Adnan Zaylani Mohamad Zahid: Re-inventing payments - the future
of financial services
Keynote address by Mr Adnan Zaylani Mohamad Zahid, Assistant Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the Malaysian E-Payments Excellence Awards (MEEA)
2019, Kuala Lumpur, 31 July 2019.
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It is my pleasure to be speaking here today, at such an exciting time for our payments landscape.
Malaysia's progress in migrating to e-payments has been promising. In less than a decade since
2011, we have reduced cheque usage by half to 101 million in 2018. E-payment acceptance
points such as point-of-sale (POS) terminals have more than doubled to 16 terminals per
thousand inhabitants in 2018. More merchants are also accepting QR payments with over
400,000 registrations recorded to-date. Meanwhile, e-payment transactions have almost tripled to
125 transactions per capita in 2018.
At the same time, new business models are emerging. We estimate that 40% of fintechs in
Malaysia are in payments or payment-related services - making it the largest segment. The
ewallet space has been particularly vibrant, contributing to rapid growth in mobile payments. From
2017 to 2018, mobile payment transaction volume had increased twenty-fold from just below two
million transactions to over 34 million transactions within a year.
Keeping these developments in mind, allow me to share three broad priorities in taking
Malaysia's payments journey to greater heights.
Greater scope to enhance inclusivity and quality of e-payment adoption
The first priority is to improve the quality of our e-payment migration to be more inclusive,
broadbased and sustainable. The good progress so far means that Malaysia has a solid foundation for
more widespread adoption of e-payments. E-payments are increasingly prevalent, with adoption
picking up across a wide range of use cases. A wider network of merchants is also increasingly
open to accepting e-payments as a possible driver of efficiency gains and revenue growth.
Importantly, these encouraging developments have been contributed, in part, by the market
reforms and incentive structures implemented since 2013. These measures have corrected
market distortions and facilitated the pooling of industry resources to continuously enhance the
payment infrastructure and services.
Nonetheless, there are opportunities for more inclusive and broad-based adoption. Studies have
shown that cash usage is still prevalent with more than 80% of Malaysians reportedly using cash
in a majority of their everyday spend such as F&B, groceries and fuel. E-payment adoption is
also uneven across geolocation and is largely concentrated in the urban centres. This calls for
greater efforts in two key areas to address such market gaps.
The first key area is to significantly expand merchant acceptance, with a focus on lower-tier
merchants. E-payment acceptance points are not yet ubiquitous, especially among
microenterprises that are frequented by many Malaysians, such as wet markets, night markets and
hawker stalls.
In this regard, solutions that are 'infrastructure-light' could go a long way in boosting e-payment
acceptance among micro-enterprises who are cost-sensitive. New, cost-effective solutions such
as QR payments and "Tap-on-Phone", which leverage on the already high penetration of
smartphones in Malaysia, may be preferred over traditional POS terminals. Indeed, we are
encouraged to see that industry players are starting to roll out interoperable solutions. Notably,
these include several pilot initiatives ahead of the nationwide roll-out of PayNet's Interoperable
QR payment solution. Such solution has the potential to become a game-changer by facilitating
merchants to accept payments from customers of different participating banks and non-banks by
using only a unified QR code.
Beyond that, we should accelerate the digitisation of the value chain for both users and
merchants. This could include digitising salary payments, and payments to suppliers,
wholesalers and distributors. These developments would make it more compelling for
consumers and businesses to maintain funds digitally, thereby providing a natural incentive to
keep using and accepting e-payments.
The second key area is on strengthening public confidence. Some segments of the population
may still lack awareness and confidence in e-payments, despite fraud levels being relatively low
in Malaysia. Some consumers are also concerned about overspending, as they are used to
relying on cash withdrawals as a way to budget and control expenses. These are cognitive
barriers that can be overcome with concerted efforts.
Banks and non-banks alike should intensify efforts on awareness-building and education
campaigns. These could focus on use cases that are central to day-to-day life, such as paying
for fuel, groceries and F&B. Done well, this can have a long-lasting effect on behavioural change
towards greater adoption of e-payments.
To strengthen this proposition to customers, financial institutions should continuously enhance
their security features, and put in place while actively promoting their product arrangements that
will give customers the peace of mind. This may include strengthening the effectiveness of fraud
detection and prevention engine using the latest technology such as artificial intelligence and
machine learning. Additionally, offering liability protection programs and a commitment to resolve
disputes within a stipulated timeframe would go a long way in providing assurance to customers.
Supporting this, financial institutions' mobile applications and Internet banking channels must
provide seamless ways for users to track their expenses. This would include budgeting features,
instant notifications and possibly smart money management tools. Some of these
enhancements may be small tweaks with a potentially big impact to get users to be more
comfortable with e-payments.
Going beyond payments to enhance value proposition to end-users
This brings me to second key priority - the need to go beyond payments in response to certain
"new normals" in the payments landscape. Today, customers increasingly expect payments to
be fast, frictionless and free. Competition has also heightened. Non-traditional players such as
fintechs and bigtechs are increasingly relying on payments as entry point into financial services.
Against this backdrop, payment service providers must rethink their strategies to remain relevant
and be sustainable in the long run. Today, going cashless is more than just e-payments. Instead,
it should be about putting customers at the core of innovation to address real pain points and
drive greater value creation. This means delivering integrated solutions to enhance the value
proposition to end-users.
