LEGALLY SPEAKING E-Money regulations in Malaysia

WE swipe our electronic money (or e-money) cards nearly every day at LRT stations or at shopping mall car parks. E-money schemes were first introduced in Malaysia in the late 1990s, the use of which has multiplied exponentially ever since. With more than two decades of Malaysians using e-money, one might foresee that the demand for physical money could slowly become obsolete. This article attempts to briefly cover the regulations behind that card based e-money we are all so familiar with.
What is e-money?
E-money is an instrument that contains monetary value paid in advance by any user like ourselves to the e-money issuer (for example, Touch 'n Go Sdn Bhd) to be able to make payments to purchase goods or services from third party merchants (such as expressways and retail outlets). E-money falls under what is known as a "payment instrument" which is defined by the Financial Services Act 2010 ("FSA") as "any instrument, whether tangible or intangible, that enables a person to obtain money, goods or services to make any payment". The FSA empowers Bank Negara Malaysia ("BNM") to designate such payment instruments as a designated payment instrument ("DPI"). E-money, debit cards and credit cards are already among the list of such approved DPIs.
Issuers of DPIs
According to the FSA, "any person, acting alone or under an arrangement with another person, who undertakes to be responsible for the payment obligation in respect of a payment instrument resulting from a user being issued with or using the payment instrument" is an 'issuer'. The prior approval of BNM is required before any person is permitted to issue a DPI. Only companies incorporated in Malaysia under the Companies Act 1965 may apply to be an issuer.
Malaysia has made steps forward in advancing the use of e-money and BNM is supportive of such development. Prior to 2005, only banks were allowed to issue e-money . Now, BNM has liberalised its guidelines by allowing non-banks to also issue e-money. To become an e-money issuer however, comes with great responsibility. Issuers must follow the standards published by BNM in addition to the operational requirements of the FSA.
Although regulations and guidelines are readily available to assist interested parties in the application for an e-money license, there is still little information available about BNM's decision-making process. There are also no pointers as to foreign equity restrictions, making it difficult for foreign applicants to assess the likelihood of approval. In comparison, the European Union has issued a Directive which defines the amount of initial capital as well as the amount of capital funds that e-money institutions are required to maintain. In 2009, an EU Directive reduced the initial capital of an applicant from €1 million to €350,000 removing any disproportionate barriers and restrictions in obtaining the required approvals.
Moving forward
There are great benefits to advancing the usage of e-money and there are also great risks in such advancement. The increasing use of e-money raises the risk of money laundering as it provides transacting parties with an easy way to transfer financial value. These risks have of course been identified and an issuer of e-money must therefore comply with the Anti Money Laundering and Anti-Terrorism Financing Act 2001 ("AMLATFA"). Issuers of e-money would be required to, amongst other things, establish clear record-keeping for transactions, undertake customer due diligence and implement an AMLATFA compliance program. Despite this risk, however, using e-money will, in the long run, increase efficiency and reduce costs associated with paper and labour intensive processes of cash based transactions. Additionally, studies have also shown that the widespread utilisation of electronic payment systems has the potential of contributing to a country's GDP .
Conclusion
Money has seen different forms over the centuries, from barter to metal coins and paper money. Soon, the ringgit notes in our pockets might be a thing of the past as the use of e-money starts to find its way into our digital wallets. This development is an important progression that will, if implemented correctly, benefit the economic interest of Malaysia. Regulators should therefore be monitoring the threats posed to this twenty first century innovation and implement adequate policies to facilitate this economic change.
Contributed by Hew Li-Sha of Christopher & Lee Ong (www.christopherleeong.com).