Strategy to Accelerate Migration to e-payments in Malaysia

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1 Strategy to Accelerate Migration to e-payments in Malaysia Nurul Ashikin Mohammad Bokhari Payment System Policy Department Bank Negara Malaysia 1 Global Payments Week 20 September 2016

2 Despite a highly bankable population 1, Malaysia s usage of paper-based payment instruments is relatively high 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 process 2 o Interbank GIRO (IBG) was priced at RM2.00 per transaction 3 Despite a high penetration of chip-based ATM/debit cards 4, 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 % of individuals aged 15 and above have a deposit account 2 Prior to 2015, cheques were not directly priced except for the stamp duty of RM0.15 per cheque 3 Prior to May million ATM/debit cards for a bankable population of 19 million

3 Key Instruments and Focus Areas to Accelerate the Migration to e-payments 3

4 Key Instruments and Focus Areas to Accelerate the Migration to e-payments BNM s Financial Sector Blueprint ( ) sets the direction for the transformation of the country s payment landscape. 2 key instruments Electronic fund transfer (to displace cheques) IBG (30 banks* with 99% CASA ** base) IBFT (20 banks* with 99% CASA** base) Debit card (to displace cash) 44.3 million debit cards* (for 19 million bankable population) 5 focus areas Price signal Quality and value proposition Access points Market incentive structure Awareness and confidence * As at end-june 2016 ** Total number of current and savings accounts 4

5 Electronic Funds Transfer to Displace Cheques 5

6 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 5. Awareness and confidence E-payment Incentive Fund Transparency measures to promote competition E-payment roadshow Media engagements Workshops Strengthening security requirements

7 Encouraging progress in the displacement of cheques by electronic fund transfers Transaction Volume (million) Million Cheque-2011: -1% Cheques IBG -2011: 21% IBG IBG fee capped at 10 sen Tiered pricing and disclosure requirements 50 senchequefee and e-payment Incentive Fund (epif) Framework 2014: -10% IBFT fee capped at 50 sen 2014: 36% 2015: -16% 2015: 31% : 68% 2 IBFT -2011: 74% 2015: 77% 0 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

8 ATM/Debit Card to Displace Cash 8

9 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 5. Awareness and confidence Market Development Fund (MDF) to fund the expansion of POS terminal network 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.

10 Risk of retail price increase due to IF hikes May 2013 Feb 2014 June 2013 onwards March 2014 April 2014 Payment Network A increased IF Acquirers increased MDRs Issuers lowered income eligibility for premium cards Payment Network B increased IF Payment Network A announced further IF hikes* (unwound after BNM s engagement) Card Type Before May 2013 Payment Network A Effective May 2013 Effective June 2014* Payment Network B Before March 2014 Effective March 2014 Credit Card 1.1% 1.32% % 1.32% % 1.2% 1.2% - 1.8% Debit Card 1.1% 1.1% 0.99% % 1.15% 0.9% - 1.1% 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. 10 Global Payments Week 20 September 2016

11 IF hikes led to the lowering of eligibility requirement for premium credit cards Credit Card Type IF rate Min. annual income requirement (industry range) Platinum % RM24,000 RM100,000 Super Premium % RM36,000 RM200,000 Super Premium % RM120,000 RM240,000 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.

12 Payment Card Reform Framework (PCRF) to promote efficiency and competition in the payment card market 1 Policy objectives Curb indiscriminate increases in interchange fees Address market distortions to enhance payment efficiency and competition 2 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 12 Global Payments Week 20 September 2016

13 IF ceilings to curb cost escalation whilst promoting market development IF rates prior to 1 Jul % % % New IF rates effective 1 July 2015 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 ( ) 0.48% (post-2020) IF ceilings for debit and prepaid cards are set at the eligible cost level to position them as costeffective 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 ( ) 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. 1 Between , the IF rate is set at 0% for the government sector with relatively low acceptance of payment cards % for card schemes that establish a Market Development Fund and 1.00% for those that do not. 13 Global Payments Week 20 September 2016

14 RM1.1 billion to be invested by the industry for infrastructure development July Chip & PIN initiative Contactless debit card initiative (MCCS 1 ) Increase POS terminals to 800k (25 terminals per 1k inhabitants) 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. 14 Global Payments Week 20 September 2016

15 Debit Cards: New and improved features Existing Debit / ATM cards New Debit / ATM cards Standalone Co-badged with 2 debit brands Co-badged with 2 debit brands 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

16 Marketing Development Fund (MDF) to support expansion of POS terminals 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 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 Global Payments Week 20 September 2016

Promising progress made since PCRF implementation 1.60% Average MDR by card types 350,000 No. of POS terminals +15% 1.40% 1.20% 300,000 250,000 +5% +18% 1.00% 200,000 0.80% 0.60% 0.

17 Promising progress made since PCRF implementation 1.60% Average MDR by card types 350,000 No. of POS terminals +15% 1.40% 1.20% 300, ,000 +5% +18% 1.00% 200, % 0.60% 0.40% 150, , % 50, % H H 2016 Domestic brand debit card International brand debit card Credit card The average MDR has started to trend downwards across all card types. Growth in POS terminals had tripled from an average of 5% ( ) 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 17 Global Payments Week 20 September 2016

18 Fostering innovation and collaboration 18

19 Desired payment landscape Malaysia s Payments Infrastructure Desired Outcomes Enhance efficiency and productivity Promote financial inclusion Key Attributes Catalyst for innovation and value creation Safe and reliable Open and Interoperable Efficient and low cost Meet user needs Flexible and future-proof Key Policy Thrusts Proportionate regulation Network expansion and cost reduction Effective competition

20 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 20

21 A transformed NPAC as a platform for innovation and collaboration Steering Committee Service Provider Consultative Group User Consultative Group Steering Committee Set high-level strategic objectives Ensure sustained transformation of the payment landscape Service Provider Consultative Group To consult, coordinate and implement industry efforts User Consultative Group To provide user feedback on payment services 21

22 Conclusion 22

23 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 23

PAYMENT CARD REFORM FRAMEWORK

PAYMENT CARD REFORM FRAMEWORK EFFECTIVE 1 JULY 2015 YIP KAH KIT PAYMENT SYSTEMS POLICY DEPARTMENT BANK NEGARA MALAYSIA [1] 1 Payment System Landscape [2] Context Setting 2 debit cards per adult 7 terminals