Muhammad bin Ibrahim: The dawn of a new era in Malaysia's
payment systems
Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Malaysian E-Payments Excellence Awards, Kuala Lumpur, 22 May
2017.
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nd
I am glad to be with you at this 2 Malaysian E-Payments Excellence Awards organised by
MyClear.
This evening, we are recognising the contributions of the financial industry, businesses and
government agencies to the country's e-payment agenda. The achievements showcased by the
award winners today reflect the broader innovations and involvement that we continue to witness
in the payment space to make e-payments more convenient, cost-efficient and safe for users.
I am encouraged that contactless payments, for example, are gaining greater appeal for smaller
value payments. Equally important have been the collective efforts made to educate and inform
users. This helps to drive changes in payment habits away from cash and cheques to
epayments.
Malaysians are increasingly embracing e-payments
Malaysia has long recognised the importance of e-payments as a key enabler to drive national
efficiency and competitiveness, and as a catalyst to facilitate the creation of new sources of
growth. Promising progress has been made in achieving the country's e-payment targets.
In a period of 6 years between 2011 and 2016, the number of e-payments per capita has almost
doubled from 49 to 97 transactions per capita. This largely reflects the accelerated adoption of
electronic fund transfers to displace cheques. Cheque usage declined by 35% from over 200
million cheques in 2011 to 133 million in 2016. Over the same period, Interbank GIRO (IBG) and
Instant Transfers (IBFT) grew almost four fold from 66 million transactions in 2011 to 257 million
transactions in 2016.
Encouraging progress has also been achieved in efforts to displace cash. Reform measures
implemented since 2015 have made the acceptance of payment cards more affordable to
merchants. We estimate the annual cost savings to merchants to be about RM168 million in
2016.
This in turn has encouraged an increase in the number of payment card acceptance devices (or
POS terminals) which expanded by 40% to 323k terminals in 2016. We expect these
developments to further expand the usage of debit cards to displace cash together with the
enhancements to the payment card infrastructure to support PIN and contactless technology.
A new era in payments
For many years, Bank Negara Malaysia has taken the leading role in shaping the development of
the country's payment systems, in line with its statutory mandate to promote safe, efficient and
reliable payment systems.
We have taken important steps to correct price signals associated with the use of different
payment instruments, and created market mechanisms to better align incentives at the institution
level. Along the way there was resistance, but we had experienced that left to its own devices,
the market is not capable of making strategic changes necessary to drive payment efficiency,
financial inclusion and competitiveness. But, cooperation is key.
Indeed, the various measures that were implemented have been instrumental in accelerating the
e-payment agenda forward, only because of the cooperation of the industry, sometimes with a bit
of nudging. But truth be told, we have been able to achieve so much.
Today, the payments industry is no longer the exclusive domain of banks. The advent of FinTech
driven by the increasingly inexpensive and pervasive internet and mobile technology has
encouraged the entry of more agile non-bank players as potential disruptors or collaborators of
the incumbent players.
This has set the stage for an exciting new era in payments, an era in which the industry is
expected to take on a larger role in delivering a more robust and efficient payments system for
Malaysia.
The Bank will facilitate this in three key ways:
i. First, through policy initiatives to encourage collaborative competition or 'co-opetition';
ii. Second, by further strengthening industry alignment; and
iii. Third, by supporting more inclusive governance arrangements for the development of the
payment system.
Policies to promote co-opetition as a key enabler for greater efficiency, competition and
innovation
Network effects are critical to an efficient payment system. The larger the network of a payment
system, the more valuable it is to users of the payment system.
Instead of duplicating resources to build costly and overlapping payment infrastructures, the
industry should collaborate at the infrastructure level to improve the network architecture and
achieve this more quickly, thus benefitting from economies of scale and new opportunities to
serve customers better.
Competition should continue to exist at the product level, where industry players compete to
deliver a positive user experience through value-added product offerings. This would not only
avoid market fragmentation, but also allow a more optimal use of scarce industry resources.
Such 'co-opetition' is not new in Malaysia. We used to have three ATM networks in the country.
In 1997, the three ATM networks were consolidated into MEPS, immediately allowing the public to
withdraw funds from a larger network of ATMs nationwide. In 2005, the financial industry
collaborated to adopt the EMV Chip technology to enhance the security and interoperability of
domestic payment cards.
This eradicated counterfeit card fraud and boosted public confidence in the use of payment
cards. As a result, payment card spending increased by almost threefold from RM47.5 billion in
2006 to RM141.6 billion in 2016. More recently, such collaboration can be observed in the
industry-wide migration to adopt PIN and EMV contactless technology to further enhance the
security and convenience of domestic payment cards.
Throughout these developments, appropriate policy interventions played an important role to
encourage 'co-opetition' in the payment market - in particular, to overcome the natural resistance
of banks to collaborate due to a perceived loss of competitive advantage if they do so.
Fostering 'co-opetition' will therefore continue to be a key policy thrust of the Bank.
In the near term, the Bank will be issuing a framework on interoperable mobile payments to foster
'co-opetition' in the mobile payment landscape. The framework will promote open and fair access
to shared payment infrastructures for both banks and eligible non-bank entities.
