In line with the global trend, Malaysia in her bid to transform herself into a cashless society has seen an unprecedented increase over the recent years in electronic wallet ("e-wallet") operators offering a host of electronic money ("e-money") products. Local and international players have both entered the scene to tap into the Malaysian e-wallet market. Several factors point towards Malaysia being a nation well-placed to embrace the e-wallet trend. For instance, according to the Department of Statistics Malaysia ("DOSM"), Internet penetration of the Malaysian market stood at 85.7% in 2017.1 Further, according to the Malaysian Communications and Multimedia Commission ("MCMC"), smartphone penetration of the Malaysian population has risen to 75.9% in 2017.2 The MCMC also reports that smartphones remained the most popular means for Malaysians to access the Internet in 2017, making Malaysia a mobile-oriented society.3
As such, with the prevalence of smartphones and accessibility of the Internet, Malaysia appeared to be ripe for entry of e-wallets. Indeed, according to the latest statistics4 published by the Central Bank of Malaysia or Bank Negara Malaysia ("BNM"), the number of network-based users of e-money for the first half of 2018 alone saw an increase of nearly 30% when compared to the entire year of 2017, and nearly 165 times when compared to the entire year of 2005. As part of BNM's drive for a cashless society, BNM has also shifted its focus in 2018 on promoting mobile payments which will greatly impact the adoption of e-money in Malaysia.5
What is e-money?
BNM defines e-money as "a payment instrument that contains monetary value that is paid in advance by the user to the e-money issuer."6 According to BNM, e-money can be issued in different forms, such as card based (e.g. prepaid card) and network-based which can be accessed via the Internet, mobile phones or any other devices.
How is e-money governed?
Before the Financial Services Act 2013 ("FSA") was enacted, e-money was governed under the Payment Systems Act 2003 (repealed by the FSA). E-money is now governed under the FSA as a payment instrument.7 Under the FSA, issuers8 of designated payment instrument ("DPI") are required to obtain BNM's prior approval. Empowered by the FSA, BNM has prescribed e-money as a DPI under the Financial Services (Designated Payment Instruments) Order 2013 ("DPI Order"). Order 2 of the DPI Order includes "electronic money that is any payment instrument, whether tangible or intangible, that- (i) stores funds electronically in exchange of funds paid to the issuer; and (ii) is able to be used as a means of making payment to any person other than the issuer."
BNM has also prescribed several requirements under the E-money Guidelines with various operational requirements in the form of principles such as the requirement to establish adequate governance and operational arrangements, to ensure proper risk management is in place, to ensure prudent management of funds etc. E-money issuers are prohibited from, among others, issuing e-money at a discount, extending loans to other persons using the money collected, extending credit to the users etc. It is also worth noting that e-money issuers are required to be locally incorporated and must ensure that all transactions in Malaysia are in Malaysian Ringgit. They are also required to comply with, among others, the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001.
What's happening in 2018?
On 20 March 2018, BNM issued the Interoperable Credit Transfer Framework ("ICTF") after taking into account the public feedback received. The operationalisation of the ICTF was stated to be an area of primary focus by BNM in 2018 in BNM's 2017 Report. The ICTF has since come into effect on 1 July 2018.
The ICTF is essentially the establishment of a shared payment infrastructure to enable interoperability of credit transfer services which would expand network reach and avoid market fragmentation. This would impact both inter-bank credit transfers and inter-scheme (e-money) credit transfers. All such credit transfers must be processed in Malaysia through the operator of the shared payment infrastructure, Payments Network Malaysia Sdn. Bhd. ("PayNet"),9 an entity partly owned by BNM. This increases BNM's regulatory oversight on the credit transfer system to ensure the safety and integrity of the same.
A crucial part of the ICTF is the establishment of the Real-time Retail Payments Platform ("RPP") by PayNet which consists of: (i) the National Addressing Database ("NAD") which links a bank or e-money account to common identifiers ("CI") of an account holder (e.g. mobile phone number, identification number, company/business registration number) which would be used to facilitate payment; and (ii) an interoperable Quick Reference ("QR") scheme and common QR codes which allow customers to make and receive payments. According to PayNet's Technology Roadmap10, the RPP remains at its infancy stage as it is currently undergoing testing and on-boarding of banks between December 2017 and October 2018.
Under the ICTF, "eligible" issuers of e-money must, among others, ensure that its customers are able to make payment to and receive payment from another customer of the same or another "eligible" issuer of e-money either through use of the RPP i.e. customers of e-wallet X must be able pay and receive e-money from customers of e-wallet Y. Transaction fees for eligible credit transfer transactions under RM5,000 must also be waived. These requirements, however, appear to only apply to issuers of e-money which are eligible according to the ICTF (e.g. issuers with 500,000 active users for 6 months consecutively).
With the sudden increase in e-wallets in Malaysia, it begs the question of whether e-wallets and e-money would take over electronic payment in Malaysia and become the future of Malaysia's cashless society in the making. Whilst BNM has been very supportive in encouraging growth in this area, e-wallets nevertheless face a number of challenges in Malaysia.
One of the biggest obstacles in the widespread adoption of e-wallets, apart from cybersecurity risks, is the availability and sheer convenience of payment cards such as debit cards over e-wallets. Indeed, BNM does not anticipate that mobile payment would replace debit cards and credit transfers in displacement of cash and cheques, but expects the former to complement the latter to accelerate the displacement of cash and cheques.11 However, with the waiver of transactions fees for credit transfers under RM5,000 and the cost effectiveness of not requiring a Point-of-Sale Terminal, the future of e-wallets in Malaysia remains promising.