Muhammad bin Ibrahim: Developing Malaysia's payment system
landscape
Keynote address by Mr Muhammad bin Ibrahim, Deputy Governor of the Central Bank of
Malaysia (Bank Negara Malaysia), at the Payment System Forum and Exhibition 2015
"Moving Forward with e-Payments", Kuala Lumpur, 3 November 2015.
* * *
Welcome to the 2015 Payment System Forum and Exhibition 2015, with the theme "Moving
Forward with e-Payments". This year is another important step in our effort to develop our
country's payment system landscape. It marks the mid-way point of our journey to transform
our country's payments infrastructure into one that is highly efficient, secure and competitive
as outlined in the 10-year Financial Sector Blueprint from 2011 to 2020.
I will focus on 3 areas in my remarks today.
• First, I will provide you with an update of where we are in our migration path five
years since we launched the Financial Sector Blueprint, and what we have done and
achieved so far.
• Second, I will share with you some thoughts on how collaborative efforts among
various stakeholders in the payment value chain can leverage and thrive on
epayments as a strategic tool in today's increasingly dynamic and competitive
environment, and
• Third, I will outline the opportunities that can be realised in relation to the Financial
Sector Blueprint targets with specific emphasis on key priorities for 2016.
Migration path, five years after
In 2011 Bank Negara Malaysia had developed a comprehensive roadmap in its Financial
Sector Blueprint to drive the migration to e-payments with measurable targets to be achieved
by 2020. Over the last 5 years, Bank Negara has worked with the payments industry to put in
place conducive regulatory frameworks, agree on market incentive structures and build
enhancements to e-payment infrastructure and services. Our aim is to provide an enabling
environment for individuals and businesses to migrate away from paper based payment
methods and adopt e-payments instruments.
The results have been encouraging. Since the implementation of the Pricing Reform
Framework in May 2013 and the e-Payment Incentive Fund (ePIF) Framework in January
2015, cheques which had only declined at a marginal rate of 2% on average from 2011 to
2013, had declined at a higher rate of 10% in 2014. The decline in cheque usage had
accelerated to 16% for the first 9 months of this year. Consequently, the number of cheques
cleared is projected to fall from about 207 million in 2010 to 149 million by the end of 2015. If
such decline rate is sustained, the target of reducing cheques to 100 million per year by 2020
would be achieved. The reduction of about 100 million cheques above saves a minimum of
RM300m not taking into account other savings in terms of efficiency and security.
Similar trend was observed in the number of electronic fund transfer transactions. Interbank
GIRO (IBG) grew at a higher rate of 36% in 2014 and this strong growth rate was sustained
at 36% in the first 9 months of this year compared to an average rate of 19% between 2011
and 2013. Instant Transfer (IBFT), the real-time fund transfer service on the other hand, has
consistently maintained its high growth rate of over 60% since 2011. This contributed to an
increase in Malaysia's e-payments per capita which is projected to increase from 43 per
capita in 2010 to an estimated 80 per capita in 2015.
To reduce the country's dependency on cash usage, Bank Negara Malaysia has
implemented the Payment Card Reform Framework this year with the objective to create an
enabling environment for the expansion of payment card terminals and higher usage of debit
cards at affordable and reduced costs.
In this regard, encouraging progress is seen in the area of deployment of payment card
terminals. Payment card terminal growth which had slowed from 14.6% in 2011 to 4.5% in
2014, is likely to rebound to an estimated growth rate of 12.0% for 2015. This would increase
the number of payment card terminals from 8 per 1,000 inhabitants in 2014 to 9 per
1,000 inhabitants in 2015. We envisage that with the implementation of a Market
Development Fund by the payment card industry, about RM455 million funds would be used
to deploy additional terminals and spur the expansion of the terminal network. This strategy
would enable the target of 25 terminals per 1,000 inhabitants by 2020 to be achieved.
Debit card transactions on the other hand, are likely to maintain its double digit growth rate of
about 40% in 2015 (39% in 2014). Despite the encouraging progress, we are still a long way
from achieving our target of 30 debit card transactions per capita by 2020. Moving forward,
we need to drive the use of debit card by capitalizing on the enabling environment created by
the Payment Card Reform Framework. We need to put in more efforts in this area.
Of collaborative efforts and strategic tool
Banking industry
It is estimated that the cost of handling cash and cheques to the banking industry is about
RM2.4 billion annually. This is sheer wastage when a cheaper alternative is readily available.
There is substantial room for our banks to strengthen their operational efficiency through
rationalization of business model and internal processes by emphasizing the use of
epayments, instead of the more manually-intensive paper-based payment methods. This
would enable banks to achieve a lower cost-income ratio, thus enhancing productivity and
competitiveness. For this to happen, it is critical that, banks should upgrade their
management information system (MIS) to fully capture the cost of different payment methods
and identify areas with potential for greater operational efficiency. In addition, banks should
foster better coordination between their respective revenue and cost centres to achieve
optimal financial performance. This should be complemented with an incentive structure
within each bank that not only rewards revenue generation but also cost reduction.
