Strategy to Accelerate Migration to

e-Payments in Malaysia

Nurul Ashikin Mohammad Bokhari

Payment System Policy Department

Bank Negara Malaysia

Global Payments Week

20 September 2016 1

Despite a highly bankable population1, Malaysia’s usage of paper-based payment instruments is relatively high

1 92% of individuals aged 15 and above have a deposit account2 Prior to 2015, cheques were not directly priced except for the stamp duty of RM0.15 per cheque3 Prior to May 20134 44 million ATM/debit cards for a bankable population of 19 million

• Pricing distortions caused users to prefer using cheques over e-payments

o Users were not charged a fee for issuing cheques even though it cost the banks

about RM3.00 on average to process2

o Interbank GIRO (IBG) was priced at RM2.00 per transaction3

• Despite a high penetration of chip-based ATM/debit cards4, ATM/debit cards are

used mainly for cash withdrawals instead of retail purchases

o Payment cards are not widely accepted, especially among smaller merchants

o The number of point-of-sale (POS) Malaysia had remained at 8 terminals per 1,000

inhabitants from 2013 to 2014

3

Key Instruments and Focus Areas

to Accelerate the Migration to

e-Payments

Key Instruments and Focus Areas to Accelerate the Migration to e-Payments

4

2 key instruments

Electronic fund transfer (to displace cheques)

Price signal

Debit card (to displace cash)

� IBG (30 banks* with 99% CASA** base)

� IBFT (20 banks* with 99% CASA** base)

� 44.3 million debit cards*

(for 19 million bankable population)

5 focus areas

Quality and value

propositionAccess points

Market incentive structure

Awareness and confidence

* As at end-June 2016** Total number of current and savings accounts

BNM’s Financial Sector Blueprint (2011 – 2020) sets the direction for the

transformation of the country’s payment landscape.

5

Electronic Funds Transfer

to Displace Cheques

Measures undertaken to promote the adoption of

electronic fund transfer services

Focus areas Measures undertaken

1. Price signal • IBG (Max. of 10 sen via online banking and 30 sen via ATM)

• IBFT (Max. of 50 sen via online banking and ATM)

2. Quality and

value

proposition

• Faster crediting time for IBG

• Real-time payment for IBFT

• Payment details in bank statement to facilitate reconciliation

• Ability to schedule future-dated and recurring payments

• Features to avoid mistaken payments

3. Access points • Accessible via online banking and ATMs

4. Market

incentive

structure

• E-payment Incentive Fund

• Transparency measures to promote competition

5. Awareness

and

confidence

• E-payment roadshow

• Media engagements

• Workshops

• Strengthening security requirements

Cheques

IBG

0

2

4

6

8

10

12

14

16

18

20

J M M J S N J M M J S N J M M J S N J M M J S N J M M J S N J

Million

2015

Encouraging progress in the displacement of cheques by electronic fund transfers

7

Tra

nsacti

on

Vo

lum

e (

mil

lio

n)

2014: -10%

Cheque - 2011: -1%

2015: -16%

IBG - 2011: 21%

2014: 36%

2015: 31%

IBFT - 2011: 74%2015: 77%

2014: 68%

Tiered pricing and

disclosure requirements

2014201320122011

50 sen cheque fee and

e-Payment Incentive Fund

(ePIF) Framework

IBFT fee capped at 50 sen

IBG fee capped at

10 sen

8

ATM/Debit Card to Displace Cash

Measures undertaken to promote the usage of

ATM/debit cards to displace cash

Focus areas Measures undertaken

1. Price signal • Reduced Interchange Fee (IF)1 for Debit Card

• Fostering a competitive payment card market

o Differentiated Merchant Discount Rates (MDRs)2

o Disclosure of MDR and IF rates to merchants

o Empowering merchants to choose the lower cost debit network

2. Quality and

value

proposition

• Migration from signature to PIN verification for added security

• Adoption of contactless functionality for greater convenience

3. Access points • 44 mil ATM cards which double up as debit cards

• 800,000 POS terminals by 2020 (25 terminals per 1,000 inhabitants)

4. Market incentive

structure

• Market Development Fund (MDF) to fund the expansion of POS

terminal network

5. Awareness and

confidence

• E-payment roadshow and Township campaigns

• Strengthening security requirements

1 Interchange fee is an interbank fee payable between banks in a payment card transaction and is priced into the merchant fee (MDR) paid by

card-accepting merchant to the merchant’s bank.2 MDR is the merchant fee paid by a card-accepting merchant to the merchant’s bank for every payment card transaction.

