Zamani Abdul Ghani: Developments in electronic money management
Welcome address by Mr Zamani Abdul Ghani, Deputy Governor of the Central Bank of
Malaysia, at the Official Monetary and Financial Institutions Forum (OMFIF) and Lafferty
Group - World Roundtable on Electronic Money Management "From Practice to Policy",
Kuala Lumpur, 15 May 2010.
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On behalf of Bank Negara Malaysia, I am most pleased to welcome all of you to this
gathering on "World Roundtable on Electronic Money Management" - "From Practice to
Policy". This event is jointly organised by Bank Negara Malaysia, the OMFIF and the Lafferty
Group. As you may be aware, Bank Negara will also be hosting the first ever Asia OMFIF
Meeting, which will take place at Bank Negara's Lanai Kijang over the next two days. This
World Roundtable on Electronic Money Management, thus precedes the Asia OMFIF
Meeting. It provides an excellent opportunity for the industry to have an interactive dialogue
with regulators and practitioners from around the world to exchange ideas, experience and
perspectives on developments in the area of electronic money and electronic payments.
Economic efficiency and cost savings
Rapid technological advancements and innovation in the last two decades had revolutionised
the payment landscape. In the retail payments area, electronic money in the form of stored
value cards and other access devices has grown rapidly. Businesses around the world are
also intensifying their efforts to cut operating costs and increase efficiency to improve their
long-term competitiveness and sustainability. These developments, among others, have
intensified the demand for electronic payment. As electronic payment facilitates the
automation of payables and receivables, costs associated with paper and labour intensive
processes, including potential errors in processing, would be sharply reduced or eliminated.
Apart from lowering costs, electronic payment allows for better resource allocation, thus
raising productivity and profitability of businesses. Electronic payment also improves cash
flow forecasting, thereby resulting in more efficient liquidity management. Furthermore,
customer service quality would also be enhanced with the provision of faster and more
convenient means of payment. Businesses that respond to these opportunities and are
effective in delivering their services will generate greater value for their customers and
achieve competitiveness differentiation.
The faster electronic payment displaces the use of cash, the less would be the need for the
costly printing and supply of currency notes and coins. The same is also true for physical
cheques. The strategic management of currency is an increasingly challenging task faced by
most central banks. Apart from ensuring cost effective and high quality currency notes and
coins, it also requires accurate forecasts of the demand for currency notes and coins, which
varies seasonally and with economic activity. The higher acceptance of electronic payment
not only improves the economic efficiency of a country, but also allows substantial cost
savings to be gained. Studies have shown that widespread utilisation of electronic payment
systems has the potential of contributing to at least 1% of a country's GDP annually. Indeed,
there are important potential benefits and scale effects that can be reaped from the
realisation of the electronic payment agenda for individuals and businesses, as well as for
the economy as a whole. Thus, it is for all these reasons that Bank Negara Malaysia has
made the migration to electronic payments as one of its strategic results.
While the acceptance of electronic payment is on the rise in Malaysia, with electronic
payment per capita doubling from 23 in 2005 to 41 in 2009, cash and cheques are still largely
popular. Hence, resource intensive and time consuming processes continue to exist in the
payment value chain. As electronic payments are more economical for the society and, as
part of the broader efforts to enhance Malaysia's long term national competitiveness, it is
essential that costs arising from these inefficiencies are eliminated. An area that requires
more attention moving forward, is the change in customers' behaviour and mindset.
Undoubtedly, it takes time and energy to withdraw cash, deposit cheques and reconcile
cheque payments. However, there are segments of society who still prefer paper as they are
so accustomed to paper and have always trusted paper instruments. Thus, one of the
greatest hurdles to accelerate the adoption of electronic payments is breaking longstanding
habits and changing the behaviour of people.
Another important aspect in promoting greater adoption of electronic payments is the need to
strengthen consumer confidence in the safety and security of the payment mechanism.
