Financial Sector Talent Enrichment Programme

Payment Systems in Malaysia

Cheah Kim Ling Payment Systems Policy Department Bank Negara Malaysia 22 April 2011
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What do we want to accomplish today?

At the end of the session, participants would be able to:
Gain better understanding of the Malaysian payment system Be familiar with the Large Value Payment System Understand retail payments Appreciate the importance of electronic payment in the nations development

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What are on our plates today?

Session 1 What is payment system? What is the structure of the Malaysian payment systems? What is SIPS and LVPS and the risks associated to it? BREAK Session 2 What are the retail payments in Malaysia, the risks and how does it work? Challenges in managing payment systems Migration to Electronic Payments BREAK Session 3 Knowledge assessment (a.k.a. games)

Financial Sector Talent Enrichment Programme

Visualizing your emotions throughout the session

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Introduction
Payment and settlement systems are to economic activity what roads are to traffic: necessary but typically taken for granted unless they cause an accident or bottlenecks develop
64th BIS Annual Report (1994)

What is a payment system? A payment system consists of instruments, banking procedures, and typically interbank funds transfer systems that ensure the circulation of money
BIS CPSS - Jan 2001 Financial Sector Talent Enrichment Programme 5

What is the structure of Malaysias payment systems?

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Snapshot of Payment and Clearing Systems in Malaysia

Large Value Payment System Major Retail Payment System eSPICK, IBG, SAN, e-Debit, FPX Securities Settlement System Securities/Equities Clearing Derivatives Clearing

RENTAS

Participated by: Licensed FIs, DFIs, Cagamas, KWSP, MEPS

Commercial banks, Islamic banks, Investment banks, DFIs

Investment banks, Stock brokers Derivative firms

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Systemically Important Payment System

Large Value Payment System

Payment systems in Malaysia

Retail Payment

System Instrument Channel

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What is SIPS and LVPS?

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Systemically Important Payment System (SIPS)

Since payment systems are a major channel for transmitting money, the effects of its failure can spread through domestic and international financial systems and markets and threaten the stability of the currency and the financial markets

If the failure of a system or a participant can cause other participants to fail and is thus able to transmit shocks within the financial infrastructure, such a system is called a systemically important payment system (SIPS)
European Central Bank
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Large Value Payment System (LVPS)

Typically process a relatively small number of high-value and time-critical payments Essential to the proper functioning of the financial system Its failure could trigger disruptions or transmit shocks, both at local and at cross-border level How large is large?
Trx that pass through Malaysian LVPS

Malaysian economy

Times 60 55 50 45 40 35 30 25 29.7

RENTAS Turnover against GDP

RENTAS: Daily average transaction in 2010

Item
51.5

IFTS 151.0 12,335

SSDS 8.1 377

Total 159.0 12,712

Value (RM bil) Volume (trx)

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

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Evolution of Large Value Payment System (LVPS)

Deferred Net Settlement Systems (DNS)
Effects the settlement of obligations between two or among various counterparties on a net basis at some later time (typically at the end of the day)

Provides continuous (real-time) settlement of funds transfers individually on an orderby-order basis (gross basis)

Real Time Gross Settlement System (RTGS)

liquidity cost gridlock risk settlement risk efficient Suitable for smaller economy

liquidity cost gridlock risk

settlement risk efficient Suitable for growing economy

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What are the risks in managing LVPS?

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Risks involved in RENTAS and its mitigation

Liquidity & Credit
Risk of gridlock Liquidity cost Credit risk to borrower (BNM) System failure Human failure Unexpected incidence/ disaster Concentration risk Failure of third party service providers Different time zones for cross currency settlement Public and international perception on BNM Collateralized intraday facility Liquidity optimiser

Operational

Robust business continuity and disaster recovery plan Compliance with international standards Issuance of guidelines and rules

FX Settlement

Cross currency settlement arrangements Robust oversight framework to ensure no major disruptions in operations
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Reputation

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BREAK

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Systemically Important Payment System

Large Value Payment System

Payment systems in Malaysia

Retail Payment

System Instrument Channel

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The evolution of Malaysias retail payment system

2000s 1990s Pre-1990s
1897 - Currency notes & coins introduced 1959 clearing of cheques undertaken by BNM 1967 issuance of RM 1980s
Payment cards were introduced 3 domestic ATM networks were established
2000 IBG implementation 2002
Chip-based ATM cards was introduced

1997
Integration of domestic ATM networks into one Image-based cheque clearing system (SPICK) was introduced E-money was introduced (Touch nGo)

(completed: 2004) Introduction of mobile banking

2004 FPX implementation 2005
EMV migration for credit card

1999 MEPS Cash commercial pilot was launched

completed Contactless credit card introduced ATM regional link Mobile payments was introduced Liberalisation of remittance policy