Risk of retail price increase due to IF hikes

Payment Network A

increased IF

Issuers lowered income eligibility for

premium cards

May 2013 Feb 2014June 2013 onwards

Acquirers increased

MDRs

Card TypePayment Network A Payment Network B

BeforeMay 2013

Effective May 2013

Effective June 2014*

BeforeMarch 2014

EffectiveMarch 2014

Credit Card 1.1% 1.32% - 1.80% 1.32% - 1.85% 1.2% 1.2% - 1.8%

Debit Card 1.1% 1.1% 0.99% - 1.45% 1.15% 0.9% - 1.1%

April 2014

Payment Network A announced further

IF hikes*(unwound after

BNM’s engagement)

March 2014

Payment Network B

increased IF

• Cost of higher IF is passed to merchants in the form of higher MDR.

• Merchants are pressured to pass on the higher cost to consumers by raising retail prices.

Global Payments Week

20 September 2016 10

• Some banks had intensified promotions for premium cards by lowering the income

eligibility requirement.

• If left unchecked, this would result in an industry-wide lowering of income eligibility

requirement, contributing to a proliferation of premium credit cards in the market

and consequently a system-wide increase in MDRs.

Credit Card Type

IF rate Min. annual income requirement (industry range)

Platinum 1.32 – 1.35% RM24,000–RM100,000

Super Premium 1 1.65% RM36,000–RM200,000

Super Premium 2 1.80% RM120,000–RM240,000

IF hikes led to the lowering of eligibility requirement for premium credit cards

Payment Card Reform Framework (PCRF) to promote efficiency and competition in the payment card market

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20 September 2016 12

Policy objectives

• Curb indiscriminate increases in interchange fees

• Address market distortions to enhance payment efficiency and competition

Key measures:

• Interchange fee ceiling on debit, prepaid and credit card transactions

• Unbundling of MDR for different payment card transactions

• Facilitating the identification of debit and prepaid cards

• Disclosure of IF and MDR rates to merchants

• Empowering merchants to choose the more cost-effective debit network

1

2

0.4% 0.99 - 1.20% 1.32 – 1.80%IF rates prior to 1 Jul 2015

New IF rates effective

1 July 2015

1 Between 2015-2020, the IF rate is set at 0% for the government sector with relatively low acceptance of payment cards.

2 1.10% for card schemes that establish a Market Development Fund and 1.00% for those that do not.

Domestic Brand Debit Card

• 0.15% or 50 sen+0.01%1

International Brand Debit/Prepaid Card

• 0.21% or 70 sen+0.01%1

Credit Card

• 1.10%2 (2015-2020)

• 0.48% (post-2020)

• IF ceilings for debit and prepaid cards are set at the eligible cost level to position them as cost-

effective payment cards to displace cash.

• IF ceiling for credit card are set at pre-May 2013 level (above the eligible costs) for an interim

period (2015-2020) to channel excess IF revenue for infrastructure development.

o IF ceilings may be adjusted downwards if the yearly industry targets on card terminals and

debit card transactions are not met.

IF ceilings to curb cost escalation whilst promoting market development

Global Payments Week

20 September 2016 13

Contactless debit card initiative (MCCS1)Contactless debit card initiative (MCCS1)

Chip & PIN initiativeChip & PIN initiative

July 2015 2016 2017 2018 2019 2020

Increase POS terminals to 800k (25 terminals per 1k inhabitants) Increase POS terminals to 800k (25 terminals per 1k inhabitants)

Increase debit card transactions to 1 billion per year (30 transactions per capita) Increase debit card transactions to 1 billion per year (30 transactions per capita)

1 Under the Malaysian Chip Card Initiative, the domestic debit card (MyDebit) will migrate from its existing proprietary standard (PMPC) to adopt the

EMV standard and the contactless functionality.