Recognising the important role of payment cards in the Malaysian payment system and in
the electronic payment agenda, Bank Negara Malaysia spearheaded the migration from
magnetic stripe to the chip-based card infrastructure on a national scale for both the ATM
and credit cards. This migration is also to counter fraud due to cloning, skimming or
counterfeiting. We began with the ATM card migration and by 2005, Malaysia became the
first country to fully migrate to the EMV chip-based credit card infrastructure on a national
scale.
Financial inclusion
Efforts and emphasis on accelerating the adoption of electronic payments would also
contribute towards Bank Negara Malaysia's objective of building a progressive and inclusive
financial system. Financial inclusion is a high priority in our national agenda and the Bank's
commitment in enhancing financial inclusion is explicitly mentioned in our new Central Bank
of Malaysia Act 2009. Malaysia has one of the highest penetration of deposit and loan
accounts in the world. Based on the study conducted by the World Bank in 2008, more than
80% of the Malaysian population has access to at least a deposit account. In 2009, the
penetration of deposit accounts and loan accounts in Malaysia are 3,300 deposit accounts
per 1,000 adults and 1,100 loan accounts per 1,000 adults, respectively. The World Bank
has also ranked Malaysia number one for three years (2008-2010) in terms of getting credit.
Much of this success in achieving a high level of financial inclusion is due to the strategies
and policy initiatives undertaken by the Bank over the years.
Going forward, efforts would also be geared towards leveraging on the high penetration of
mobile phones in Malaysia, even amongst the lower income groups. Thus, the convergence
of electronic money and mobile phone hold immense potential to reach the unbanked and
underserved segments of the population, particularly in the rural or non-urban areas. The
mobile channel and electronic money instruments can, not only allow mobile payment and
remittance services to be offered to these communities, but can also act as the gateway to
extend further financial products and services including credit, savings and insurance. These
would bring more from these communities into the formal financial system and economic
mainstream and would transform the livelihood of the poorer segments of society. The
development of a more inclusive financial system is one of the focus areas, apart from
electronic payment in the new financial sector blueprint that Bank Negara is in the midst of
formulating.
Going green
Electronic payment also enables businesses to move towards eco-friendly work environment
and practice social responsibility through "green" initiatives. Yes, we are conscious of the
"Equator Principles" in finance and banking. The movement away from paper via online
banking and electronic payment and the elimination of the need to drive to and from bank
branch offices allow customers to reduce their carbon footprints. Statistics have shown that if
20% of households in the world switch to online payment modes, an estimated 1.8 million
trees equaling to 100 million pounds of paper would have been saved.
Regulatory environment
The introduction and application of new technologies in the payments area have led to
greater innovation, the introduction of new payment channels as well as new methods of
delivering payment services more efficiently at lower costs to a wider spectrum of society and
consumers. However, these have also brought on new risks. Regulators, providers and
issuers have taken into consideration the risks that each of these various payment modes
may have on the safety of the payment systems as a whole. Safeguards have to be put in
place to instill public confidence in the usage of these innovative payment services or
channels. In this regard, it is vital for regulators to impose prudential requirements on the
providers and issuers of the electronic payment systems and instruments. The need for
sound regulation and supervision is further exacerbated by the fact that criminals are
constantly on the lookout to exploit the weakest link or point in the financial system.
The risk of the new and increasingly popular payment mechanisms being used as conduits
for money laundering and combatting the financing of terrorism (AML/CFT) activities is also a
growing concern for central banks and financial intelligence units around the world. The
increasing use of electronic payment systems, particularly electronic money, for making
cross-border payments makes them vulnerable to exploitation for criminal purposes.
Therefore, all parties involved in the payment value chain have to be vigilant to ensure that
they are not exploited for such purposes. Adherence to international standards on AML/CFT,
including the ability to trace funds back to the source and to positively identify the
beneficiaries of the funds, are indeed vital.
