Malaysia's Digital Payments Transformation Roadmap
Digital Futures in Southeast Asia
I. Introduction and vision
Malaysia, a rapidly developing nation in Southeast Asia, has been making significant strides in transforming its payment landscape. The country's vision is to create an inclusive, efficient, and secure digital payment ecosystem that supports economic growth and financial inclusion. This roadmap outlines the key strategies and initiatives to accelerate the adoption of digital payments and promote financial inclusion in Malaysia.
The strategic outcomes targeted by 2025 include increasing the share of digital transactions to 50% of all retail payment transactions, expanding financial inclusion to 95% of Malaysian adults having access to a transaction account, and achieving 100% digital payment acceptance among registered businesses.
II. Current landscape of digital payments and financial inclusion
2.1 Mobile and internet penetration
Malaysia boasts high mobile phone and internet penetration rates, providing a strong foundation for digital payments. As of 2020, mobile phone penetration stood at 139.1% (Malaysian Communications and Multimedia Commission, 2020)[1], indicating widespread access to mobile devices. Internet penetration reached 88.7% in the same year, with 27.4 million internet users (Statista, 2021)[2].
2.2 E-wallet adoption
The e-wallet market in Malaysia has seen significant growth in recent years. Major players include Touch 'n Go eWallet, Boost, and GrabPay. In 2020, there were approximately 40 e-money issuers licensed by Bank Negara Malaysia (BNM), with e-money in circulation reaching RM 2.7 billion (Bank Negara Malaysia, 2020)[3].
2.3 Real-time payments
In 2018, Malaysia launched DuitNow, a real-time payment platform that facilitates instant fund transfers using mobile numbers or national ID numbers. This initiative has significantly improved the efficiency of digital transactions in the country.
2.4 Financial inclusion
While Malaysia has made considerable progress in financial inclusion, there are still segments of the population that remain underserved, particularly in rural areas. According to the World Bank's Global Findex Database 2017, 85% of Malaysian adults had an account at a financial institution or through a mobile money provider[4]. However, this leaves room for improvement, especially among lower-income groups and rural populations.
III. The pillars of digital payments transformation
A. Digital payment streams
The transformation of digital payment streams in Malaysia encompasses various transaction types. For Person to Government (P2G) and Business to Government (B2G) transactions, efforts are focused on enhancing and promoting digital channels for tax payments, licensing fees, and other government services. The implementation of a unified government payment portal will streamline these transactions, making them more efficient and user-friendly.
In the realm of Person to Business (P2B) transactions, Malaysia is accelerating the adoption of QR code payments, particularly among small and medium enterprises (SMEs). This initiative is coupled with efforts to promote interoperability between different e-wallets and payment platforms. To encourage businesses to offer digital payment options, the government is considering incentives such as tax benefits or grants.
For Person to Person (P2P) transactions, the focus is on further enhancing DuitNow to improve user experience and functionality. There are also plans to promote cross-border P2P transfers within the ASEAN region, facilitating easier and more cost-effective remittances.
Business to Business (B2B) transactions are being transformed through the digitization of supply chain payments, with a focus on key industries such as manufacturing and agriculture. The promotion of electronic invoicing is another key initiative aimed at streamlining B2B transactions and reducing administrative burdens.
In the Government to Person (G2P) sphere, efforts are underway to digitize the disbursement of social benefits, pensions, and subsidies. The implementation of a unified digital identity system will facilitate secure G2P transactions, ensuring that benefits reach the intended recipients efficiently and securely.
B. Digital finance infrastructure
The development of robust digital finance infrastructure is crucial for Malaysia's digital payments transformation. A key initiative in this area is the implementation of a National Digital ID system. This system aims to provide a secure and trusted platform for online transactions and access to digital services. The National Digital ID is expected to be fully operational by 2024 (Ministry of Communications and Multimedia, 2021)[5], and will play a crucial role in facilitating secure digital transactions across various sectors.
The real-time retail payments platform, DuitNow, continues to be enhanced and promoted. Future developments for DuitNow include increasing the transaction limit to accommodate larger payments and expanding its use cases to include features such as recurring payments and request-to-pay functionality. These enhancements will make DuitNow more versatile and useful for a wider range of transactions.
Open Banking is another key area of development in Malaysia's digital finance infrastructure. Bank Negara Malaysia has been working on an open banking framework to promote innovation and competition in financial services. The implementation of open banking is expected to be phased, with the first set of APIs focusing on product information and customer acquisition (Bank Negara Malaysia, 2021)[6]. This initiative will enable fintech companies and third-party providers to develop innovative financial products and services, enhancing the overall digital finance ecosystem.
