By: Sonny Zulhuda
Malaysia regards electronic commerce as a powerful driver for the national development and economic growth. This belief has be reinforced by the setting up of national policies and laws seeking to ensure that processes, tools and technologies are put in place to facilitate the electronic commerce. Among those laws is the Payment Systems Act (‘PSA’) 2003 (Act 627) which came into force on 1st November 2003). It is a principal legislation which provides for the framework for the regulation and supervision of the payment systems and payment instrument in Malaysia.
When anticipating the birth of this law, the Central Bank Governor emphasized that the study on the legal and regulatory framework was undertaken to enhance the efficiency of payment system and to specifically provide the mandate to the Central Bank of Malaysia to effectively oversee and facilitate greater development of such system in the country.
‘Payment system’ is defined as any system or arrangement for the transfer, clearing or settlement of funds or securities (Section 2). It, however, excludes a payment system operated by the Bank under the Central Bank of Malaysia Act 1958; a clearing house recognized under the Securities Industry Act 1983; a clearing house licensed under the Futures Industry Act 1993; an in-house payment system operated by a person solely for his own administrative purposes that does not transfer, clear or settle funds or securities for third parties; a system that solely facilitates the initiation of payment instructions; and such other systems or arrangements as may be prescribed by the Bank.
Meanwhile, also provided in the same section, ‘payment instrument’ means any instrument, whether tangible or intangible, that enables a person to obtain money, goods or services or to otherwise make payment. It therefore includes credit cards, charge cards, debit cards, and e-money.
The definition of both payment systems and payment instruments makes the application of PSA wide and goes beyond financial entities. It was noted that this Act can even apply to communications service providers licensed under the Communications and Multimedia Act 1998 such as those services offered by way of pre-paid cards and commercial transactions using the mobile phones.
The Role of BNM
The ultimate objectives of PSA 2003 are reflected in its preamble as “to promote monetary stability and a sound financial structure.” This was also to promote a reliable, efficient and smooth operation of the national payment and settlement systems and for ensuring that the national payment and settlement systems policy is directed to the advantage of Malaysia. This noble task will be spearheaded by the Central Bank or Bank Negara Malaysia (BNM).
The task of implementing PSA is not only important but also very urgent. As digital transactions have become widespread, alternative payment methods would essentially be issued and used by variety of institutions. Some would even extend beyond the reach of national boundaries. The Central Bank Governor noted that e-cash and e-commerce will make it increasingly difficult to define and measure monetary aggregates, national income and wealth. Thus, it was noted that capacities and capability of institutions need to be enhanced, while financial infrastructure needs to be put in place and consumers and markets educated accordingly. This Payment Systems Act, it is argued, would provide essential remedies to offer in this new financial environment.
Designated Payment System
By virtue of section 6(1) of this Act, BNM as the governing body is authorised to designate a payment system as a ‘designated payment system’ (‘DPS’) if that payment system poses a systemic risk, or that such designation is necessary to protect the interest of public. ‘Systemic risk’ is defined in section 2 as the risk that “the failure of a participant or operator to meet his payment or settlement obligations will cause another participant to be unable to meet his payment or settlement obligations when due; or the risk that the failure of a participant or operator to meet his payment or settlement obligations may cause significant liquidity or credit problems that might threaten the stability of financial markets.”
The effect of this designation, as prescribed in section 7(1) is to oblige the operators of DPS governance and risk management compliance prescribed by Chapter 2 of the Act. This compliance covers issues of internal management, qualification and appointment of directorship, governance as well as operational arrangements.
Until recently, it is noted that BNM has so far designated two payment systems as DPS, namely the ‘Real Time Electronic Transfer of Funds and Securities System’ or ‘RENTAS’, a real time gross settlement system for the transfer and settlement of funds and book-entry scripless debt securities; and the ‘Sistem Penjelasan Informasi Cek Kebangsaan secara Elektronik’ or ‘eSPICK’, a cheque clearing system for the clearing of cheques.
Designated Payment Instrument
Another important facet of the Act is on the designation of payment instruments at the authority of the BNM. The Central Bank may prescribe any payment instrument as a ‘designated payment instrument’ (‘DPI’) provided that such instrument may be of widespread use as a mean of making payment and may affect the payment systems of Malaysia; and that it is necessary to protect the interest of the public or it is necessary to maintain the integrity, efficiency and reliability of a payment instrument (section 24). Once so prescribed, the DPI operators would have to comply with certain requirements as prescribed in section 25 of the PSA 2003 as well as governance and operational arrangements in sections 27 and 28 respectively.
Under this provision, three types of payment instrument have been so far designated by BNM as DPI, namely (1) charge cards; (2) credit cards; and (3) electronic money which stores funds electronically in exchange of funds paid to the issuer and is able to be used as a mean of making payment to any person other than the issuer.
Safety, Security and Operational Reliability
Given the mandate of this Act, the Central Bank of Malaysia or BNM does assume a huge oversight responsibility for the payment and settlement systems in the country considering the high numbers of usage in Malaysia. As of year 2007, the number of users and subscribers of payment instruments (including credit cards, charge cards, debit cards and e-money) was over 85 million usage with a total value of transaction reaches RM 4.6 million, including Interbank Giro. For this purpose, too, in 2003 BNM requires that each of the DPS and DPI operator to identify, document and submit measures that ensure the safety, security and operational reliability of the payment system/instrument, respectively, including contingency arrangements.
As payment systems are fundamental to the functioning of the economy, it is just natural that the Bank’s oversight activities are directed towards ensuring the reliability of the major payment and settlement systems and mitigating risks in these systems. That is why in practice, the role played by the BNM is not only on systemic risk reduction, but also is extended to promoting an efficient payment and settlement infrastructures and services. This also includes fostering payment innovations and driving towards enhancing safety, security and efficiency of the payment systems. The ultimate objective is to sustain and enhance public confidence in promoting electronic payments.
As mentioned earlier, this law seeks to enhance the efficiency of payment system and to specifically provide the mandate to the Central Bank of Malaysia to effectively oversee and facilitate greater development of such system in the country. Indeed, the ultimate goal of PSA 2003 is to enhance the efficiency of payment system and to specifically provide the mandate to the banking regulator to effectively oversee and facilitate greater development of such system in the country. Even though the law is only in force for about five years, the law is proven to be influential in facilitating the electronic commerce in Malaysia, particularly its electronic banking practices.
- Bank Negara Malaysia, Financial stability and payment system report, (Kuala Lumpur: published by author, 2007)
- Zeti Akhtar Aziz, “Electronic Banking: The Way Forward,” from the Website of Bank Negara Malaysia.
- Zety Akhtar Aziz, “Impact of E-Banking and E-Commerce on Central Banking Functions,” from the Website of Bank Negara Malaysia.
- Payment Systems Act 2003 (Act 627)