In Malaysia, electronic money is prescribed as a designated payment instrument in the
Payment Systems Act 2003 (PSA) and the Act is under the purview of the Bank. As such,
any person who wishes to issue electronic money would be required to obtain the prior
approval of Bank Negara Malaysia and is subjected to the prudential requirements imposed
by the Bank. In 2005, in line with the objective of reducing the use of cash in the domestic
economy, we liberalised our policy by allowing non-banking institutions to issue electronic
money. In 2008, the Bank issued the Guidelines on Electronic Money, which outlined the
broad principles and minimum standards to be observed by electronic money issuers. As at
end-March 2010, 26 issuers have been approved to issue electronic money comprising both
card-based and network-based schemes. During the past five years, the use of electronic
money recorded encouraging average annual growth of 21.5% and 24.9% in terms of volume
and value respectively. With regard to the oversight of electronic money issuers, in particular
the non-banking institutions, our objective is to ensure the safety and reliability of the issuers'
systems and operations.
We acknowledge, nevertheless, that in this rapidly changing commercial and technological
environment, it is becoming increasingly challenging for regulators to develop policies that
are effective and appropriate to address the regulatory concerns while at the same time,
promote innovation. Digital convergence of telecommunications, computers, and the media is
fast conjoining many new products and services to replace the old ones. For these reasons,
inflexible and highly prescriptive regulations and rules may be inhibitive to innovation. In
addition, with the entrance of more non-bank players in the payments industry, overseeing
these players could be more challenging as a different regulatory approach may have to be
adopted. Regulators would need to be conversant with the business dynamics and
operational arrangements of these new players while, at the same time, these players have
to adapt quickly to the regulators' supervisory approach and requirements.
The regulators' dilemma in achieving a proportionate regulatory framework, in particular to
promote the growth of electronic money, remains a challenge. This give rise to the need to
balance trade-offs between impacting public confidence and promoting innovation and
competition. Let's take the example of the provision of a more lenient regulatory regime.
While this would promote the entry of new players in the market, it may also lead to the
payment systems being used for illicit purposes. Regulators may as well get the major
stakeholders to understand this dilemma. By doing this, hopefully the regulators will be able
to apply a more stringent regulatory regime to protect public interest, but at the same time do
not unduly affect the viability and growth of electronic payments.
Concluding remarks
Regulators play an important role in ensuring that effective regulations are in place to
maintain the integrity of the payment system as well as to promote user confidence,
particularly for new payment services. At the same time, it is also recognised that migration
to electronic payment brings immense benefits to the country. Hence, a regulatory
environment that would allow innovation to thrive has to be balanced against the objective of
safeguarding public interest and confidence in the payments infrastructure. This balancing is
required to ensure continued acceptance and usage of the various payment systems and
instruments.
The emergence of payments processors, such as Spare Change, Boku, Paymo, to facilitate
payments for virtual goods and services over online social networks, such as Facebook,
Bebo and MySpace, as well as person-to-person transfers among users, are developments
which regulators are monitoring very closely. If their operations involve virtual currencies that
enable payment for virtual goods and services, do they pose a risk to the safety and reliable
functioning of the payment system? Should they be regulated? At what stage should they be
regulated? Are regulatory concerns in these new payment innovations warranted if they exist
only in the virtual space? How should they be regulated as they operate without geographical
boundaries? In addition, should virtual currencies be allowed to be used to purchase real
good and services or be exchanged for real world currency? I or we do not have answers to
these questions. But these are the issues that regulators and market players are grappling
with. I will leave these to participants in this Roundtable to deliberate on.
I believe that the common purpose of today's Roundtable is to discuss on ways to speed up
the migration to electronic payment with special focus on electronic money. This is indeed a
good platform for all key stakeholders to provide their thoughts and highlight areas that
require further improvement. In conclusion, therefore, I would like to thank OMFIF and the
Lafferty Group for their involvement in this Roundtable event. I wish you all success in your
deliberations and look forward to your views and suggestions in achieving our common goal.
Lastly, I on behalf of Bank Negara Malaysia also wish to register our appreciation to all of
you for taking time from your busy schedule to attend this event.