27 October 2017

Malaysia: Towards an electronic payment landscape

Understanding the implications of liquidity management with transparency, control and efficiency is critical to treasury.

Across the world, the financial industry is using technology to deliver fast and efficient payment systems to companies in a wide range of industries. Businesses operating in Malaysia’s insurance industry, for example, are gradually shifting away from paper-based cheques towards electronic payments.

Creating modern payment systems that meet the evolving needs of a treasurer is a collaborative endeavour between banks and their customers. “How can we make the payment process more seamless? How can we work with our clients to achieve this goal? This is the focus that we currently have,” said Kuresh Sarjan, Managing Director, Regional Head of Sales, Financial Institutions Group (FIG), Global Liquidity and Cash Management, Asia Pacific, at HSBC.

Mr. Sarjan was speaking at an HSBC customer engagement event held in September in Kuala Lumpur. By bringing together banking professionals, insurers, as well as a representative from Malaysia’s payment network, the event gave the audience a rare opportunity to hear several different perspectives on the changing payment environment.

By adopting the payment platforms that are most appropriate to a company’s individual needs, a corporate treasurer can enjoy a number of benefits. Automated processes lower manpower costs, electronic transfers allow for the rapid movement of funds, while going digital allows for greater cash flow visibility. The end result is that both the treasurer and chief financial officer (CFO) can increase the amount of liquidity that is at their disposal.

“The topic of liquidity is so critical because it is the backbone of how most institutions operate,” said Harish Kumar K V, Regional Head of Liquidity and Investment Products, Global Liquidity and Cash Management, Asia Pacific, at HSBC.

Cheque out

In recent years, Malaysia has already made considerable progress in lowering cheque usage. Over the five-year period ending 2016, the number of cheque transactions per capita fell approximately 38 per cent to 4.2 from 6.8 in 20121.

“In addition to the convenience of electronic transfers, the reduction in cheques is also due to lower costs of e-payment alternatives,” said Tay Gim Soon, Group Chief Operating Officer, Payments Network Malaysia Sdn Bhd (PayNet) – the country’s infrastructure for financial markets, which acts as the local cheque clearing system. In particular, he highlighted the lowering of fees for Interbank GIRO (IBG) to 10 sen.

Despite the considerable success in cutting down the number of cheques used, Mr. Tay admitted that more needs to be done to continue this trend. “What we see is that the low hanging fruits have been addressed. The more entrenched users of cheques are harder to migrate out,” he said. “The way that we are trying to do this is by continuously improving the value proposition of the e-payment alternatives.”

Large companies, for example, have completely moved their payrolls away from cheque to e-payments. But when it comes to business-to-business payments, especially among small- and medium-sized enterprises, cheques are still widely used.

There are a number of issues associated with cheques. There is the possibility that they can go missing, or they could be altered to fraudulently change the recipients or the amount to be paid. The risks and manpower resulting from this method of payment multiply as the number of cheques used increases. It is not unusual for a large company to issue tens of thousands every year.

Insurance agents exemplify these issues. Situated between insurers and consumers of insurance products, they issue and receive large amounts of payments – accepting money from clients and passing a portion to an insurer.

Cheong Kim Meng is the CFO of Marsh Insurance Brokers (M) Sdn Bhd. When he moved from the electronics industry into insurance three years ago, he was surprised by the extent that cheques were still used.

He decided to transfer the company entirely to electronic payments, a process that took around 18 months to complete. Not only did he receive support from the company’s head office in the US, but the shift also coincided with an upgrade to the Enterprise Resource Planning (ERP) system, which made it easier to simultaneously make changes to the payment procedures.

On the issue of broader change in the insurance sector, Mr. Cheong said that electronic payments becoming the industry standard could take some time, and might even require some pressure from the regulators.

Insurance is a large, established industry that is subject to regulatory scrutiny. “How many insurers are waiting for the regulator to prompt them to go towards electronic transfers as a group?” he asked.

Informed payment

Moving away from cheques is only one part of the equation, as it relates to monies going out of the company. Monies coming into the company are associated with a set of challenges that are present even when using electronic payments.

“Most of the time, payments are quite easy to manage once an interface with the customers’ ERP is installed,” said Abdul Rahim, Senior Product Manager at HSBC Bank Malaysia Berhad. “The harder part is receivables.”

The main issue is reconciliation – ensuring that the money paid to the company from a third party matches up with the amount expected. The problem is that payments are often made with information that is in a format that does not allow for straight-through processing. As such it is important for customers to get the right solutions. JomPAY or Financial Process Exchange (FPX) might be considered by customers as a receivable solution which is currently offered by HSBC Bank Malaysia.

“We find that when we talk to insurance companies many of them face the same challenges, with their intermediaries paying them and separately sending the information on customers and policies the payments relate to,” said James Parker, Regional Sales Head (Southeast Asia) Financial Institutions, Global Liquidity and Cash Management at HSBC.

“The insurers then need to work out whether the payment amount matches with what they are expecting, which items reconcile and which do not, and where to find the missing information,” he said.

“One potential solution to some of these challenges is to allow someone making a payment to easily attach more information for the recipient.”

A company with multiple insurance policies helps illustrate how inefficiencies can arise. In order to make a payment for their policies the customer should provide details about each of the policies that they are paying for. In reality, this often does not happen, and the client might simply send over a monthly payment without any relevant information.

“So we end up picking the phone and calling the client directly to find out – eating into productivity on our side, as well as on the client side,” said Mr. Cheong.

He highlighted an additional issue for agents. When an agent receives payment from customers, it will pass the money onto the insurer, which then remits a portion of the money back to the agent. It is quite common, said Mr. Cheong, that the amount remitted fails to match the amount that was expected, thus resulting in additional reconciliation problems.

The solution is to allow someone making a payment to easily attach more information for the recipient. PayNet will achieve this by adopting ISO 20022 – the message standard that will be used by financial institutions to communicate with each other.

The IBG currently provides two 20-character payment reference fields that users can enter data into. Introduced in 2013, PayNet’s Mr. Tay said that although this is likely enough for a single payment or invoice, it was only a temporary solution. Expanded payment reference fields will be added to RENTAS, the wholesale real-time gross settlement system, as well the upcoming Real-time Retail Payments Platform (RPP).

Three fields will be included: 40, 140 and 250 characters. Even the largest field might not be enough for some users to fit all their payment information, said Mr. Tay, but will be enough space for a hyperlink to a repository of supporting documents, which could be supplied by an ERP or accounting packages.

PayNet has committed to complete this transition by June 2018, while the 42 banks that participate in these platforms will have to make changes to their systems, their statements, and how they deliver information to their clients.

The move is a healthy sign that market infrastructure is developing in line with the demands of the businesses that rely on it. By improving electronic payments, more companies will stop using cheques, and we will move to closer to a digital payment landscape.

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