Is Cash Still King?

Lee Ai Hsian discusses the electronic money system in Malaysia.

Cash is king”, or so the old adage goes.
With the advent of digital payment services and the two biggest electronic payment providers, Alibaba and WeChat, making their mark in Malaysia - could this be the end of cash? In this article, we take a closer look at electronic monies, its governing laws and how Malaysian consumers are protected under our existing legislation.
Payment instruments in Malaysia are governed by the Financial Services Act 2013 (“FSA”). The issuance of a “designated payment instrument” requires the prior approval of Bank Negara Malaysia (“BNM”). Under the Financial Services (Designated Payment Instruments) Order 2013, the following instruments have been prescribed as “designated payment instruments”: (a) charge cards; (b) credit cards; (c) debit cards; and (d) electronic money.
Under the FSA, “electronic money” is defined as “any payment instrument, whether tangible or intangible, that:
  1. stores funds electronically in exchange of funds paid to the issuer; and

  2. is able to be used as a means of making payment to any person other than the issuer.
One of the most recognisable form of electronic money (“e-money”) in Malaysia is the Touch ’n Go card which can be used for transit-related services and at selected merchants.
The advance in technology and the affordability of mobile devices in recent years have seen the introduction of mobile electronic wallets which now allow consumers to also use their smartphones as wallets.
An electronic wallet (“e-wallet”), or sometimes also referred to as a ‘digital wallet’, is a digital account that stores funds electronically in order to make payments. An e-wallet will generally need to be linked to an individual’s bank account or credit/debit card so that a ‘top-up’ of funds can be made into his e-wallet to purchase goods and/or services from a merchant. An e-wallet essentially operates in the same way as a debit card, and once funded, can be used as an instrument of payment.
With the introduction of Quick Response (“QR”) code payments for mobile e-wallets, the e-wallets of today can now not only be used for online transactions but also at physical retail outlets through the use of mobile devices fitted with scannable QR codes to facilitate such transactions.
China is leading the way to becoming a cashless society in which hundreds of millions of shoppers are increasingly using their smartphones to buy everything from designer handbags to street snacks. It has been reported in Beijing that even beggars are now soliciting for alms using QR codes and e-wallets, and that bridesmaids are wearing QR codes around their necks to collect gifts of money for the bride and groom (and reportedly upsetting the groom's mother with the unorthodox behaviour!). At the heart of the country’s digital payments boom are QR codes which are essentially two-dimensional images made up of a series of black and white squares.
Digital payments using mobile e-wallets are processed by scanning QR codes at the point of sale with the use of a QR scanner and smartphone with a built-in camera. Depending on the merchant or nature of business, there are generally two different methods for a merchant to accept QR code payments:
  1. Static QR codes: During payment, a consumer will need to scan the merchant’s business’ unique QR code (printed or generated from that merchant’s smartphone or mobile payment app) and enter the relevant amount payable.

  2. Dynamic QR codes: For every sale transaction, a dynamic QR code will be generated by the merchant which is tied to the amount of that transaction. This QR code will be scanned by the consumer using his mobile phone and the equivalent amount will be deducted from the funds in his mobile e-wallet.
QR codes are generated instantaneously and a transaction is completed within seconds once a consumer inputs his PIN or verification code within the app in his mobile device.
Because QR codes appear to be so simple and accessible, they are vulnerable to scammers who may try to trick users into scanning ones that may have pre-installed viruses designed to steal money or personal information. As a consumer, one would ask as such, “How safe are e-wallets?”
Consumers can take comfort that there are adequate laws and security measures in place in Malaysia to safeguard their e-wallet funds. Pursuant to the Guideline on Electronic Money (“E-Money Guidelines”) issued by BNM, e-money issuers are required to comply with specific operational, security and risk standards when operating their e-money schemes to safeguard the integrity of their systems, data and records.
Issuers of e-money in Malaysia can be divided into two categories, namely:
  1. Large e-money scheme issuers – these are issuers with a purse limit exceeding RM200 or outstanding e-money liabilities for six consecutive months amounting to RM1 million or more; and

