Muhammad bin Ibrahim: Fostering safe, efficient and reliable payment
systems
Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the SWIFT Business Forum Malaysia, Kuala Lumpur,
1 March 2016.
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As we transition into a high income and high value added economy, a resilient and efficient
financial market infrastructure is an important enabler for economic growth and financial
stability. Payment and Settlement Systems play a critical role in the smooth functioning of the
economy. A fact sometimes underestimated. In a larger perspective, it can also be leveraged
upon as a strategic tool to facilitate regional market integration, strengthen the country's
competitiveness, and enhance the country's position as an international Islamic financial
centre. Today's Business Forum organized by SWIFT offers a valuable platform for the
financial community to exchange ideas and identify opportunities for collaboration to enhance
the financial market infrastructure as an indispensable part of a vibrant financial ecosystem in
Malaysia.
In my remarks today, I would like to discuss the importance of open and competitive
Payment and Settlement Systems as a backbone for economic growth. I will also highlight
the opportunities arising from greater standardization and interoperability and how banks can
lead the way in facilitating greater straight through processing (STP) for greater efficiency
and competitiveness. Lastly, I will outline the importance of keeping pace with innovation,
with a focus on real-time payments.
Importance of open and competitive payment and settlement systems
To sustain improvements in the efficiency of payment services and lower barriers of entry,
competition is vital in the payment landscape. Strategies adopted by Bank Negara Malaysia
for payment system development in Malaysia are therefore aimed to foster effective
competition among the market players as a key driver to lower costs, enhance quality and
innovation, and provide greater choice to the public. An example of this is reflected in Bank
Negara Malaysia's recent reform measures for the payment card market. These measures
were introduced in response to inordinate market power to hike prices and the lack of
transparency and information in how prices of products and services were being set.
The payment card market in Malaysia is sizeable with 453.9 million transactions valued at
RM141.5 billion in 2015. The payment card market is dominated by two major international
payment card networks which cumulatively controlled about 90% of market share in
Malaysia. Prior to the implementation of the reform measures in mid-2015, the growth of
payment card terminals from 2013 to 2014 had remained stagnant at 8 terminals per
thousand inhabitants. Based on a report published by the World Bank and the IMF in 2013,
the higher Merchant Discount Rate or MDR paid by merchants, averaging between 1.5% to
2.5% when accepting payment card transactions, had the impact of pricing out smaller
merchants.
Lack of effective competition in the payment card industry had led to higher costs for
payment card transactions, which would in turn raise costs for businesses and consumers.
Over a period of 14 months from May 2013 to June 2014, interchange fee, that is the
wholesale fee paid between banks in a payment card transaction, were hiked several times.
As interchange fee is priced into the MDR, the hikes in interchange fee contributed towards
an increase in the MDR for merchants. A lack of price transparency and the overall
competition further weakened market pressure to lower interchange fee and MDR.
The highly concentrated market also discouraged merchants from switching to another
payment card network given concerns over losing significant competitive advantage if they
did. Clearly, left unchecked, such indiscriminate interchange fee hikes risked bringing about
a broad-based increase in MDR which would in turn be passed on to consumers through
higher retail prices of goods and services.
To curb indiscriminate increases in payment card acceptance cost and foster a competitive
payment card market, Bank Negara Malaysia implemented the Payment Card Reform
Framework in July 2015. Under the Framework, the interchange fees are subject to
objectively-set ceilings, while a market incentive structure was instituted to strengthen the
incentives for investments in payment card infrastructure. In addition, measures were also
introduced to enhance transparency and competition by prohibiting restrictive trade practices.
The results of such measures are very encouraging. These reforms have had an immediate
and positive impact on the payment card landscape. The cost of payment card acceptance
had started to moderate whilst the annual growth of payment card terminals had tripled from
5.4% in 2014 to 18.1% in 2015.
In addition to promoting effective competition within the payment industry, it is also important
to preserve the neutrality of Payment and Settlement Systems. This includes neutrality
among instruments and geo-political interests. This is especially true for global and critical
market infrastructure providers such as SWIFT where the offer of services to all parts of the
world should be guaranteed and reliable. The emergence of other service providers to fill any
void should it happen, would be most unfortunate as it could diminish efficiencies gained
from access to global market infrastructures. As a participant-owned institution, adequate
safeguards to maintain SWIFT's neutrality and finality are essential to ensure it continues to
serve its mandate as a trusted provider of secure financial messaging services to facilitate
global connectivity.
Opportunities from greater standardization and interoperability
Let me now move on to the need for standardization and interoperability in Payment and
Settlement Systems. Proprietary and legacy systems are costly and a source of much
inefficiency as time and resources are needed to maintain different systems and facilitate
interconnectivity. Hence, there is much value for the financial community to collaborate
through greater standardization to facilitate interoperability and innovation to achieve greater
economies of scale and network multiplier effects. For instance, in the area of retail
payments, the collective industry efforts to adopt chip technology based on international
standards in 2003 had succeeded in eradicating counterfeit fraud. The investment cost of
about RM200 million was recovered through potential fraud cost avoidance in just less than
two years. The migration to adopt the international chip standard on an industry scale has
boosted public confidence collectively in the use of payment cards. Foreign cardholders
including tourists had increased spending by about 77% in the past 10 years, from
RM5.6 billion in 2005 to RM9.9 billion in 2015.
