In recent years, the rise of e-commerce and the increasing popularity of mobile devices such as tablets and smartphones have revolutionised the retail payments landscape and enabled new ways of making payments, one of which is by using electronic money (“E-Money”).
ccording to the Guideline on E-Money (“Guideline”) 2008 by Bank Negara Malaysia;
E-Money is a payment instrument that contains a monetary value that is paid in advance by the user to the E-Money issuer. For example Touch ‘n Go Sdn Bhd.
Now with it, the user can purchase virtual or real goods and services from third-party merchants who accept the E-Money as a form of payment. Like our highway toll operators and retail outlets.
When users pay using their E-Money, the amount will be automatically deducted from their E-Money balance.
The Financial Services Act 2013 defines E-Money as;
A payment instrument, whether tangible or intangible, that stores funds electronically in exchange of funds paid to the issuer and is able to be used as a means of making payment to any person other than the issuer.
Therefore, E-Money is legally recognised as a valid and enforceable legal tender in Malaysia.
Types of E-Money Application
E-Money can be issued in different forms. The primary two forms are;
- Card-based – multi-purpose prepaid card embedded with microprocessors which can be loaded with a monetary value and can be used in exactly the same way as cash subject only to the amount of monetary value stored on the card and acceptance by merchants. Examples are like Mondex, Visa Cash, Touch N Go cards
- Network-based – specialised software that works like an e-wallet that allows the transfer of monetary value on computer networks via the Internet, smartphones or any other devices. Think eCash, PayPal, MOLPay, MOLWallet.
Now it’s important to note that E-Money can either have a centralized or a decentralised system. But what does that mean?
Well, to put it simply here’s a breakdown
- Centralised System – there is a central point of control over the money supply. Bank deposits, electronic funds transfer, PayPal, eCash, WebMoney are some examples of this system. Whereas…
- Decentralized system – the control over the money supply comes from various sources. Digital currencies such as Bitcoin, Litecoin, Monero are some prime examples.
However, in recent years, a new mobile e-payment sub-system has been introduced exclusively for NFC-enabled tablet and smartphone users.
This new sub-system includes the likes of Google Wallet, Apple Pay, Android Pay. It allows users to access funds in their deposit or credit accounts in financial institutions or credit card networks to initiate payments.
The rise of social networking sites and online gaming sites has spurred the growth of virtual currency market.
The European Central Bank in 2012 defined virtual currency as;
“a type of unregulated, digital money, which is issued and usually controlled by its developers, and used and accepted among the members of a specific virtual community.”
Virtual games often make use of virtual currencies to enable transactions between the game players. Players can use the virtual money to buy new features in a game, extend their lives or send virtual gifts to other players.
But, as virtual currency is not worth anything in the real world, it is not “money or money’s worth”. Therefore, it does NOT have legal tender status in any jurisdiction in the world.
So the next time if you were to get scammed online and lose your ‘gaming money’, too bad.
A cryptocurrency is a payment instrument using cryptography to secure the transactions and to control the creation of new units. Bitcoin became the first cryptocurrency in 2009.
No transaction fees and bank accounts are involved and transactions can be made anonymously.
Many merchants have started accepting cryptocurrency which enables users to use this virtual currency to buy goods and services in the real world. As cryptocurrency is not backed by any government, many central banks have cautioned against it.
It remains largely unregulated but that may possibly change in the near future.
In this article, the focus is on the centralized type of electronic money, as this is the only one that is currently regulated by our laws.
E-Money Issuer’s Obligations
Regulators in many countries have stepped in to regulate E-Money schemes. The objective is to promote the safety and soundness of E-Money schemes.
They recognised that only a prudent and safe management of electronic money schemes can encourage wider acceptance and success of E-Money schemes. It’s also to instil users’ confidence in the usage of E-Money as well as encourage new, innovative and more secure E-Money schemes to be designed.
In Malaysia, E-Money can be issued by financial and non-financial institutions.
E-Money issuer in Malaysia must adopt the principles and minimum standards outlined in the Guideline and obtain approval from the Central Bank before it can operate their electronic money schemes. The principles are:
- Establish adequate governance arrangements which are effective and transparent;
- Have appropriate risk management infrastructure and processes for its E-Money operations. This includes having adequate security and internal controls on its systems to ensure the safety and integrity of the E-Money data and records and effective fraud detection and resolution mechanism;
- Ensure that the rights and responsibilities of its users and merchants are clearly set out in the relevant contractual documents, including issues about consumer protection and privacy;
- Manage the funds collected from users prudently to ensure timely refund of the E-Money balances to users and payment to merchants as well as to ensure that the funds are kept separately from the issuer’s working capital funds;
- Provide refunds of E-Money balances should users decide to close their account or were wrongly charged due to technical discrepancies; and
- Conduct customer due diligence on potential merchants and establish clear record-keeping for transactions to prevent merchants from using the E-Money schemes for money laundering purposes.
There are major challenges in implementing an effective E-Money scheme. This includes;
- Acquiring a large base of merchants to accept E-Money,
- Gaining trust and confidence from the users,
- Ensuring a high-security level in the E-Money system; and
- Competing against other retail payment instruments such as credit and debit cards.
The higher the number of merchants who are willing to accept E-Money, the higher the probability that E-Money will be spent by users. As such, transaction and operating costs will also be lowered if there is a wider use and acceptance of E-Money in the market (“Economies of Scale”).
The E-Money market has developed slower than expected and has not yet developed enough to become an alternative for cash. Evidently, it takes time to gain market confidence and change consumers’ mindset and behaviour for a new payment instrument.
In addition, E-Money schemes pose legal, security and law enforcement issues.
The convenience and anonymity make electronic money schemes vulnerable to exploitation for money laundering and other criminal activities. The cross-border nature of electronic money schemes makes it challenging for law enforcement to combat money laundering and other criminal activities.
Having said the above, there is still a great growth potential in the E-Money market.
Historically, many of the E-Money schemes were developed primarily for use at low-value transactions – such as public transportation, car parking and pay phones. Over time, this has been expanded into fields such as retail transactions.
One notable success is the Octopus card in Hong Kong. It’s estimated that over 40% of the aggregate value of transactions is now non-transport related.
Online shopping is increasing. Now, credit and debit cards are often for online purchases.
However, consumers still fear unauthorized third-party access to their personal information and worry about the lack of security features on some of these e-commerce sites. Payment by E-Money present a more secure alternative to credit and debit cards in online payments since it does not involve a bank account and no personal information is required to be submitted when making a transaction.
So, there is a need to strike a balance. Between ensuring a well-functioning payment system and not stifling the innovations and technological developments of new E-Money schemes. This is to reduce transaction costs and increase convenience and efficiency in modern Malaysia.