RM1.1 billion to be invested by the industry for infrastructure development

Global Payments Week

20 September 2016 14

Debit Cards: New and improved features

Existing Debit / ATM cards New Debit / ATM cards

MEPS/Bankard logo are at the back of the card

1. Contactless functionality

2. Equal prominence of debit card

brands on the face of the card.

3. ‘Debit’ imprinted on the front of the

card to facilitate identification

StandaloneCo-badged

with 2 debit brandsCo-badged with 2 debit brands

1

2

3

Marketing Development Fund (MDF) to support expansion of POS terminals

• PCRF provides payment card schemes with the option of establishing a MDF to support

the expansion in the number of POS terminals

• Two major payment card schemes have established the MDF, which is expected to

channel approximately RM 455 million to increase the number of POS terminals from

240k in 2014 to 800k by 2020

Interchange fee (IF)

Issuer A

Issuer A’s MDF funds

for terminal

deployment

0.1% of the value of

credit card transaction

Under-achievement of

Issuer A’s individual

target for terminal

deployment

Disburse pro-rated

MDF funds into a

pooled account

Pooled MDF

account

Funds available to

issuers who are able

to cover the shortfall

in POS terminal

deployment

1 2 3

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20 September 2016 16

0.00%

0.20%

0.40%

0.60%

0.80%

1.00%

1.20%

1.40%

1.60%

2014 2015 1H 2016

Domestic brand debit card

International brand debit card

Credit card

Promising progress made since PCRF implementation

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20 September 2016 17

0

50,000

100,000

150,000

200,000

250,000

300,000

350,000

2011 2012 2013 2014 2015 1H 2016

+18%

Average MDR by card types No. of POS terminals

+5%

+15%

� The average MDR has started to trend downwards across all card types.

� Growth in POS terminals had tripled from an average of 5% (2011-2014) to 18% in 2015

and 15% in 1H 2016

� Debit card transactions continue to record double-digit growth supported by progressive

roll-out of POS terminals and contactless cards

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Fostering innovation and collaboration

Desired payment landscape

Malaysia’s Payments Infrastructure

Desired Outcomes

Proportionate regulation

Network expansion and cost reduction

Effective competition

Enhance efficiency and

productivityPromote financial

inclusion

Catalyst for innovation

and value creation

Key Attributes

Safe and reliable

Open and Interoperable

Efficient and low cost

Meet user needs

Flexible and future-proof

Key Policy Thrusts

Background of the National Payments Advisory Council (NPAC)

• NPAC is an advisory body established in 2001 to provide strategic direction and market

inputs on key payment system initiatives.

– Chaired by Governor of BNM and participated by representatives from relevant

regulators, foreign central banks, government departments, banking and insurance

associations, major banks and key payment system operators.

• NPAC has been instrumental in providing strategic insights and direction that led the

formulation of the 10-year roadmap in BNM’s Financial Sector Blueprint to chart the

development of the payment system in Malaysia.

• NPAC has been transformed in 2016 to be more inclusive and effective as a strategy

setting and industry consultation and coordination body to ensure-

– Comprehensive consultation with relevant stakeholders to resolve potential issues

that would hinder the achievement of the FSB targets

– Better alignment of industry resources to avoid duplication

– Future payment system development takes into account user feedback and

innovation

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A transformed NPAC as a platform for innovation and collaboration

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Steering Committee

• Set high-level strategic objectives

• Ensure sustained transformation of the payment landscape

User Consultative Group

Service Provider Consultative

Group

Steering Committee

Service Provider Consultative Group

• To consult, coordinate and implement industry efforts

User Consultative Group

• To provide user feedback on payment services

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Conclusion

Conclusion

• To accelerate migration to e-payments, BNM has focused on creating the enabling

environment by leveraging on and strengthening existing payments infrastructure to

lower the barriers and enhance the incentives for adoption of e-payments.

• To sustain the quality of e-payment services, foster innovation and meet future needs,

the focus moving forward will be on fostering wider stakeholder engagement and

facilitating collaboration on interoperable platforms through the transformed NPAC to

expand network and spur the offering of innovative payment solutions

• Adequate focus is also directed towards strengthening the risk management measures

and consumer education and protection measures to combat the evolving cyber and

fraud risks to sustain public confidence in the use of e-payments

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