Payment System Card-Based Payment Instrument

Payment System Card-Based Payment Instrument

1.
Q: Can you explain the underlying reasoning in Bank Indonesia’s decision to raise the credit card repayment minimum to 10% of the total balance outstanding? Speaking frankly, the new rule puts an extra financial burden on credit cardholders.

A: At BI, we considered the issue at great length before issuing the ruling. One fundamental reason for raising the minimum payment was precisely to protect consumers from falling into a debt trap. Of course, you will respond with another question: why would that be? Doesn’t it create an added burden? Credit cardholders need to understand properly that the prevailing interest rates on card purchases for goods are now in the range of 2.25%-3.5% per month. For cash advances, even higher rates are charged at 2.7%-6% per month. If credit card interest is calculated for a full year, the rates vary from 28.8%-42% for goods purchases. For cash advances, the annual rates are as high as 33%-72%. Added to this, cash advances are charged high administration fees. Now, try to compare this with rates on time deposit rates, currently in the range of 7%-9%. The size of the spread is painfully obvious.Imagine if you paid a minimum of only 3% of the outstanding balance every month. As the months go by, the interest on the card balance would quickly soar. Why is this? The remaining balance would be subject to very high interest charges, and the concern is that you would no longer be able to pay your credit card bills. This is the background to why BI adopted a policy of raising the minimum card repayment to 10%.

2.
Q: I see. Could you explain which parties are actually involved in credit card transactions?

A: There are several parties that become involved in a transaction made by credit card. Obviously, there is you, the credit cardholder. When the credit card is used, there is a merchant, such as a supermarket, hospital, hotel, restaurant, bookshop or other seller, that will process your card transaction. Then there is the credit card issuer, for example, a bank or non-bank financial institution. Indonesia now has 20 credit card issuers, of which 18 are banks and 2 are non-bank financial institutions. Now in addition to the three parties normally known to the public, there is another party involved in the credit card transaction. This is the Financial Acquirer (FA). The FA is the party that advances payment on the transaction conducted by the credit cardholder. Together with the merchant, the FA is responsible for checking the validity of sales drafts. The FA also provides authorisation terminals, receives and processes each transaction and provides training and supervision for merchants. In addition, there is yet another party known as the Technical Acquirer, who provides the equipment for processing transactions (authorisation terminals). Finally, there is the principal, well known to the public. The principal is a bank or non-bank financial institution with sole rights to a credit card brand name, such as Visa, MasterCard, JCB, Diners, American Express, BCA Card and others.

3.
Q: Could you explain again the difference between a principal and credit card issuer?

A: The principal is a bank or non-bank financial institution with exclusive rights to a brand for card-based payment activities. Principals are divided into two categories. General principals hold brand rights that may be used by the Principal itself or by other card issuers. Examples of this are Visa and MasterCard. Use of the brand is not only available to the Visa and MasterCard principals, but also other issuers of Visa and MasterCard products, such as banks. In addition to General Principals, there are Special Principals, whose brand rights may only be used by the Principals themselves and cannot be shared with other issuers. In this case, the Principal acts both as Issuer and/or Acquirer.

4.
Q: In view of the many different parties involved in processing what appears to be a simple credit card transaction, there must be many different types of equipment involved. Could you explain what equipment is used?

A: When you use your credit card, a sales draft will be issued stating the card number, name of cardholder, card validity, name of merchant, amount of transaction and authorisation code and bearing your signature. It is important to check the sales draft carefully for the number of items purchased and purchase amount. The sales draft should not be immediately discarded, but retained as evidence in case of any difference between the credit card billing statement and the amount you spent. One device commonly used is electronic data capture (EDC). When a merchant sweeps a card through this machine, it will read the card information and then receive an authorisation code before issuing the sales draft. To print the obverse side of the credit card on the sales draft, an imprinter is also needed, but with advancements in EDC devices, imprinters are now rarely used. Sweeping the card will generate a point-of-sales transaction in which the machine receives an authorisation code that appears on a computer screen.