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eWallet: A Dominant Paradigm Leading the Way to a Cashless World?

The rise in popularity and level of activity in the FinTech space is manifest, given the prevalence and widespread use of smart devices. Greater proliferation of smartphones will accelerate the pace of new product development. FinTech encompasses a broad spectrum of revolutionary and disruptive technological innovation including artificial intelligence, smart contracts and big data analytics. Now, the advent of eWallet is making waves in the FinTech market, bringing about a paradigm shift in the way the financial services industry operates with many perceiving it to be a catalyst towards the advancement of a cashless society.

The Cashless Trend

While cash remains the primary method of payment, there has been a declining trend in its use with developments in payment virtualization, digital technology and systems infrastructure. The growth of e-commerce and apps has become embedded into our everyday lives. The physical act of paying is fast becoming redundant now that there are mobile and Internet channels for banking services. One by-product of this technological expansion and a key driving force in the increasing volume of digital transactions is eWallet.

eWallet, or digital wallet, is an alternative payment option to cash – based on encryption software that stores payment information much like a traditional wallet. Its utility is similar to that of a credit or a debit card. However, instead of a physical card, eWallet is an internet-based payment system where transactions can be made online using a smart phone or computer. It can work through an app on a smartphone by scanning a quick response (QR) code, e-commerce websites, or by a tap on a smartphone at a cash register deployed at retail stores or other point-of-sale (POS) terminals for instant payment i.e. transactions using a technology known as near-field communication (NFC) compatible reader pad.

Essentially, it is an online prepaid account (that can be linked to an individual’s bank account) protected with a password where cash value and personal identity information are stored on an electronic device. Users are able to use it for future transfers or transactions, such as for flight tickets, among others. In return for making transactions, users are rewarded with cash-back bonuses, loyalty redemptions and other incentives.

Salient Features and Economic Inclusion

There are two components in eWallet: information and software components. The former is a database of user-inputted details, entailing the account holder name, credit/debit card number, security number, billing address and other personal information so that the user is not required to enter their details on lengthy fields every time they make a transaction. The latter stores that information, and provides encryption and security for the information and actual transaction.

eWallets fall into two categories:

• Client-side eWallets’ – maintained by the customers whereby they download the program and once installed, they enter their pertinent information. At the checkout page of an e-commerce website, the eWallet will auto-fill the user’s information in the payment forms and prompt a password.
• Server-side eWallets’ – maintained by an organization/merchant, which stores customers’ information on their remote server. These are popular among major retailers as it provides greater degree of standardization and efficiency.

While eWallets may come with risks of system malfunction or outages due to high traffic in its servers, it entails much more benefits. Its use reduces risk of card theft and fraudulent transactions. The data is secured with encryption and an authentication system. Retailers also do not obtain users’ card or account details as a random transaction number is used. eWallets are instantaneous, ubiquitous, convenient, easy to use, cheaper, and reduces processing time. They provide greater flexibility as users can make payments from different accounts in one eWallet rather than carrying multiple cards and its access does not require a designated POS or ATM counters. Furthermore, it has an infinite lifespan and does not expire like a credit or debit card.

It is also important to note that eWallets improve access to financial services and play an integral role in economic inclusion. It caters to the underbanked (those deprived of banking services or financial products) by reducing banking transactions costs, benefiting consumers with lower credit scores and economic standing that are forced to pay high fees or take on high-cost loans. In effect, eWallet is leveling the financial playing field.

Market Response

eWallet propagation is intensifying on a global level with PayPal, Google Pay, Apple Pay and Samsung Pay achieving critical mass. It continues to expand with different wallet models giving way to market fragmentation. According to Market Research Report, the global eWallet market is expected to grow at a compound annual growth rate (CAGR) of 15% and estimated to reach market size of approximately USD 2.1 trillion by the end of forecast period 2017- 2023 (as illustrated in the diagram below).

Markets in various regions are at different stages in the adoption of eWallets. China, the world’s current e-commerce market leader, is leading the pack with 60% of its transactions made via eWallets. China’s adoption grew as a result of the rise of Alipay and WeChat Pay, which dominate the market share. Its success is owed to legions of growing Chinese tourists (Chinese tourists’ overseas spending reached a record $261 billion last year according to the World Tourism Organization) that find it more convenient to use their phones to pay when travelling. Furthermore, China’s regulatory framework is less mature allowing wallet players to innovate thus facilitating the quick expansion of eWallet in China. India is the next biggest eWallet market, and the fastest growing e-commerce market in the world, triggered by a period of rapid digitalization following its banknote demonetization move, which has since gathered momentum. Going cashless is advantageous for countries with small currency denomination like Indian Rupees and large consumer mass. Meanwhile, eWallet is slowly catching up in the US as cards remain to lead its payment mode due to customers’ security concerns over payments, according to American

Bankers Association

Interestingly, technologically advanced Japan is still lagging behind and is predominantly cash-based despite being a pioneer in eWallet since 2004.

According to a survey by the Bank of Japan in 2016, only 6% of Japanese people use mobile phone payments due to Japanese consumers’ lack of trust on “invisible” payment. Cashless payment terminals are still unavailable in many areas due to lack of investments in eWallet infrastructure. Furthermore, it is difficult to break into Japan’s local payments market – unless a local bank is willing to cooperate, which is tough as Japan’s banking industry is facing negative interest rate. Malaysian players have also built a substantial consumer base driven by strong domestic demand. AirAsia has recently entered the eWallet race with BigPay, strategically tapping into its 63-million passenger database, which also feature FX remittance and peer-to-peer (P2P) lending. AEON Credit Service (M) Bhd is also launching its own called AEON Wallet, focusing on QR integration. Last year, Malaysia’s Treasury announced a pilot project for eWallet Take Action Pay (TaPay) to be carried out in Cyberjaya with the aim of making it Malaysia’s first cashless city.

