Malaysians have not only been exposed to the use of technology in banking, but are also increasingly using the digital world in their banking transactions. From the automated teller machine (ATM) where cash is withdrawn and banking services conducted, people are using computers and mobile phones to make transactions that are increasing at a fast pace.

Bank Negara has been one of the co-drivers of that change along with the financial institutions. Heading the central bank’s push in the adoption of e-payments is deputy governor Muhammad Ibrahim, a career central banker at Bank Negara.

“If you do not adopt technology, you will be left behind. You must not put constrains on it. The necessary framework must be in place,” says Muhammad.

The push to use technology has had a tangible impact on consumers and financial institutions. Customers in the comfort of their own homes no longer, for nearly most of their banking needs, have to drive to a branch to conduct a transaction.

For the banks, the use of technology means better efficiency and productivity. And taken together, it has led to savings for both consumers and banks.

Bank Negara says that banks can derive cost savings by promoting the use of e-payments over cheques and cash. In an industry where money flow generates income, there is always a cost of executing a transaction and banks incur a cost of RM2.4bil annually to process cash and cheques.

It costs RM3 to process a cheque compared with 20 to 50 sen for an interbank transaction.

The usage of technology has seen banks save RM231mil in cheque-processing costs from 2013 to 2015 and as of the end of last year, the public has saved RM611mil from the reduction in interbank giro fees.

For years, Bank Negara has been pushing for companies and individuals to reduce the use of cheques. Given the high cost of executing a cheque transaction, it is understandable why that initiative was given prominence.

But it is technology that has allowed that transition to take place and at the end of last year, interbank giro transactions surpassed the number of cheques for the first time in 2015.

“Having the banks adopt an increasing amount of e-payment methods will improve competitiveness and allow banks innovate, and this can help with new products and services that offer new value propositions and in the long run can reduce cost,” says Muhammad.

Technology has allowed individuals and businesses to migrate from cheques to e-payment and that has seen the usage of cheques decelerate significantly in recent years.

Between 2011 and 2013, cheque transactions fell 1.6 per cent but that rate of decline rose to 10 per cent in 2014. Last year, the number of cheques that changed hands fell 16 per cent.

Interbank giro transactions, on the other hand, rose 19 per cent between 2011 and 2013 and 34 per cent between 2014 and 2015.

The increase in interbank financial transfers has been even more impressive, rising 60 per cent since 2011 but 77 per cent in 2015.

What has helped fuel the usage of e-payments has not just been the wider reach of the Internet and broadband, but also the proliferation of smartphones. As technology has become more accessible to consumers, so has the use of e-payments.

It is not just the urban areas which have gained from the cost savings of e-payments.

Muhammad says the adoption of technology in rural areas has also sprouted, with people in the kampung now having access to banking where there might be no physical branches.

He says the appointment of 5,000 to 6,000 banking agents has seen to that rise. These agents are basically sole proprietors of small sundry shops or grocery shops who conduct banking transactions for people in their community.

These agents have seen a rise of between 20 per cent and 30 per cent in their income, but the money they make comes from their customers not having to travel to the nearest bank branch.

Migration to e-payments will mean that not only cost savings are shared between banks and their customers but also how banks operate.

The need for physical branches is still important, especially in rural areas, but the need for brick-and-mortar branches will decrease in time.

For banks, the employment mix will also evolve. Muhammad says technology may not necessarily mean fewer employees, but higher skilled workers to handle the increasing use of technology within financial institutions.

Not just online transactions

The use of online transactions is just one aspect of the push for e-payments by Bank Negara. It is also trying hard to displace cash usage via debit cards and progress towards that was slow in the initial years because of market distortions and structural issues.

But last year, the central bank implemented the payment card reform framework to mitigate escalation in cost and make debit card acceptance more affordable.

To support infrastructure enhancements and the expansion of point-of-sale terminals, the industry has committed to investing RM1.1bil between 2015 and 2020 and progress has been seen since. Bank Negara wants to see 800,000 point-of-sale terminals in use by 2020 and the cost of accepting payment cards started to moderate downwards and the number of point-of-sale terminals more than tripled from 5 per cent in 2014 to 18 per cent last year.

Debit card transactions recorded growth of 31 per cent last year and there are now 43 million ATM and debit cards in the country.

“Migration to e-payments is a bold reform and like any reform, it is a departure in the way we do things. But all stakeholders must gain from it, only then it can work,” says Muhammad.

“At the end of the day, people will appreciate the ease of doing business and the reduction in the cost of doing business.”

He says that e-payments is about giving people options. The use of credit cards was once blamed for the rise in bankruptcies, but how to handle the usage of cards in modern society has to be balanced through education and proper conditions like setting a minimum wage to be eligible for a credit card.

“We give people the option and it is that the consumer knows best,” says Muhammad on how people should handle financial responsibilities when it comes to e-payments.

“The consumer will know what is best for them. It is about informed decision-making.”

The rise of financial technology

Technology as a disrupter is well-documented and it is tangible in the financial world. A report yesterday said US$4.5bil was invested last year in financial start-ups in Asia and that was a four-fold increase from 2014.

Globally, investments in fintech (financial technology) last year was 60 per cent higher at US$19.1bil from 2014.

Muhammad is well aware that fintech is the future of business and like e-payments, is about the adoption of technology.

“The good thing about fintech is that it injects competition into the traditional financial services providers, including service providers,” he points out.

A prelude to fintech in Malaysia was the launch of the investment account platform by Islamic banks. In this model, borrowers would channel their proposal to that platform and the banks would pick the ones they could fund.

“It’s an innovative approach taken by the Islamic banks, but eventually it will be almost all banks. The intended borrower will go to this platform and their proposal will be accessed by the banks and rated by rating agencies. People will have a choice of financing it. This is only possible because of technology and this is the first of many that will come,” he says.

To harness the potential of fintech, regulations will likely need to be changed, which Muhammad says can easily be done. One caveat though: the protection of consumers will be of paramount importance for the central bank when it comes to fintech being rolled out for Malaysians.

“As far as financial services is concerned, we will adopt proportionate regulation proportionate to the risk. We want to balance innovation and safety for the consumer. The protection of consumer interest is extremely important to ensure there is a balance,” he says.

Muhammad says technology is here to stay and that there is no point fighting it.

“Technology is the way for us to be more competitive and innovative. What is important is for the regulator to set a framework so that fintech will operate in a safe, efficient and transparent manner,” he says.