Muhammad bin Ibrahim: Mobile payment - the next wave
Keynote address by Mr Muhammad bin Ibrahim, Governor of the Central Bank of Malaysia (Bank
Negara Malaysia), at the Payment System Forum & Exhibition 2017 "Mobile Payment: The Next
Wave", Kuala Lumpur, 8 December 2017.
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Welcome to the Payment System Forum & Exhibition 2017. This year's theme 'Mobile Payment:
The Next Wave' is the continuation of our country's e-payment transformation that started seven
years ago. In 2011, we launched the 10-year e-payment roadmap in the Financial Sector
Blueprint 2011-2020. Various reform measures were instituted to remove pricing distortions,
instill market incentives and induce competition to reduce costs in our effort to create a
conducive environment to accelerate migration to e-payments.
These measures have been effective in reducing Malaysia's usage of cheques and fostering the
adoption of e-payments. The total cheque volume has declined by 42% from 205 million cheques
in 2011 to an estimated 120 million cheques in 2017.
Electronic fund transfers have increased from 66 million transactions in 2011 to an estimated
329 million transactions in 2017, surpassing the number of cheques issued by almost three
times. At the current rate of decline, we are likely to achieve the Financial Sector Blueprint target
of reducing cheque usage to 100 million in the year 2019, one year ahead of schedule.
Encouraging progress has also been made in the expansion of the point-of-sale (POS) terminal
network. The reform measures in the Payment Card Reform Framework (PCRF) implemented
since 2015 have enhanced transparency and competition, bringing about a continued decline in
the average merchant discount rates (or MDR). Merchants have benefited from lower cost of
accepting card payments, with an estimated cost savings of about RM422.4 million from 2015 to
September this year. Consequently, the annual growth of POS terminals has more than doubled
from about 6.8% for the period between 2011 and 2014, to 17% for the period between 2015 and
2017.
Key trends shaping our payment landscape today
Since the Payment Forum in 2015, many developments have taken place in the payment
landscape both domestically and internationally.
Firstly, society has become increasingly digital and connected, driven by the Internet and mobile
revolution. For a population of 32.1 million in Malaysia, there are 42.8 million mobile phone
subscriptions while smartphone penetration stands at 70% and is increasing.
Secondly, payment technology has become more advanced, scalable and increasingly low-cost.
For instance, innovations in the area of merchant acceptance has lowered the cost for
merchants to embrace electronic payments through the use of Quick Response (QR) codes.
Likewise, the advancements in biometric and tokenisation technologies and the shift towards
greater publication of Application Programming Interfaces have enhanced the ability of payment
service providers to develop new use cases and deliver superior customer experience.
Thirdly, the market players in our payment landscape have become more abundant, diverse and
increasingly non-traditional. In 2017 alone, Bank Negara Malaysia has processed applications
from 43 new non-bank players, an increase of 91% compared to the past two years. This is in
line with global developments where the size of the global payments industry has increased to
account for 34 percent of overall banking revenues in 2016 and is projected to become a USD$2
trillion dollar industry by 2020. This is a significant turning point. In essence, the traditional
payment channels are increasingly being replaced by nimble, innovative and lower cost
alternatives.
We must embrace the next wave of technological and e-payment transformation. As a nation, we
need to rise and seize this exciting opportunity, take a proactive rather than a reactive role, and
benefit from the enormous opportunities brought about by technology to improve our payment
system's security, efficiency, productivity. We need to bereft ourselves of the inertia to move
forward with the times.
There are a few strategies we ought to adopt, to reduce further the wastage arising from the cost
of maintaining two parallel systems by accelerating the displacement of cheques, harness the
pervasiveness of mobile payments to ensure reach, and focus on solving the last mile obstacles
to enhance migration to e-payments.
The enormous cost of maintaining two parallel systems
Cheque is a very costly payment instrument to process compared to electronic fund transfer.
Our study shows that the unit cost for cheque processing by banks has increased from RM3 in
2011 to RM4 in 2016, and is estimated to be about RM6 by 2020. At around 120 million cheques
currently, this translates into an enormous cost of around RM480 million, a sheer wastage to the
economy.
It is also costly for businesses to handle cheques. We estimate an average processing cost of
about RM6.80 per cheque due to expenses incurred on delivering, depositing, reconciling and
handling of returned cheques. On the contrary, the cost of processing an Interbank GIRO and
Instant Transfer (IBFT) are around 30 sen per transaction. Such unit cost is likely to decline
further due to economies of scale as e-payment adoption gains further traction.
In Scandinavian countries, higher cost has been the one of the key factors that drove the cheque
volume to a negligible level. Denmark, for example, turned off its interbank cheque clearing
system on 1 January 2017 once cheque usage was widely displaced by electronic fund transfers
and debit cards. In the case of Malaysia, we estimate that at the current rate of decline, it will take
us about 27 years before cheques can be reduced to a negligible level of 0.1 per capita, with an
estimated cost to the banking and business community of about RM12.9 billion. This is a huge
amount of prodigality. By accelerating the pace of cheque decline, we can shorten the number of
years needed to reduce cheque usage to a negligible level and derive greater cost savings for the
country.
Harness the prevalence of mobile payments to expand reach
Most Malaysians are likely to carry both a debit card and mobile phones and there are 45.4 million
debit cards and 42.8 million mobile phone subscriptions. For a population of 32.1 million this is
considered high. We need to take advantage of this. In particular, for debit cards. We need to
optimise the use of this medium.