Overview of Malaysian Payment System

Central Bank of Malaysia Act 2009 defines a payment system as any system or arrangement for the transfer, clearing or settlement of funds or securities. It covers large value payment system (LVPS) including Real Time Electronics Transfer of Funds and Securities (RENTAS), and retail payment system, within which e-money is recognized as a payment instrument. Bank Negara Malaysia or Central Bank of Malaysia (BNM) oversees both LVPS and retail payment system, administering a set of legislation to regulate Malaysia’s financial system, with e-money being one of the activities under its purview. BNM currently lists 5 banks and 35 companies as e-money issuers.

Regulatory Environment

E-money falls under the Financial Services Act 2013 (FSA) definition of a designated payment instrument (DPI), i.e. “any instrument, whether tangible or intangible, that enables a person to obtain money, goods or services to make any payment”. Issuers of e-money are required to obtain approval from BNM to operate DPI pursuant to the Payment Systems Act 2003, and the issuer must be a company incorporated under the Companies Act 2016. License issued under Money Business and Services Act 2011 (MBSA) requires the licensee to carry out money services business comprising of money changing, remittance and wholesale currency businesses.

E-money issuers are also required to comply with the Guidelines on Electronic Money (E-Money) issued by BNM in 2008. For example, it requires customers’ funds to be kept in a trust account in accordance with the Trustee Act 1949, which can only be used for refund to users and for payment to merchants. It also specifies purse limits depending on whether it is a small or large e-money scheme. Breach of the guidelines can result in BNM revoking its approval to the issuer for its e-money business operations. eWallets provide easy financial transactions thereby increasing the risk of money laundering, fraud and illicit fund transfers. As such, issuers are also subject to the Anti-Money Laundering, Anti-Terrorism Financing and Proceeds of Unlawful Activities Act 2001 (AMLA) and Anti-Money Laundering and Counter Financing of Terrorism (AML/CFT) policy guidelines issued by BNM including (AML/CFT) – Electronic Money and Non-Bank Affiliated Charge & Credit Card (Sector 4).

If the eWallet features FX remittance, like BigPay, the issuer will be subject to the Foreign Exchange Administration (FEA) Rules administered by BNM under the FSA and Islamic Financial Services Act 2013 (IFSA), imposing general restrictions on foreign exchange dealings by residents and non-residents. If it features P2P lending, then the Securities Commission (SC) is the primary supervisory authority and approval will be required.

Key Contractual and Legal Issues

eWallet creates more synergy as its potential to drive transaction volume and maximize reach has attracted major organizations and financial institutions to form alliances with eWallet players. Unlike technology companies, finance is a heavily regulated industry. It is important for potential partners to understand that they may not operate in similar regulatory environment and therefore should ensure that regulatory obligations are carefully defined in agreements. Payment technology and regulation are constantly evolving so partners need to be attentive in their negotiations including exit strategy and effect of change in program or local laws. eWallet providers must gain public confidence in using e-money as a payment instrument and ensure consumer protection like data protection by setting out clear contractual terms of service and detailing dispute resolution process. eWallet providers should also always conduct due diligence prior to entering into contractual relations with potential partners and be mindful of expectations and accountability in order to prevent systemic risks. Know-your-customer (KYC) requirements may also pose an issue, which could hinder eWallet adoption. Banks must implement appropriate measures to verify clients’ identities in person.

However, is it possible to satisfy such regulatory requirements digitally? Electronic KYC (eKYC) checks are possible as opposed to paper documents by obtaining prior approval from BNM. BNM has released eKYC guidelines, permitting verification via video calls, ‘selfies’ and social media to ensure effective anti-money laundering measures. CIMB Bank Berhad was the first bank in Malaysia to receive regulatory sandbox approval for eKYC. Merchantrade Asia Sdn Bhd also received BNM’s approval to implement eKYC, which will be integrated with its remittance online portal and mobile app, eRemit. Implementation of eKYC is still nascent in Malaysia compared to the other developed economies. For example, Abu Dhabi Global Market has launched eKYC utility project with the expertise of a consortium of UAE’s largest financial institution to develop a proof-of-concept to finalize a regulatory framework and using Distributed Ledger Technologies to underpin core functionality of eKYC utility.

Conclusion

Whilst banks are traditionally the apex of Malaysian payment services, eWallet is redefining the payment system although it is bolstering the existing financial system rather than obliterating traditional payment. The eWallet race will intensify now that banks are rethinking their payment strategy and entering the competition, leveraging on its existing relationship with customers and the general perception of improved security features and digital infrastructure. This will further lead Malaysia towards a cashless society, in line with BNM’s Financial Sector Blueprint 2011-2020, which aims to accelerate the migration to electronic payments and increase e-payment transactions to its 200 per capita target by 2020. However, as it is still a developing FinTech, eWallets should continuously be monitored with appropriate controls and regulations to keep them on the same footing as banks.

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• “ADGM Launches eKYC Utility Project With Consortium Of Key UAE Financial Institutions.” FINTECH AT ADGM, Abu Dhabi Global Market, Feb. 2018.
• Havaldar, Krishna K. Business Marketing: Text and Cases. McGraw-Hill Education (Australia), 2015.
• “E Wallet Market.” Online Travel Market Research Report – Global Forecast to 2023 | MRFR, MarketResearchFuture, Aug. 2018.

 

Prepared By:

Dato’ Azmi Mohd Ali (Senior Partner) azmi@azmilaw.com

Syaizta Kamal (Trainee Solicitor) general@azmilaw.com