In the e-wallet space, we have noticed the practice by some players in offering generous rewards
including cashback to stimulate usage among users. While such practice may be effective in
driving e-wallet adoption at the initial stage, it is questionable whether such practice is
sustainable in the longer run. For instance, we have observed that the transaction volume of
some players tend to fall significantly once the promotion period is over.
To achieve a more sustainable migration, the industry should strengthen the value proposition of
e-payments. Greater focus should be placed on creating innovative and value-added solutions
that go beyond payments. This may serve as a natural incentive for customers to adopt digital
financial services.
To enhance the value proposition to end-users, Bank Negara Malaysia has also focused its
efforts on evolving our regulations to facilitate new business models. The ongoing work on the
digital banking framework is one example, amid growing interest among traditional and
nontraditional players to enter this segment.
Of importance, the success of these new business models will depend on the industry players'
ability to harness customer data to develop value-added services while ensuring compliance with
data protection laws and regulations. This is key to enable greater customisation and offering of
new services. For example, industry players that understand their clients' cash flow, turnover and
supply chain can potentially identify new growth areas. These may include the provision of
shortterm credit, insurance and wealth management services to customers and businesses.
In harnessing customer data, there are clear synergies between existing and new players.
Incumbents have vast amounts of data, but legacy systems and culture can pose challenges to
turn such data into insights. On the contrary, new players could face the opposite challenge -
with more agile technological capabilities built from the ground-up, but having little or no data to
work with.
It is thus no surprise that more strategic partnerships between traditional and new players are
emerging, in Malaysia and abroad. Such initiatives could foster vibrant ecosystems that could
penetrate market segments that were previously underserved or unserved.
Similar opportunities are also possible on the cross-border payments sector amid increasing
migration flows, global e-commerce and internationalisation of value chains. Concerted industry
efforts are imperative to bring the cross-border payment experience up to par with that for
domestic payments. Likewise, a customer-centric approach that goes beyond just payments can
potentially be transformational.
In an increasingly globalised economy, Malaysian SMEs stand to gain significantly from
crossborder payment innovation. Better integration of payment services with regional or global
ecommerce networks could expand market access. Value-added features could also be
embedded to eliminate existing frictions for cross-border trade. This may include digitising trade
finance documentation and streamlining back-end processes of financial institutions and
corporates to drive greater efficiency and expedite compliance process.
Future-proofing the payments landscape will be key moving forward
Finally, let me turn to the third key priority for payment infrastructures to be future-proofed.
Payment systems of the future must be inclusive and able to accommodate the speed of change
for implementing new solutions at scale.
In this regard, we have achieved a key milestone with the launch of the Real-time Retail
Payments Platform (RPP) last year. It is designed to be more scalable, flexible and open to
support new use cases such as Proxy Payments, Request-to-Pay, e-Mandates and services to
support more seamless customer onboarding processes. The RPP represents the first step of a
multi-year journey to future-proof our retail payment infrastructure. Additionally, the Bank is
currently embarking on a study to identify possible opportunities to renew or enhance Malaysia's
large value payment system, RENTAS, to support the emerging needs of the economy.
Across the board, four key elements will be important. The first is interoperability which can
enhance competition and drive greater efficiency through wider network reach and economies of
scale. Last year, we established the Interoperable Credit Transfer Framework that facilitates fair
and open access for banks and non-banks to shared payment infrastructures such as the RPP.
The second element is standardisation, which can improve efficiency and foster the development
of new services. For instance, adoption of ISO20022 may provide opportunities for innovations,
enhanced fraud and financial crime detection, and improved straight-through processing. To
harness the full benefits of ISO20022, Bank Negara Malaysia will undertake an industry-wide
consultation to develop a holistic migration strategy covering both domestic and cross-border
payments.
The third element is flexibility and openness. Open APIs can pave the way for businesses to
scale and offer value-added products and services. They enable rich and diverse ecosystems
that deliver more personalised and wider range of services to customers. While this may be a
shift from banks' traditional approach of managing customer engagement through their own
channels, it could be crucial to maintain long-term business agility.
In this area, Bank Negara Malaysia has supported the formation of the industry's Open API
Implementation Group to identify and develop standardized open APIs for high-impact use cases.
In this regard, the Implementation Group has developed standardized specifications for open
APIs on product information of financial institutions. Moving forward, Bank Negara Malaysia will
undertake further work on secure methods for allowing trusted third parties to access a broader
range of banking information through open APIs, with the customer's consent.
Last but not least, is payment ecosystem resilience. While interoperable, standardised and open
systems may facilitate enhanced efficiency and competition, it may also introduce new risks in
such systems due to the increased interlinkages. All future-proofing efforts must therefore be
anchored on enhancing operational resilience, including cyber resilience, in a rapidly evolving risk
and threat landscape. To this end, the Bank had recently issued its policy on Risk Management
in Technology (RMIT). This sets out baseline standards for financial institutions, and addresses
key fundamentals of technology resilience including governance, cybersecurity risk management
as well as capacity-building.
Conclusion
These are exciting times, where rapid technological innovations, evolving business models and
shifting customer preferences, present new opportunities and challenges to the status quo. Such
opportunities can bring about a positive and transformational impact to our society and economy.
We should be bold to capitalize on these emerging trends, while remaining steadfast in
managing the associated risks. Times are changing, and change is good. It takes us out of our
comfort zones, and helps us reach new heights. Before I close, I would like to congratulate all the
winners of today's ceremony and I wish you all a pleasant evening ahead.