2006
HOUSe was established by 4 LIFBs ATM functionality enhanced:
IBFT Bill payments IBG

1984 Automation of the cheque clearing system (KLACH)

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Retail payments in Malaysia

System
eSPICK Shared ATM Network Interbank GIRO Financial Process Exchange FPX) Remittance

Retail Payments

Instrument

Cheque Credit card Charge card Debit card/ATM card E-money

Channel

ATM Internet banking Mobile banking Mobile payment

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Overview of cheque clearing process

Manual clearing Clearing of cheque done by banks KLACH Automation of check clearing SPICK Image-based cheque clearing system eSPICK (CTCS) Check Truncation and Conversion System

Physical Cheques & images

Images

Clearing House Collecting Banks

Paying Banks

Collect & process cheques in batches, and submit to CH

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Process, clear and settle amounts

Verify and honour the cheques

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Shared ATM Network

MEPS
Shared ATM network which connect member banks and DFIs to enable customers to access their accounts from one anothers ATM MEPS also established cross-border ATM links with Indonesia (ARTAJASA and Rintis), Singapore (NETS), Thailand (ITMX), China (CUP) and Korea (KFTC) to facilitate cross-border cash withdrawals

HOUSe
Shared ATM network which connect 4 LIFBs to enable customers to access their accounts from one anothers ATM

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Shared ATM Network

Within Malaysia

ATM

Acquirer Bank

MEPS Switch

Issuer Bank

Regional partnership arrangement

ATM

Acquirer Bank

Partners Switch

MEPS Switch

Issuer Bank

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Interbank Giro (IBG)

What is it?
An inter-bank funds transfer system operated by MEPS to facilitate payments and collections of up to RM500,000 per transaction (credit transfers) Payment services offered vary based on banks i.e. 3rd party funds transfer, loan and hire purchase repayment, credit card repayment and salary payments Implemented in October 2000 and currently has 36 participating banks

How does it help me?

Make payments/transfers via any participating bank (e.g. Public Bank) to another person who holds an account with another participating bank (e.g. Citibank) without issuing cheques, bank drafts, etc. Can be done OTC and online

Why should I use it?

Convenient Efficient both in terms of time spent and cost Safe and secure

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Interbank Giro (IBG)

Coming soon
365 days availability Near real-time transfer

MEPS Switch

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Financial Process Exchange (FPX)

What is it?
A multi-bank Internet payment platform operated by MEPS to facilitate on-line payments for e-commerce transactions Introduced in October 2004 and currently has 17 participating banks

How does it help me?

Make payments for online purchases at participating merchants provided your bank is a member of FPX Payment is made using your internet banking platform Payment is directly debited from your bank account Make payments using auto-debit instructions, e.g. mthly insurance premium

Why should I use it?

Convenient Make purchases online Dont need a credit card to buy online Pay as you buy (direct debit) Safe and secure no fraud cases reported thus far

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Financial Process Exchange (FPX)

Buyer selects his bank from list of participating banks

Buyer is connected to Internet banking page of his bank and enters the necessary details (alike when internet banking transaction is performed

Buyer choose to pay via FPX at sellers website

Sellers account

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Remittance
What is it?
When a fund is transferred from one location to another (usually between countries), the process is called 'remittance'. Currently governed by two legislations under BNM Money Service Business Act is in the pipeline

Liberalisation measures
Allow qualified non-bank operators to provide remittance services since 2005 Allow banks to appoint local agents to collect and disburse funds for remittance on their behalf

Rationale To migrate the informal to formal remittance channel To monitor the inflow and outflow of funds To address AML/CFT issues To safeguard consumer interest To promote competition and enhance efficiency

39 non-bank RSPs as at end-2010 Outward and inward remittance in 2010 was RM13.4 billion and RM4.7 billion respectively
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Retail payments in Malaysia

System
eSPICK Shared ATM Network Interbank GIRO Financial Process Exchange FPX) Remittance

Retail Payments

Instrument

Cheque Credit card Charge card Debit card/ATM card E-money

Channel

ATM Internet banking Mobile banking Mobile payment

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Commonly used payment instruments in Malaysia

VALUE 2010
Charge card 0.3% Debit card 0.2% E-Money 0.1%

VOLUME 2010

Credit card 4.1%

Debit card 1.5% Cheques 16.9%

Charge card 0.4%

Cheques 95.2%

Credit card 24.1%

E-Money 57.1%

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Credit card
Features
buy now pay later concept Cardholder given a line of credit Eligibility requirements apply minimum age & income Minimum payment must be made before due date Balance unpaid after due date will attract finance charges

27 issuers (4 non-banks) 9 million cards in circulation (end-2010) 70% active 294.9m transactions worth RM79.8b in 2010 NPL ratio: 1.7%

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Credit card transaction flow

Card Brand Owners/ Switch operators
4. Request authorisation 7. Approve/ Reject 5. Request authorisation 6. Approve/ Reject