  2. Small e-money scheme issuers – these are issuers with a purse limit not exceeding RM200 and outstanding e-money liabilities of less than RM1 million.
Under the Financial Services (Minimum Amount of Capital Funds) (Approved Person) Order 2013, large e-money scheme issuers are required to maintain minimum capital funds of RM5 million or 8% of its outstanding electronic money liabilities, whichever is higher. Small e-money scheme issuers are subject to a minimum capital funds requirement of RM100,000.
Large e-money scheme issuers, specifically, are also required under the E-Money Guidelines to deposit all funds collected in exchange of the e-money issued in a trust account with a licensed institution in Malaysia. This trust account must be established in accordance with the Trustee Act 1949 and a copy of the trust deed must be submitted to BNM. The funds in the trust account are to be used only for refunds to users and payments to merchants.
Investment of such funds are permitted under the E-Money Guidelines. However, this is limited to only high quality liquid ringgit assets such as deposits with licensed institutions, debt securities issued or guaranteed by the Government and BNM, Cagamas debt securities, and other instruments specified by BNM.
For small e-money scheme issuers, BNM requires such issuers to place the funds collected in deposit accounts with licensed institutions, separate from their other accounts, and for such account to be managed in a manner akin to a trust account arrangement. Funds held by small e-money scheme issuers may only be invested as bank deposits.
The requirement for e-money issuers to establish trust arrangements in respect of funds collected in exchange of the e-money issued serves to protect the consumers’ e-wallet funds in the event an issuer becomes insolvent.
Apart from the specific requirements stipulated in the FSA and E-Money Guidelines, an approval issued by BNM may also be subject to conditions, for example:
  1. the imposition of a maximum prescribed limit for e-wallets and daily transactions by a user;

  2. the prior approval by BNM’s Consumer and Market Conduct Department of any proposed fees and charges and the terms and conditions of the e-money scheme;

  3. the submission of monthly statistics on the operation of the e-money business;

  4. the maintenance of a prescribed liquidity ratio;

  5. the requirement to store sensitive customer information in Malaysia and not offshore;

  6. the maintenance of a secure QR and bar code security setup; and

  7. the restriction for all transactions and transfers to be conducted within Malaysia.
E-money issuers are also subject to anti-money laundering laws of Malaysia and are required to adhere to the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 of Malaysia and the relevant regulations and guidelines – these include reporting obligations, customer due diligence and record-keeping requirements.
The adoption of electronic payments and mobile banking have seen an exponential rise in Malaysia in recent years. According to BNM’s Quarterly Bulletin (Second Quarter 2018), financial transactions via mobile banking have increased at a compounded annual growth rate of 91% over the past seven years, recording a total of 106.1 million transactions valued at RM48.3 billion in 2017 (2011: 2.2 million transactions; RM0.9 billion). The number of subscribers to mobile payment services offered by non-banks have also more than quadrupled from 0.8 million subscribers in 2017 to 3.4 million subscribers as at end-June 2018. And in the first half of 2018 alone, mobile payment transactions processed by non-bank e-money issuers stood at 7.2 million transactions (valued at RM404.7 million), which is more than seven times higher than the 1.0 million transactions in 2017 (valued at RM240.3 million).
To spur even greater adoption of mobile payments, the Interoperable Credit Transfer Framework (“ICTF”) was introduced by BNM (effective 1 July 2018) to establish a shared payment infrastructure which connects bank and non-bank accounts to ensure the interoperability of their respective credit transfer services. The ICTF outlines requirements aimed at ensuring a fair and open access to shared payment infrastructure to promote a level playing field and to foster collaboration between banking institutions and non-bank e-money issuers at the infrastructure level.
In line with the ICTF’s principle of ‘collaborative competition’, another key role in facilitating seamless and secure mobile payments is the recently launched Real-Time Retail Payments Platform (“RPP”). With the implementation of the RPP by Payments Network Malaysia Sdn Bhd (“PayNet”) in early January 2019, participating e-wallet services are now able to use a single QR standard for payments for goods and services. Consumers would no longer need to switch between the different services provided by banks (e.g. Maybank’s QRPay or CIMB’s CIMB Pay) and non-banks (e.g. Alipay, WeChat Pay, Boost or Favepay) to make payments, as merchants will display a single QR code that will be compatible with multiple e-wallet services. It has been reported that PayNet has BNM as its largest shareholder and 11 other major banks in Malaysia as joint shareholders.
Malaysian consumers are currently spoilt for choice with over 40 e-money issuers in the market with a multitude of incentives, discounts and cash-back promotions on offer. The move towards electronic payments and a cashless society is aided by the reforms and measures which have been implemented by BNM to encourage the use of electronic payment methods. The main challenge for digital payments however is that cash is intuitive, and it remains to be seen whether Malaysian consumers are prepared to fully embrace a cashless society. Whilst cash may still be king for now in Malaysia, its reign may come to an end in the not-too-distant future as an increasing number of young tech-savvy consumers embrace electronic payments as the preferred means to carry out financial transactions.

You may view the full issue of Skrine’s Legal Insights Issue 1/2019 here.