In the area of large value inter-bank payments, continuous efforts are also being made to
modernize and enhance the RENTAS or the Real-Time Gross Settlement System to
strengthen its resilience and elevate its efficiency and interoperability. In 2006, the
RENTASUSD CHATS link, an inter-bank Payment versus Payment (PvP) settlement link, was
implemented to eliminate foreign exchange settlement risk. This was followed in 2007 with
the implementation of a Delivery versus Payment (DvP) settlement service for USD
securities issued, deposited and traded in Malaysia to eliminate settlement risk arising from
trading of such securities. In 2012, Malaysia was among the first countries in the world to
have its large value inter-bank payment system assessed by the IMF and the World Bank
under the Financial Sector Assessment Program, to be in compliance with all applicable
Principles of Financial Market Infrastructures (PFMI).
For 2015, the RENTAS daily average transactions totalled about 17,900 with a value of
RM217.8 billion. This amounted to 4.4 million transactions valued at RM53.6 trillion
throughout 2015. As part of the ongoing transformation of RENTAS, there is currently an
exercise to transform RENTAS into a multi-currency system that adopts the SWIFT
messaging standard. The adoption of SWIFT as an alternative access channel, which caters
for multiple messaging standards including the ISO 20022, will facilitate the integration of
RENTAS with other regional large value payment systems to facilitate seamless, safe and
efficient cross-border financial transactions. The interconnectivity with other economies
within the region will further enhance the integration of our trade and financial transactions.
Development and modernization of the payment system in any country will not be possible
without the banking system. Therefore, banks should lead the way in facilitating straight
through processing (STP) to enhance operational efficiency by promoting standardisation
and interoperability. This can be achieved through the adoption of common standards such
as the ISO 20022, for corporate and cross-border payments. In this regard, banks should
leverage on the momentum created by the ongoing transformation of RENTAS to reach out
to their customers by offering holistic, end-to-end, STP solutions. This would contribute
towards enhanced safety and efficiency and facilitate economic growth through greater
connection with global supply chains, as well as, enhance greater integration with regional
markets.
Importance of keeping pace with innovation
Let me now turn to the importance of keeping pace with innovation. Over the past five years,
significant efforts have been undertaken to modernise Malaysia's retail payment
infrastructure and migrate away from inefficient paper based payment instruments such as
cash and cheques. Good progress has since been made, especially in the displacement of
cheques. The annual decline rate had accelerated from an average of -1.6% in 2011 to 2013
to -10.1% in 2014 and -16.5% in 2015.
Concurrently, there is also an increase in the uptake of electronic fund transfer services. The
annual growth rate for the Interbank GIRO (IBG) had increased from an average of 18.8%
prior to 2013 to 34.1% in 2014 and 2015. The Instant Interbank Funds Transfer (IBFT)
service had also recorded encouraging growth where its annual growth rate of over 60%
since 2011 had further increased from 67.8% in 2014 to 76.7% in 2015, signifying greater
confidence in the use of e-payments.
However, we must not be complacent. As we move forward, there are two technology trends
that hold immense promise to revolutionize the payments market. The first is the proliferation
of mobile technology and ubiquitous communications. Increasingly, mobile devices are the
preferred channel for consumers to make payments conveniently from anywhere and at any
time. The second is the ability to process payments and move funds instantaneously around
the clock.
Towards this end, Bank Negara Malaysia's wholly-owned subsidiary MyClear has initiated a
multi-year program to modernise Malaysia's payment infrastructure. The key thrust of this
plan is to develop a new real-time Retail Payments Platform that will serve as both a catalyst
and enabler for innovative payments in Malaysia. This should meet the needs of consumers
and businesses who increasingly expect payments on-demand where funds are available to
the recipient immediately. In this regard, I would like to call upon the financial industry to
jointly work with MyClear in the development of such new real-time Retail Payments
Platform.
Conclusion
Payment and Settlement Systems are the foundation that underpin the financial market
infrastructure and serve as a catalyst for economic growth. Hence, efforts to promote the
resilience, interoperability and competition of such systems are of utmost importance. This
has been and will continue to form the key thrust in Bank Negara Malaysia's policy work in
delivering our mandate of fostering safe, efficient and reliable payment systems. There are
immense opportunities and new sources of growth including expanding financial accessibility
to the underserved that is made possible from greater standardization and interoperability of
the payment systems, as well as, innovation. Hence, in today's rapidly evolving and highly
competitive environment, the financial community should capitalise on such enabling
environment, and collaborate through standardisation and interoperability, to lower costs,
foster innovation and deliver better value proposition and choices to their customers.