Enhancing internet connectivity is crucial for the success of digital payment initiatives, particularly in rural areas. Malaysia is collaborating with the Malaysian Communications and Multimedia Commission (MCMC) and telecommunications providers to improve internet infrastructure nationwide. This includes expanding 5G network coverage and implementing the National Fiberisation and Connectivity Plan (NFCP). These efforts will ensure that digital payment services are accessible to all Malaysians, regardless of their location.
C. Blockchain and tokenization
Malaysia has been exploring the potential of blockchain technology and tokenization to enhance its financial services sector and digital payment ecosystem. These technologies offer opportunities for increased efficiency, transparency, and security in financial transactions.
In the realm of blockchain in financial services, Bank Negara Malaysia (BNM) has shown significant interest, particularly for its potential in improving the efficiency and security of financial transactions. A notable initiative in this area is Project Castor, launched in 2017. In this project, BNM collaborated with several banks to develop a proof-of-concept for a blockchain-based trade finance application [8]. The project aimed to demonstrate how blockchain could streamline trade finance processes and reduce fraud risks, showcasing the potential of this technology in the financial sector.
Several Malaysian banks have also been experimenting with blockchain for cross-border remittances. For instance, CIMB Group partnered with Ripple to enable instant cross-border payments [9]. This initiative highlights the potential of blockchain to revolutionize international money transfers, making them faster, cheaper, and more transparent.
Tokenization, the process of representing real-world assets digitally on a blockchain, is gaining traction in Malaysia. The Securities Commission Malaysia (SC) introduced a regulatory framework for Digital Asset Exchanges (DAX) in 2019 [10]. This framework allows for the trading of digital assets, including security tokens and cryptocurrency, providing a regulated environment for these new forms of assets. Additionally, the SC has issued guidelines for Initial Exchange Offerings (IEO), providing a regulated avenue for businesses to raise capital through token issuance [11]. These initiatives demonstrate Malaysia's proactive approach to embracing new financial technologies while ensuring appropriate regulatory oversight.
While Malaysia has not yet launched a Central Bank Digital Currency (CBDC), BNM has been actively researching the concept. In 2021, BNM announced its participation in Project Dunbar, a multi-CBDC platform for international settlements, in collaboration with other central banks and the Bank for International Settlements (BIS) [12]. This project explores the use of distributed ledger technology for cross-border payments between financial institutions. Concurrently, BNM is exploring the potential of a domestic CBDC, carefully weighing the benefits and risks for the Malaysian financial system.
Malaysia has adopted a balanced approach to regulating blockchain and tokenization. The Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019 brought digital assets under the purview of securities laws [13], providing clarity on the legal status of these assets. Furthermore, BNM has issued guidelines on digital assets to prevent their misuse for money laundering and terrorism financing [14], demonstrating a commitment to responsible innovation.
Looking to the future, Malaysia could consider several initiatives to further leverage blockchain and tokenization for digital payments transformation. Developing a national blockchain strategy would help coordinate efforts across different sectors and government agencies, ensuring a cohesive approach to blockchain adoption. Encouraging the development of blockchain-based solutions for supply chain finance could particularly benefit SMEs, improving their access to financing and streamlining their operations.
Exploring the use of tokenization for fractional ownership of assets is another promising avenue. This could potentially increase liquidity in real estate and other traditionally illiquid markets, opening up new investment opportunities for a broader range of investors. Continuing research and development on CBDCs, with a focus on interoperability with other payment systems and cross-border usage, will be crucial for staying at the forefront of digital currency developments.
D. Digital governance and standards
Digital governance and standards play a crucial role in ensuring the security, reliability, and interoperability of digital payment systems. In terms of cybersecurity policies, Malaysia is strengthening measures for financial institutions and payment service providers. This includes the implementation of the Risk Management in Technology (RMiT) policy, which sets out risk management standards for technology-related risks. Regular cybersecurity assessments and stress tests are being conducted to identify vulnerabilities and enhance resilience. The establishment of a Financial Sector Cyber Threat Intelligence Platform is also underway, which will facilitate information sharing and collaborative defense against cyber threats.
Data protection is another key area of focus in digital governance. Malaysia is enhancing its data protection regulations to build trust in digital financial services. This includes a review and update of the Personal Data Protection Act 2010 to ensure it remains relevant in the face of rapidly evolving technology. Guidelines for responsible AI and machine learning in financial services are being developed to address the unique challenges posed by these technologies.
Interoperability standards are being developed to ensure seamless interaction between different payment systems and e-wallets. This includes the establishment of a common QR code standard for all payment providers, which will simplify the payment process for consumers and merchants alike. The implementation of APIs for seamless integration between different financial institutions and fintech companies is also being pursued, fostering innovation and competition in the financial services sector.
IV. Enabling policy and regulatory environment
The policy and regulatory environment in Malaysia is evolving to support digital payment transformation. In 2020, Bank Negara Malaysia introduced a framework for digital bank licensing to promote innovation in the banking sector. Up to five licenses are expected to be issued, with successful applicants to be announced in 2022 (Bank Negara Malaysia, 2020)[7]. This initiative is expected to bring new players and innovative business models into the banking sector, potentially accelerating the adoption of digital financial services.
