Still large room for further expansion

Rikza Abdullah, Contributor, Jakarta

Strong promotion by commercial banks has boosted the growth of the credit card industry, which still offers large room for further expansion in Indonesia.

"The potential of the Indonesian market is immense and, with our share of personal consumption expenditure standing at only 1.1 percent compared with a global average of 7 percent, we have really only begun to scratch the surface," Visa International's country manager for Indonesia, Ellyana C. Fuad, said here Thursday.

Sylvia Marie Challita, country manager for American Express Bank Ltd., told The Jakarta Post here on Friday the prospects for the credit card business in Indonesia were very bright as at present just one percent of the population held credit cards.

"Because the majority of consumer spending continues to be cash-based, the card market in Indonesia offers immense potential," she said.

Ellyana said the credit card business in Indonesia had grown steadily in the past years. As of March, the number of credit cards circulating in the country was estimated to exceed 3.44 million, indicating a 16.7 percent increase over the last 12 months.

However, according to Sylvia, the actual number of cardholders was lower, given that some cardholders had more than one card.

According to a study, about 10 million out of Indonesia's population of 210 million are potential credit card holders. The industry, therefore, has the potential to grow by over 30 percent per annum.

Sylvia said that since 2000, the development of the credit card industry had entered a phase of growth after a slowdown due to the economic crisis in 1997. Foreign banks had made heavy investments for their card franchises, while card issuers spent a lot for promotions to increase card usage.

Visa credit cards, which were first introduced in Indonesia by Bank Duta in 1983, currently dominate the payment industry in the country. Visa credit cards in the country are now issued by 17 banks and financial institutions, and are accepted by 56,000 merchants.

"Visa's share in the credit card market is about 65 percent," Ellyana said, adding that the number of Visa credit cards circulating in the country reached almost 2.34 million, with expenditures reaching $485 per card per annum. The figure for the credit cards reflected a 27.8 percent increase over the previous 12 months.

The other 35 percent share of the credit card market is divided among MasterCard, American Express, Diners Club and bank cards issued by domestic banks.

Rupert G. Keeley, president and chief executive officer of Visa International Asia Pacific, said the potential growth of the credit card industry in Indonesia was enormous, given the fact that Visa'a personal consumption expenditure penetration of 1.1 percent was still too low compared to 3.1 percent in Latin America, 7.3 percent in the European Union, 8.9 percent in the United States and 13.6 percent in Canada.

Sylvia said the credit card business was attractive due to its inherent profitability and the tremendous potential for growth.

"It builds a card member database, giving the bank ability to offer other retail banking products," she said. "It also provides card issuers the database to understand the consumer's needs and develop card products to meet specific needs."

Credit cards are very profitable to their issuers. The biggest profit maker is the high rate of interest -- interest on credit cards alone generally accounts for three quarters of the profits earned by banks that issue credit cards. Also, many companies charge an annual fee for issuing a credit card, and most companies charge late fees, automated teller machine (ATM) fees, over-the-limit fees and other miscellaneous charges. Credit card companies also profit by charging merchants and service providers a fee each time a customer uses the company's credit card in the merchant's establishment.

Furthermore, the level of credit card-based loans that go sour is relatively low. "We are careful in issuing credit cards, therefore, minimizing the credit risk," said Sylvia.

However, Keeley expressed concern that credit card fraud had grown rapidly in Indonesia, at a rate of 60 percent per annum, even though the amount of money involved in the fraud cases was still very small, less than 1 percent of the sales volume.

To strengthen the credit card industry, Ellyana said, local banks needed to make concerted efforts to expand credit card acceptance by increasing the number of retail outlets and opening up new sectors that could accept cards.

For Visa International, it plans to expand its merchant acceptance into everyday expenditure segments, including supermarkets, airlines and insurance, she said.