This will be supported by interoperability standards and proportionate risk management controls
that aim to encourage competition while facilitating collaboration at the infrastructure level. Banks
and operators of shared payment infrastructures such as MyClear and MEPS are encouraged to
publish open Application Programming Interfaces (or APIs) to drive continuous innovation in
value-added payment services by both banks and non-bank fintech players.
Merger of MyClear and MEPS to strengthen industry alignment and spearhead the
transformation of the payment landscape
Today, I am also pleased to announce an agreement has been reached between Bank Negara
Malaysia and the industry to merge MyClear and MEPS which operate Malaysia's shared
payment infrastructures for wholesale and retail payment transactions. The merged entity will be
called 'Payments Network Malaysia', or 'PayNet' in short.
PayNet will be jointly owned by Bank Negara Malaysia and the financial services industry. It will
embark on modernising our payment infrastructure. It will assume a key role in ensuring that
Malaysia's payment systems are future-proofed and always at the cutting edge of payment
efficiency, innovation and competition. Importantly, the merger will further strengthen the
alignment of strategies and priorities for the development of Malaysia's payment systems. It is
also expected to significantly reduce the time to market for delivering improvements.
As a shared utility, PayNet will operate with a public interest objective to support and develop
safe, reliable and efficient payment systems in Malaysia. PayNet will provide the necessary
common infrastructure, and the banks will compete on providing financial products and services.
In the long run, we should expect that the merged entity should venture abroad and strike foreign
alliances to further expand network and reach.
Over the next 12 months, PayNet will move forward with plans to develop and implement a
Realtime Retail Payments Platform (RPP) that will facilitate interoperable mobile payments.
A central feature of the RPP is the national addressing database that will allow payments to be
made conveniently through the use of mobile phone numbers and National Registration Identity
Card (NRIC) numbers, instead of referencing bank account numbers.
In line with principles of fair and open access, the RPP will be open to both banks and eligible
non-bank payment service providers. Besides making the technology roadmap for the RPP
publicly available, PayNet will actively engage with the banking industry, FinTech community and
other relevant stakeholders in the development of the RPP.
PayNet will also direct its focus to promoting MyDebit, which is the domestic debit card network,
as a low-cost alternative to displace the use of cash. Significant efforts will be devoted towards
increasing the acceptance of MyDebit, particularly among lower-tier merchants to lessen the use
of cash to lower the operational costs for businesses.
Some of the initiatives that will be undertaken by PayNet include enabling MyDebit to be used on
mobile phones and operating a 'shared token service' for the local payment industry. In addition,
PayNet will also expand the use of MyDebit to pay for transit services, including buses and trains,
within the coming year.
Supporting more inclusive governance arrangements through the transformation of
NPAC
While we can look forward to developments that will further transform our payment systems, the
process also matters.
Since the establishment of the National Payments Advisory Council (NPAC) in 2001 to advise on
and steer payment system development in Malaysia, we have worked to put in place a more
inclusive process for setting the payment agenda. This aims to reflect the changing make-up of
the payment industry and better anticipate the changing demands of users.
We cannot hope to future proof the system without a good pulse on the expectations, constraints
and incentives that drive payment behaviours and decisions to invest in innovation. It also often
determines how quickly or slowly we can roll out planned initiatives, or even stay the course on
these plans.
This led to changes that were introduced last year to broaden the representation of the NPAC to
include stakeholders on both the demand and supply sides of the payment market. This includes
wider representation from non-bank payment service providers and user groups such as
consumers, merchants and government agencies.
The NPAC now comprises a Steering Committee, a User Consultative Group and a Service
Provider Consultative Group. The consultative groups serve to promote dialogue, encourage
alignment and canvass new ideas to improve payment solutions. This provides important inputs
to focus on the strategic and tactical priorities for the development of the payment systems in
Malaysia.
Continued support from all stakeholders necessary to ensure the successful migration to
PIN verification
Before I end my speech, allow me to take this opportunity to commend the industry on its efforts
to achieve a smooth transition from signature to PIN verification of payment card transactions.
Collectively, we shall achieve our targets to migrate users to PIN verification by 1 July 2017. We
have seen tremendous commitment and intensified efforts by banks to meet these targets and I
am pleased to note that we are near completing the replacement of all active payment cards and
POS terminals with PIN functionalities.
We have been clear that there will be no extension to the deadline of 1 July 2017 for turning off
signature verification.
By that date, only PIN will be accepted for domestic payment card transactions, so it is important
that in the next 40 days, we should not be complacent and no effort is spared to encourage the
migration to PIN. From the latest data we have, the PIN bypass rate has now been reduced to
10% in April. At the current rate of migration, we expect to see that rate to come down much
further before the end of June.
Closing remarks
Driving and sustaining an inclusive transformation of Malaysia's payment ecosystem is a
collective effort.
Bank Negara Malaysia will continue to foster a conducive payment ecosystem, with the National
Payments Advisory Council (NPAC) playing a more active role in shaping priorities to enhance
and future-proof the country's payment systems.
PayNet will serve as the key vehicle for collaboration at the infrastructure level, encouraging more
open competition and greater innovation in payment solutions by both banks and non-banks in
serving the public and economy.
The remaining piece is the continuous education of businesses and consumers to encourage
the desired change in payment behaviour that will deliver important efficiency and productivity
gains for our economy.
Let me conclude by congratulating MyClear and the winners of today's awards ceremony. I hope
that today's event will inspire greater achievements in accelerating Malaysia's migration to
epayments.