Role and Strategy of the Central Bank

The central bank has been very active in promoting the development of e-payment schemes in Malaysia. This active role is in line with the Payment System Act of 2003, which details the role of the central bank as the operator, overseer and facilitator for development of the country's payment system (Bank Negara Malaysia 2004). In this regard, the central bank has promoted the development of e-payment schemes by adopting a liberalization policy that both allow banks to offer retail payment services and potential e-money issuers to penetrate the payment service market. The objective of the liberalization policy is to increase competition in the payment service market, leading to more efficient payment services available to the public. The central bank assumes the central role in facilitating and driving the developments in the payment landscape in Malaysia (Bank Negara Malaysia 2007). This includes sustaining public confidence in the retail payment systems and steering the national agenda to promote the migration to electronic payments.

3.1 Collaboration with Government

One of the strategies undertaken by the central bank is establishing close collaboration with the government. This close collaboration resulted in the government accepting payment cards by the government, as announced in the 2006 budget. In addition, the government introduced online payment services to the public in 2007 (Bank Negara Malaysia 2007) including the ability to pay for electronic filing of company and business statutory documents for both the Companies Commission of Malaysia as well as the Financial Processing Exchange offered by the Inland Revenue Board Malaysia to complement its e-filing services.

3.2 Management of Systemic Risk in the Retail Payment System

To enhance public confidence in the payment system, the central bank undertook oversight activities in order to reduce the systemic risks in the payment system. One of the major risks in the retail payment system is fraud. Recognizing this, from 2005 the central bank required migration to the Europay-MasterCard-Visa standard for credit cards as a step to reduce fraud risk arising from credit card use. This change prevented the use of cloned domestic credit cards. The new standard, however, is less effective against credit card fraud arising from purchases made over the internet or by telephone (Bank Negara Malaysia 2007). The central bank also issued a set of guidelines on managing fraud and risks on credit card operations to all banks.

Fraud is also a risk faced by internet banking users. To mitigate the risks arising from internet banking, the central bank issued guidelines that outline the minimum risk management requirements for all forms of electronic banking, including internet banking. In addition, in 2004 the government established the Internet Banking Task Force, comprising the leading banking institutions, the Malaysian Cyber Security Agency (a national body established to address information, communication and technology security issues), the Malaysian Communications and Multimedia Commission, the Royal Malaysia Police, Bank Negara Malaysia and TM Net Sendirian Berhad (the government linked corporation which provides internet services in Malaysia). Specific requirements were also issued to banks, such as the requirement to implement two-factor authentication for internet banking transactions.

Recognizing that controls are needed to address risks facing the public from using e-money, the central bank is formulating a regulatory framework for the electronic money business. The central bank also extended its regulatory oversight to cover nonbank remittance operators. This step was taken due to the growing importance of remittance flows, in particular remittances sent abroad by foreign workers in the Malaysia. The initial step was to formulate a set of prudential requirements for remittance operators and to subject remittance operators to the Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) requirements (Bank Negara Malaysia 2006).

As part of its efforts to mitigate systemic risk in the payment system, MEPS conducts a disaster recovery exercise for three of its core service networks: the shared ATM network, e-Debit, payment for goods or services through cashless methods such as credit cards or online purchases, and Interbank GIRO (IBG), a funds transfer payment system operated by MEPS that enables consumers to transfer funds through banks across Malaysia (Bank Negara Malaysia 2007). The live disaster recovery exercise is critical, as it serves to familiarize the MEPS disaster recovery team, financial institutions and related service providers with the disaster recovery process.

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