This is consistent with the push by BNM to encourage e-payments in Malaysia

By DR TEO WING LEONG / Pic By BLOOMBERG

Many countries around the world are aiming to become “cashless societies”. While we have heard of stories that Sweden is close to becoming a cashless economy and that e-payments are ubiquitous in China, Malaysia has lagged behind in the adoption of e-payments.

Nonetheless, you may notice that gradually, some mid-size retail chains in Malaysia has removed minimum transaction restrictions on card payments.

This is consistent with the push by Bank Negara Malaysia (BNM) to encourage e-payments in Malaysia.

As one of its initiatives to encourage e-payments, BNM introduced the Payment Card Reform Framework (PCRF) on Jan 15, 2015. PCRF involves a wide range of measures.

You may remember back in 2016, we were told by banks to replace our old ATM cards with new cards that bear the word “debit” on them.

It was the result of one of the measures of PCRF to facilitate identification of debit cards. Other measures of PCRF include requiring banks to charge merchants different fees (called merchant discount rates — MDRs) for different types (domestic debit, international debit and credit card) of transactions.

While the aforementioned measures are consistent with economic principals and hence are steps in the right direction, PCRF does include some measures that are more controversial.

Chief among these is the imposition of interchange fee ceilings for different types of payment cards, a step that in itself creates conflicts and inconsistency with the economics of the electronic payment system.

Interchange fee is the fee paid by merchants’ banks (from the merchant discounts that they receive) to card issuers (the banks that issue the cards) for the services (such as authorisation, transaction processing etc) that the issuers provide in the payment process.

Before PCRF, interchange fee rates for credit card transactions were between 1.2% to 1.8%, while the rates for debit card transactions were between 0.9% and 1.45% in Malaysia.

PCRF imposed an interchange fee rate ceilings of 0.21% for international debit card transactions and 1.1% for credit card transactions starting Jan 1, 2015, with a plan to lower the interchange fee rate ceiling for credit card transactions to 0.48% starting Jan 1, 2021.

The intent is for the lower interchange fee rates to translate into lower MDRs, thereby lowering the costs for merchants to accept card payments in a bid to increase card acceptance in Malaysia.

While the intention is good, experiences from countries that have imposed interchange fee ceilings suggest that it can have unintended consequences.

Revenue for card payment system is only collected from the merchants and the cardholders.

Merchants pay the merchant discounts, while cardholders pay the annual fees and interest where applicable on unsecured loans.

If interchange fee rates are arbitrarily lowered by regulations, issuers must recoup the lost revenue by increasing annual fees or other bank fees or costs must be reduced by reducing the generosity of card reward programmes, both of which have been observed in Australia, the US and Spain.

Increased annual fees and reduced rewards may lower consumers’ incentives to use cards for payments.

Arbitrary regulation of interchange fee rates may also reduce innovations in the payment system. In the US, a joint venture (JV) of the three largest mobile operators (AT&T Inc, T-Mobile US Inc and Verizon Communications Inc) to develop a mobile payments system was abandoned following US Federal Reserve (Fed) Board’s decision to sharply reduce debit-card interchange fee rates, which made the JV’s original business model untenable.

So, it is not clear that regulating interchange fees will promote e-payments. Take the case of government itself: Interchange for government services is at 0% under the PCRF, but this has not translated to growing acceptance of e-payments for government services and the public sector.

While the potential benefits of going cashless can be as high as 1% of gross domestic product, in order to more effectively reach BNM’s objective of encouraging e-payments, BNM should reorient its approach to become less interventionist, appreciate the market dynamics and to concentrate on steps that are effective and consistent with the economics of the payment system.

These would include letting the market players decide interchange fee rates; provision of tax incentives for use of a debit, credit or other e-payment vehicle; and direct reimbursement of merchant discounts to new accepting merchants for a limited period of time.

• Dr Teo is the associate professor and head of School of Economics at the Faculty of Social Sciences, University of Nottingham (Malaysia Campus).