlets), Fuji

Image Plaza (retail electronic store), ITB and ITS (campus in Bandung and Surabaya

cities respectively), Jonas Photo (photography-related service), and Pesan Delivery

(delivery service company). In July 2008, T-Cash has been used by more than 10,000

Telkomsel’s customers with average daily five transactions at Indomaret, about Rp.

20,000 (US$ 2.12 -- using Bank Indonesia’s mid rate December 2007) per

transaction. Since the launching of T-Cash, total amount transacted has achieved Rp.

100 million (US$10,616.84).

It is very easy to activate the T-cash service. The registration is done through

text message (SMS) by sending ‘REG TCash Name#Date-of-birth<ddmmyyy>#your-

mother maiden name’ to 2828. The cost for registering is Rp. 125/sms (US$12.48

cents). Then Telkomsel’s customer needs to top-up their T-cash wallet with Rp.

82

50,000 (US$5.31) as the minimum top-up value, to be done at merchant. Later it will

be enhanced so customer can top-up from their bank by account transfer, or mobile

banking service.

Telkomsel, working with BNI and Hongkong cellular operators (CSL and

Shinetown Mobile) has further enhanced the T-Cash service, to enable to do

remittance service (conveniences in doing fast and secure money transfer with

cheaper cost, across the countries) for Indonesian workers working overseas (those

workers are called as TKI, abbreviation of Tenaga Kerja Indonesia).

Telkom, Telkomsel’s parent company also has FlexiCash service. Registration

to use the service is initiated by calling Telkom’s Call Center, then registration

continued by sending a text message to 555. Following the successful registration, an

e-wallet account is created along with a new assigned Personal Identification Number

(PIN). Per SMS is charged between Rp. 500 (US$5.31 cents) – Rp. 2,000 (US$21.23

cents). Participating merchants include McDonald’s (fast food restaurant), game

online payment, Telkom hotspot (Telkom Wi-Fi service), Short-text advertising

payment in Jawa Pos (daily news paper), Harian Fajar (daily news paper), Kompas

Group (news paper, retail chain bookstore and office equipments, hotel), ticket

payment (airline, busway – a special bus with a dedicated lane in Jakarta), Blitz

(cinema).

Indosat, one of Telkomsel’s competitors has already launched digital cash

service called Dompetku (Indonesian word for ‘my wallet’). It is now in pilot stage

(early stage of public implementation). Merchants that have already participated are

Alfamart (mini market), Kopindosat (Indosat cooperative), Bank Danamon (bank),

83

and Asuransi Bintang (Insurance). Indosat customer can activate Dompetku service

by visiting and registering at Indosat outlets (called Galeri Indosat). Customer will

then receive notification and PIN through SMS. To make a purchase, customer shall

type BELI (Indonesian word for ‘buy’) on their cellular phone then send the text

message to 789. No fee applied at this moment. Bank Mandiri is currently the Partner

bank of Indosat, to provide top-up and withdrawal service. Bank Mandiri and Indosat

are also in the process of developing another micropayment-based service, based on

Near Field Communication (NFC) technology. This will enable processing a

transaction through a smart card integrated within a cellular phone.

Other cellular operators, Excelcomindo and the recent established Axis are

starting to prepare to launch their version of mobile wallet in the near future.

1.4.11. Micropayment in Other Industries

In Transportation Industry, Bank Mega cooperated with one of Toll-road

operators, PT. Citra Margatama Surabaya has recently launched CMS Tol Card

(Indonesian: Kartu Tol CMS). This card is currently valid in one city only, Surabaya.

Surabaya toll road is located near Juanda, Surabaya International Airport.

At this stage, it is still considered socialization stage with 1,000 cards has

been distributed. Until the end of August 2008, 20% discount is given to Toll-road

users who use this card to pay when they pass through the Surabaya toll-road.

Administration fee, which is set at Rp. 10,000 (US$ 1.07 -- using Bank Indonesia’s

mid rate 2007), is waived during the socialization period. Bank Mega provides the

top-up service starting from Rp. 20,000 (US$ 2.12) to Rp. 1,000,000 (US$106.17).

84

There is a plan to use the card for other toll-road later this year, in Hasanuddin

Airport, Makassar, located at Sulawesi Island in Indonesia.

Another private label cards for micropayment is Blitz Card for Blitz Cinemas

chain issued since March 2008 along with the opening of new shopping center –

Grand Indonesia in central of Jakarta. New card is sold at Rp. 50,000 (US$5.31), and

then customer gets Rp. 40,000 balance (US$4.25). Usage includes paying for your

cinema ticket, discount for merchandize and snacks. Top-up can be done through

ATMs: Bank Niaga, HSBC and BCA. Distribution until June 2008 has been 35,000

cards.

Other includes Indomaret Card for Indomaret mini markets chain that is

planned to be launched in September 2008. Micropayment cards are also issued by

several International superstores operated in Indonesia like Sogo, and Seibu.