Payment system infrastructure providers
Basic payment infrastructure should be viewed as a form of 'utility services' such as
electricity, telephone and broadband lines, where it is regarded as a key enabler for
innovation. Hence, access to payment infrastructure should be made as open and as
affordable as possible. The bigger the network of a payment infrastructure, the more value it
can bring to its participants in terms of economies of scale and multiplier network effects.
Payment system infrastructure development should be shared and not be regarded as a
competitive tool as investments in this space is expensive and continuous.
Therefore, payment system infrastructure providers such as MEPS and MyClear should
collaborate more effectively to avoid duplication and wastage. In addition, MEPS and
MyClear should also collaborate and put in place common payment system infrastructure
that would benefit all stakeholders. The recent collaboration between MEPS and MyClear
under the Malaysian Chip Card Specification (MCCS) initiative to migrate the domestic debit
card to the Europay-MasterCard-Visa (EMV) standard and contactless feature is a step in the
right direction.
Moving forward, MEPS and MyClear should jointly identify areas for strategic cooperation,
with a clear line of sight to the future, to ensure that payment system infrastructure in
Malaysia continue to keep pace with innovation and meet user needs.
Merchants and consumers
With increased transparency in payment services brought about by the various regulatory
and industry measures, merchants and consumers alike should leverage on expanded
information disclosure to get the best deals that suit their requirements. A smart consumer
will drive competition and reduce costs over the long run
Processing payments and account reconciliation manually is a tedious affair and a source of
much inefficiency. Merchants in particular should leverage on e-payments as a means to
rationalize their business processes to be more efficient, so that more resources can be
directed towards growing their business. Merchants should also leverage on the latest
payments technology such as the mobile point-of-sale (mPOS) which allows them to
leverage on smart devices to accept payment cards on-the-go. Consumers on the other
hand, should also embrace e-payments to be more efficient and safe by taking advantage of
the various incentives provided by the banking industry.
Opportunities and key priorities for 2016
We have now reached a critical juncture in our migration to e-payments. With the enabling
environment in place and the encouraging progress recorded for the past five years,
emphasis should now be devoted towards implementation and facilitating behavioural
change among individuals and businesses. We must use as beacon the targets set out in the
Financial Sector Blueprint. The achievement of such targets would put us on par with other
advanced countries and become as competitive as we transition into a high value added and
high income economy. The support from all relevant stakeholders is needed to ensure that
such objective becomes a reality.
As the catalyst for e-payment growth, the banking and payments industry should explore the
possibility of forming strategic alliances with non-traditional partners. The recent partnerships
between banks and telcos in the roll-out of mPOS are a good example of such new
partnership.
Let me outline the key priorities for the banking and payments industry in the upcoming year
of 2016. I would like to raise 6 points.
i. First, as a group, we need to ensure there is no delay in the key payment card
infrastructure projects such as migration to cardholder verification by PIN and the
migration to contactless debit cards under the Chip and PIN and the MCCS
initiatives. Coordinated constant and effective communication strategies must be
undertaken to ensure an effective and seamless migration;
ii. Second, the payments industry must collaborate towards the achievement of an
additional 50,000 payment card terminals and 137 million debit card transactions
under the Payment Card Reform Framework. In this regard, the industry should
devise creative measures to facilitate behavioural change. This may include offering
incentives and educating merchants and cashiers to motivate customers to use
debit cards instead of cash;
iii. Third, MyClear together with the banking industry should expand the biller base for
JomPAY, a payment system launched in April 2015, to further enhance the
efficiency and convenience of making and accepting online bill payments;
iv. Fourth, the banking industry should undertake effective measures to reduce the
number of cash and cheques used for credit card and loan repayments which
totalled 101 million transactions in 2014. This would bring about operational
efficiency and reduce costs in the banks' operations. The industry should strive to
achieve an annual decline rate of 15% per year similar to that of cheques;
v. Fifth, payment system infrastructure providers such as MEPS and MyClear should
enhance their Memorandum of Understanding (MoU) to ensure any payment
infrastructure development initiatives would not result in duplication of efforts by the
banking system. In addition, both MEPS and MyClear should develop medium term
roadmap to enhance payment system infrastructure to keep pace with innovation
and meet user needs. This must be supported by consultation with relevant
stakeholders and robust market assessment and cost-benefit analysis; and
vi. Last but not least, it is critical for the banking and payments industry to maintain
confidence in the use of e-payments, Hence, the industry should continuously
enhance their risk management measures and security features, and review the
effectiveness of their customer education and awareness programs.
On this note, I wish all of you an engaging and productive forum. Please take the opportunity
to visit the exhibition booths to find out more on how you can benefit from the various
business and payment solutions.