In the case of debit cards, the Merchant Discount Rates are still very high despite the direct
debiting of the users' account. Acquirers should reduce the rates further. There are certain
segments of the merchant community that are cost-sensitive and may not be able to afford the
MDR of card payments. In this regard, mobile payment has the potential to complement the debit
card as a low-cost alternative to accepting cash. Mobile e-wallet is a strong alternative to debit
cards as merchants can accept payment through a QR code.
The use of QR codes has enormous potential. Out of 24 million adults in Malaysia, there are only
12 million active online banking accounts. We estimate that there are about 10 million bank
accountholders who are not using online services, while the remaining 2 million adults are likely
to be unbanked. In this regard, I am encouraged by the fact that non-bank e-money issuers are
targeting to increase their product penetration in these unserved segments since the banks are
not servicing this particular segment. The QR code could be a catalyst to reach this group.
To encourage QR code payment, avoid market fragmentation and broaden financial inclusion,
Bank Negara Malaysia has issued an Interoperable Credit Transfer Framework (ICTF) for
consultation. The ICTF aims to connect both banks and eligible non-bank e-money issuers to
ensure reachability of bank accounts and e-money accounts. For the first time in our history,
customers of both banks and non-banks will soon be able to transfer funds across the network
seamlessly by just referencing the mobile number and IC numbers of the recipients or scanning
the QR code of the recipients.
In this regard, PayNet, the merged entity of MEPS and MyClear, as the operator of the country's
shared payment infrastructure would provide open and fair access to its clearing system and
other shared payment utilities to both banks and eligible non-bank e-money issuers. This would
enhance the network multiplier effects and foster better allocation of industry resources, as
market players would be able to compete based on value-added services rather than on the
basis of infrastructure.
In addition, the Interoperable Credit Transfer Framework would level the playing field between
banks and non-bank players, by subjecting them to risk management requirements that are
proportionate to the nature, scale and complexity of their business activities. The framework
would enhance consumer protection and confidence in the use credit transfer services.
Focus on solving the last mile obstacles to enhance migration to e-payments
To remain relevant, it is important for all stakeholders to step up their game to drive innovation
and new use cases to accelerate the displacement of cash and cheques. PayNet, as the
operator of shared payment infrastructure, will facilitate the pooling of resources to develop
innovative use cases to meet the evolving needs of end-users. For this to happen, PayNet might
need to establish an innovation lab and publish open APIs to leverage on the creativity,
resourcefulness and innovativeness of the fintech community.
Banks and non-bank players should focus on solving last mile obstacles by alleviating the 'pain
points' faced by consumers and businesses. Subject to the observance of data protection laws,
market players should mine customers' data to develop innovative solutions and deliver superior
customer experience. Customers can now look for digital solutions that enrich their quality of life.
This may necessitate entities to forge strategic alliances to deliver innovative services leveraging
on each other's competitive advantages.
Equally important, are efforts to enhance cyber security and promote greater public awareness
of the security features and safety tips to mitigate fraud. Bank Negara Malaysia will work with the
payment industry to take preemptive actions to protect the security of customer funds and
financial market infrastructures.
Conclusion
In our quest to engage in the digital economy, migration to e-payments is a critical component. It
will benefit Malaysia through greater efficiency and productivity, thereby enhancing our country's
competitiveness. We have no choice but to improve the way we conduct our financial affairs.
The banking system has allocated huge amount of resources. From 2009 to 2017, the industry
has invested RM893 million to enhance the e-payment infrastructure. Moving forward, the
industry will invest a further RM346 million to expand the POS terminal network and RM40 million
to develop the Real-time Retail Payments Platform to spur the usage of mobile payments.
By the end of 2020, it is envisaged that individuals and businesses will be able to make and
receive payments seamlessly via online banking, payment cards and mobile payments. There
are no reasons whatsoever for us not to migrate from a costly and inefficient payment
mechanism to a cheaper, safer and more efficient payment mode.
To reflect the higher cheque processing cost, hasten the migration away from cheques, and
incentivise individuals and businesses to migrate to a lower cost of doing business, beginning 2
January 2021, the cheque fee will be increased from 50 sen to RM1.00 and gradually thereafter,
to reflect the actual cost of cheque processing. However, users of financial services will continue
to be given a choice of using cheques, if they prefer to use an expensive and inefficient option
rather than a cheaper one.
To support businesses and individuals, over the next three years a few initiatives will be
implemented. To drive the migration to e-payments during the transition period, the Instant
Transfer fee of 50 sen would be waived for transactions up to RM5,000 per transaction made by
individuals and SMEs effective 1 July 2018.
The e-Payment Incentive Fund (ePIF) will be enlarged with an additional contribution of RM198
million from financial institutions. The funds will be used to assist account holders to migrate
efficiently to e-payments. Individuals and businesses are advised to take advantage of these
incentives and engage their respective financial institutions.
In line with this year's theme of 'Mobile Payment: The Next Wave', we have invited a total of 18
exhibitors comprising both banks and non-banks to showcase their new and innovative payment
solutions. Do take the opportunity to visit the booths to gain further insights on how the solutions
would benefit your business and cater to your payment needs. With this, I wish you a productive
forum ahead.
Thank you.