Comprehensive guidelines for electronic Know Your Customer (e-KYC) processes are being implemented to facilitate remote account opening and onboarding. These guidelines allow for video-based identification for account opening and establish standards for biometric authentication. By simplifying the account opening process while maintaining robust security measures, these guidelines are expected to boost financial inclusion and the adoption of digital financial services.
The regulatory sandbox continues to play an important role in fostering fintech innovation. The scope of the sandbox is being expanded to include more diverse fintech applications, and efforts are being made to streamline the application and approval process for sandbox participants. This approach allows for the testing of innovative financial products and services in a controlled environment, balancing the need for innovation with prudent risk management.
V. Inter-agency/stakeholder collaboration
Collaboration between various stakeholders is crucial for the success of Malaysia's digital payments transformation. The Financial Education Network is being strengthened to promote financial literacy and digital payments awareness. This involves collaboration between government agencies, financial institutions, and educational institutions to develop a national financial literacy curriculum and implement targeted education programs for underserved communities.
Public-private partnerships are being fostered to drive digital payment adoption. A Digital Payments Task Force with representatives from both public and private sectors is being established to coordinate efforts and address challenges. Regular industry roundtables are being organized to discuss challenges and opportunities in the digital payments landscape, ensuring that policies and initiatives are responsive to industry needs and technological developments.
VI. Digitally-transformed central bank
Bank Negara Malaysia is leading by example in the digital transformation journey. Efforts are underway to implement a fully digital regulatory reporting system, which will streamline reporting processes and enhance the central bank's ability to monitor and analyze the financial system. The development of a central bank digital currency (CBDC) for wholesale and potentially retail use is being explored, which could revolutionize the way monetary policy is implemented and financial transactions are conducted. Enhanced data analytics capabilities are being developed to support more effective monetary policy and financial stability monitoring, leveraging the power of big data and artificial intelligence.
VII. The role of strategic communication
A comprehensive communication strategy is being developed to support the digital payments transformation. This strategy aims to raise awareness about digital payment options through multi-channel campaigns, educating the public on the benefits and security of digital transactions. Efforts are being made to address concerns and build trust in digital financial services, recognizing that public confidence is crucial for widespread adoption. Success stories and use cases are being highlighted to encourage adoption, demonstrating the real-world benefits of digital payments across various sectors of the economy.
VIII. Conclusion
Malaysia's Digital Payments Transformation Roadmap provides a comprehensive framework for accelerating the adoption of digital payments and promoting financial inclusion. By focusing on the key pillars of digital payment streams, digital finance infrastructure, blockchain and tokenization, and digital governance and standards, Malaysia is positioning itself to create a robust and inclusive digital payment ecosystem. The success of this roadmap will depend on strong collaboration between the public and private sectors, as well as effective communication to drive awareness and adoption among the Malaysian population.
By embracing blockchain and tokenization technologies alongside other digital payment innovations, Malaysia has the potential to enhance the efficiency, security, and inclusivity of its digital payment ecosystem. This comprehensive approach to digital payments transformation positions Malaysia as a leader in financial innovation within the ASEAN region, paving the way for a more inclusive and technologically advanced financial future.
References:
[1] Malaysian Communications and Multimedia Commission. (2020). Communications and Multimedia: Pocket Book of Statistics, Q2 2020.
[2] Statista. (2021). Internet user penetration in Malaysia from 2015 to 2025.
[3] Bank Negara Malaysia. (2020). Financial Stability Review - Second Half 2020.
[4] World Bank. (2017). Global Findex Database 2017.
[5] Ministry of Communications and Multimedia. (2021). National Digital Identity (NDI) Framework.
[6] Bank Negara Malaysia. (2021). Open Banking in Malaysia.
[7] Bank Negara Malaysia. (2020). Licensing Framework for Digital Banks.
[8] Bank Negara Malaysia. (2017). Financial Technology Regulatory Sandbox Framework.
[9] CIMB Group. (2018). CIMB Group Partners with Ripple to Enable Instant Cross-Border Payments Across ASEAN.
[10] Securities Commission Malaysia. (2019). Guidelines on Digital Assets.
[11] Securities Commission Malaysia. (2020). Guidelines on Digital Assets (Second Edition).
[12] Bank for International Settlements. (2021). BIS Innovation Hub and central banks of Australia, Malaysia, Singapore and South Africa will test CBDCs for international settlements.
[13] Attorney General's Chambers of Malaysia. (2019). Capital Markets and Services (Prescription of Securities) (Digital Currency and Digital Token) Order 2019.
[14] Bank Negara Malaysia. (2018). Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) – Digital Currencies (Sector 6).