Acquiring bank
3. Request authorisation 8. Approve/ Reject

Issuing bank
1. Issues card

2. Make payments Merchant Financial Sector Talent Enrichment Programme Cardholder 30

Credit card transaction flow of funds and fees

Card Brand Owners/ Switch operators
Membership fee Subscription fee Authorisation fee Settlement fee Others (net) Interchange fee Membership fee Subscription fee Authorisation fee Settlement fee Others

(net)

Acquiring bank
Merchant discount rate (MDR)

Issuing bank

Annual fee Finance charges Penalties Others Merchant Cardholder

Flow of funds Fees

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Charge card
Features
buy now pay later Outstanding balance need to be settled in full by end of billing month Fees are often higher than credit cards Charge cards are often associated with prestige

7 issuers 182 thousand cards in circulation (13% active cards) 5 million transactions worth RM5.2 billion

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Debit card
Features
buy now pay now Transaction amount is deducted immediately from bank account Spending limit is represented by the amount of funds available in bank account Manage finances more effectively No late payment penalties, finance charges, and card debts No income requirement Withdraw cash from participating merchants International (Visa/MasterCard) and ATM (e-debit)

29 issuers (16 international; 13 e-debit) 34 million cards in circulation international (4 million), edebit (25 million), combo (5 million) 18 million transactions worth RM4.7 billion

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Electronic Money (e-Money)

Features
pay now buy later Transaction amount is deducted immediately from prepaid balance Spending limit is represented by the amount of funds available in prepaid account Ideal for small value payment e.g. transportation and fast food outlets No late payment penalties, finance charges, and card debts No income requirement Predominantly used in transportation sector Can be broadly categorised into card-based and network-based

26 issuers banks & non-banks 699.3 million transactions worth RM2.7 billion

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Retail payments in Malaysia

System
eSPICK Shared ATM Network Interbank GIRO Financial Process Exchange FPX) Remittance

Retail Payments

Instrument

Cheque Credit card Charge card Debit card/ATM card E-money

Channel

ATM Internet banking Mobile banking Mobile payment

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Payment Channels
Internet
Banking products and services offered on the internet through access devices including personal computers and other intelligent devices Financial products and services accessible via the mobile phone ATM: Automated teller machine that enables a customer to perform banking activities without visiting the bank Phone banking

Mobile Others

Internet banking No of providers No of subscribers No of transactions1 Value of transactions

1

Mobile banking 11 0.8 million 2.3 million RM137.9 million

Mobile payments 6 0.7 million 4.9 million RM529.6 million

27 9.8 million 758 million RM1.1 trillion

Financial and non-financial transactions

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Challenges in managing retail payment system

Balancing Act
Systems Security vs. Systems Efficiency Market Innovation vs. Consumer protection Technological Advancement vs. Regulatory Expertise

Technological Advancement
Increasing Complexity and Connectivity Increased Processing Power/Speed Blurring of Borders and Boundaries Geographical and Jurisdictional Issues Facilitates emergence of new fraud/risk

Emergence of New Players in the Industry

New risks

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Migration to e-Payment

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Why E-Payment?

MORE Cost savings Straight-Through Processing (STP) Efficiency and safety

LESS Cost of printing, minting, distribution, control and destruction of notes and coins Costs related to transportation, security, insurance, fraud, robberies, staff and administration Cost of doing business Need to maintain cash and thereby, reduces money demand

Productivity gains Boost financial intermediation Financial inclusion Countrys competitiveness

"By increasing the efficiency and velocity of payments in electronic payment networks, there is a potential to create cost savings of at least 1 percent of GDP annually over paper-based systems in any given economy"
Source: A white paper by Global Insight, which was presented at the ministerial-level session of the United Nations Economic and Social Council in Geneva in June 2003 Financial Sector Talent Enrichment Programme 39

Has it been effective?

Number of transactions per capita 60 50 40 30 e-Payments 20 10 Cheques 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10
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6 4 2 Cheques 0 '00 '01 '02 '03 '04 '05 '06 '07 '08 '09 '10 e-Payments 16 14 12 10 8 Turnover to GDP

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Conclusion: Regulators greatest challenge to achieve a balanced regulatory framework

Promote the development of efficient and innovative payment services

Maintain the overall stability and integrity of the payment system

Less regulatory control Promote free market practices Allow for free market access and competition Promote innovation

More stringent prudential requirements Strengthened oversight Consumer protection measures National interest considerations

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BREAK

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KNOWLEDGE ASSESSMENT

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How e are you?

Place all the payment instruments that you have with you on the table. Lets do a quick count.

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Mobile banking Internet banking Credit card Debit card Electronic money (card) Electronic money (virtual/internet) Electronic money (mobile) MyKad Charge card Cheque

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How well do you know your payment instruments?

Tell us why people should use you

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