Reforms in card payment systems

The move towards a cashless society has begun which will see some 800,000 payment terminals springing up in the next five years.

MALAYSIA is headed towards a cashless society, with the reforms having begun on Jan 15.

The move to encourage the usage of debit cards isn’t surprising, considering that some 90% of Malaysia’s transactions are still conducted in cash. Most developed countries such as Australia, New Zealand and the United Kingdom conduct a substantial part of their transactions via cards.

In Malaysia, the cost of handling physical cash is inefficient and expensive, costing banks an estimated RM1.8bil a year.

Last month, Bank Negara undertook significant reforms in the card payment industry, which will indefinitely remodel the way Malaysians make payments.

Raj says the cost to install and maintain the EDC terminals are too high for some of the smaller merchants.

These reforms will affect banks, merchants, terminal and card manufacturers, and payment service providers.

The entire rehaul of the payment industry will potentially impact revenue of RM5.1bil – the estimated amount that banks are collectively expected to earn from now till 2020 from the provision of credit and debit cards based on the current system.

The reforms are expected to result in some cost savings for the financial institutions, who would be assuaged to channel some funds to help develop infrastructure for the reforms in the payment system. The amount, according to Bank Negara estimates, comes up to some RM1.1bil to be invested for infrastucture development.

As a direct result of Bank Negara’s reforms, Malaysians will start to see a lot more card terminals flooding the market. Banks and merchants will be implementing measures to encourage Malaysians to use their debit cards.

Don’t be surprised if one is able to wave one’s debit card at a contactless terminal to pay for an RM5 meal at the mamak stall, or buy a cheap item at the pasar malam.

“Even the pasar malam stall owner will be able to offer payment through cards for small transactions as little as RM5, for instance,” says a bank official.

These measures will directly affect the merchants rather than the consumers. Consumers will, in fact, be oblivious, save for the fact that more merchants will be asking them to swipe their debit cards rather than their credit cards.

The interchange fee incurred for debit cards will be significantly lower, while the interchange fee for credit cards will also be capped to ensure consumers are not short-changed.

For the uninitiated, the interchange fee is incorporated into the merchant fee (or the merchant discount rate (MDR)) paid by the merchant to the acquirer for enabling the merchant to accept payment by cards. Acquirers are financial institutions or third-party agents such as GHL Systems Bhd that provide payment terminals to the merchants.

Bank Negara director of the payment system policy department Tan Nyat Chuan says that in the last 18 months, some indiscriminate increases in the interchange fee have caused acquirers to raise the MDR.

Tan says the implementation of ceilings to the interchange fee will protect the interest of the consumer.

The merchants who are affected by the higher MDR are pressured to pass on the cost to the public by increasing the prices of goods and services. The cost is indirectly borne by all bank customers, even those who do not use payment cards.

“The interchange fee accounts for about 16% of the industry’s total credit card revenue, while the bulk of the revenue comes from interest and finance charges derived from the customers’ credit card revolving balance,” he says.

Tan explains that the main objectives of the framework are to address indiscrimate increases in the interchange fee by ensuring that the cost of payment card acceptance is fair and reasonable.

He says the implementation of ceilings to the interchange fee will protect the interest of the consumer.

“The more affordable cost of payment card acceptance brought about by the framework will also provide incentives for smaller merchants to accept payment cards. This will facilitate small businesses to increase their sales from accepting payment card transactions from both consumers and tourists,” he adds.

On Dec 23, Bank Negara released the Payment Card Reform Framework on its website.

Below are the salient points:

> Card terminals will need to be increased from 220,000 presently to 800,000 by 2020. A portion of this will need to be wireless and contactless.

> Contactless terminals will make up some 30% of all terminals.

> All debit cards have to be contactless enabled. Thus, all debit cards have to be re-carded by 2017.

> Debit card transactions are expected to increase ten-fold by 2020. Consumers can expect great debit card offers as merchants encourage its usage.

> The debit card interchange fee will immediately drop to 0.15% for domestic transactions and 0.21% for international transactions as opposed to 1% on average.

> The interchange fee for credit cards will be capped at an interim ceiling of 1.1% from an average of 1.2% currently up to 2020. It will be brought down to 0.48% by 2021 (if the cost structure remains unchanged).

> All card transactions will move from being signature-based to PIN-based by 2017.

The fee of 0.48% that is to be imposed by card services providers from 2021 onwards is estimated to be the real cost of card payment transactions for banks, based on a study done by Bank Negara.

Where the merchants are concerned, they will have more reasons to instal a payment card terminal due to the lowered costs and they will be able to capture more sales. Of the terminals, as about 30% is to be contactless, there will likely be a higher adoption of mobile point of sales (mPOS), especially by the smaller merchants.

According to industry players, an mPOS can be as cheap as RM150, while the price of the traditional electronic data capture (EDC) terminal can range from RM1,000 to a few thousand ringgit, depending on its specifications.

Fee-wise, users of the mPOS will only have to pay as low as RM15 per month for the solution and software, while the EDC terminal users have to pay anything from RM50 to RM100 per terminal per month.

What’s happening in other countries?

Comparing the situation in Australia with what Bank Negara is doing, Tan opines that the introduction of the payment card reform framework that spans over an interim period of six years allows for a longer time for the adoption of the new system and transition.

Previously, the Reserve Bank of Australia had announced a reduction in the interchange fee with immediate effect, and as a result, all banks in Australia had to adopt the new rates overnight.

On top of that, the central bank had gotten feedback from the financial institutions before it crafted the Payment Card Reform Framework, as it understands that the banks will need time and resources to develop and improve on the payment infrastructure system.

As Malaysia progresses to become a modern and developed nation, going cashless is inevitable.

Most developed countries such as Australia, New Zealand and the UK conduct 90% of their transactions via cards.

On the other hand, close to 90% of Malaysia’s transactions are still conducted in cash.

By having more card acceptance points, the country is also able to capture higher tourist spending, particularly those from advanced nations.

Related stories:

Beneficiaries and losers

How a cashless society will impact the various segments of society

Economy , Payment , credit cards , Bank Negara