Can e-payment players capitalise on lifting of barriers?

This article first appeared in The Edge Malaysia Weekly, on February 12, 2018 - February 18, 2018.
Can e-payment players capitalise on lifting of barriers?
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COME July, Bank Negara Malaysia’s Interoperable Credit Transfer Framework (ICTF) will come into effect, effectively dropping the barriers that previously kept non-bank e-payment players out of the established banking ecosystem.

The measures themselves should not catch banks and non-banks by surprise — both have been in consultation with Bank Negara. The ICTF itself was circulated to the industry in December last year to obtain feedback, which was submitted earlier this year.

But once implemented, the ICTF could have far-reaching implications for consumers and how they will pay for goods and services in the future. Here is a hint: Bank Negara hopes it won’t involve physical cash.

So what will the ICFT do?

The framework wants to ensure that payment services will be interoperable. To achieve this, banks and non-bank e-money issuers will have to collaborate at the infrastructure level, as opposed to developing in exclusive and separate ecosystems.

One of the more eye-catching aspects of the ICFT is the waiver of transaction fees for eligible credit transfers of less than RM5,000. In other words, consumers will no longer be charged for transferring money or payment services.

Note that the ICFT is still a draft exposure and may be subject to changes following the feedback process.

“This may be bad for the banks in the short term; they will lose the transaction fee income. But in the long run, it will be good for the banks,” says one industry player.

He argues that banks have been relatively complacent, enjoying the easy income from transaction fees.

“In China, for example, Alipay and WeChat Pay were able to disrupt the banks because they were not charging transaction fees, but the banks continued to do so. This attracted the customers to use their services,” he explains.

By waiving the transaction fees and levelling the playing field, e-money players will have to find other ways to attract consumers to use their services. Simply, they will have to add value above and beyond mere transactions.

It is important to note that the ICFT explicitly makes this exception.

“A banking institution and an eligible issuer of e-money may impose a fee on customers who are on-boarded as merchants for value-added services provided in addition to credit transfer services and [other] facilities,” notes the ICFT.

One example of value-add would be charging merchants for point-of-sales systems that are integrated into the payment systems.

“Simply subsidising transaction costs is the lazy way to gain scale. E-money players will have to be innovative and find ways to attract customers by introducing products with compelling use-cases. They can throw money at consumers to create the initial traction, but such a strategy is not sustainable in the long term,” explains one industry executive.

With the success of Alipay and WeChat Pay in China, many local companies big and small have been looking to make inroads into the space.

One is DiGi.Com Bhd, which has launched mobile payment app VCash.

ACE Market-listed PUC Bhd — formerly PUC Founder (MSC) Bhd — ventured into e-payments last year, with an app called Presto.

For now, at least, both are giving away small amounts of cash to attract users.

VCash is offering RM5 outright to new users. Meanwhile, Presto is taking on a gamified approach by offering users a chance to win cash back when sending a red packet or ang pau over the app.

In constrast, such wallets will have to contend with competition from the likes of Grab Pay from the ride-hailing company Grab, which will be paired with an established use-case that has widespread adoption.

It remains to be seen which e-money player will emerge dominant, but the ICFT should ensure that giants like DiGi.Com and upstarts like PUC will have a relatively level playing field in terms of access.

“The operator of the shared payment infrastructure is required to establish a National Addressing Database (NAD), while banks and eligible non-bank e-money issuers are required to enable customers to make payments to one another through the use of common identifiers (such as mobile phone numbers and identity card number) registered with the NAD,” Bank Negara says in an email response to questions.

“The decision on how the NAD will be populated will be decided by the operator of the shared payment infrastructure in consultation with its participants,” adds the central bank.

Simply, consumers should be able to transact between bank accounts and e-money accounts seamlessly by using everyday identifiers like mobile phone numbers or identity card numbers.

Naturally, the ICFT also comes with a host of compliance and risk management measures to ensure conformity with existing KYC (know your customer), customer due diligence, anti-money laundering (AML) and counter financing of terrorism (CFT) regulations.

For example, it transfers liability to the party (bank and non-bank) with the weaker controls, on AML or CFT, for instance.

While banks are compelled to open their doors to non-banks via the NAD, new entrants will have to go through an application process, and may be subject to conditions. Bank Negara brushes aside concerns that potential operators will be prevented from entering the ecosystem.

“Fair and open access to the shared payment infrastructure by both banks and eligible non-bank e-money issuers is a key element of the ICTF. As such, the ICTF mandates for access requirements to the shared payment infrastructure to be objective, non-discriminatory and risk-based,” it explains.

“The ICTF has safeguards to mitigate further the risks of a financial institution (bank or non-bank) being denied fair access,” the central bank adds.

The operator of the shared payment infrastructure is required to establish an appeal-handling process to hear an appeal made by any financial institution where access has been denied or if there are disagreements regarding the access conditions imposed by the operator.

Thus, come July, when the ICFT is implemented, the structural barriers that have been holding back e-money issuers will be removed. But it remains to be seen if they will be able to develop a compelling proposition for users to adopt their digital wallet.


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