Last week, I spent a few days in Malaysia for a friend’s wedding and for a short drive around the country’s western coast. This was my first time in Malaysia since the start of the COVID pandemic.
Although the purpose of my trip was primarily for leisure, I couldn’t help but notice the interesting dynamic of Malaysia’s evolving payment ecosystem.
Card penetration is still low and will likely remain so
The first thing I noticed was that many small merchants still do not accept card payments. Although card payments are convenient for both merchants and consumers, there is a frictional cost involved with card payments for merchants.
The cost of accepting card payments includes a fixed transaction fee per transaction and a variable fee based on the size of the payment which can add up to 3% of the total amount collected. In addition, merchants need to pay for the hardware to be able to accept card payments, which is another extra cost that some merchants may be unwilling to bear.
Card companies trumpet the fact that a large percentage of payments made globally are still done in cash, implying that there’s a vast addressable market to be won. This is true but there are large amounts of cash transactions made today that will likely never transition to card payments.
In Malaysia, there are still a large number of mom-and-pop businesses that depend on low-margin, small-sized transactions. The frictional cost of card payments makes accepting such payments too costly for these merchants. Moreover, as cash is still dominant in Malaysia and with the nature of these businesses dealing with relatively small transactions, cash is still a relatively convenient solution.
I am bullish on the prospects of card payments growing globally. But I believe card penetration for certain types of businesses will remain low for the foreseeable future.
Other digital payment methods gaining steam
Although card payment is not widely accepted at small merchants, I noticed that local or regional digital payment methods such as Grabpay, Shopee Pay, and Touch and Go are much more common.
I believe that merchants are more inclined to adopt these payment solutions as they are cheaper to set up and have lower transaction fees. Grabpay and Shopee Pay, for example, require neither the installation of a card reader nor a dedicated point of sale system. Merchants only need to download the app to start accepting payments.
Besides the low set-up cost, these solutions currently levy merchants a lower fee than cards. Some solutions like Touch and Go are not even charging any transaction fees to smaller merchants. This naturally makes merchants more willing to accept these payment solutions.
At the other end of the transaction, consumers are inclined to use these digital payment methods as they are more convenient than cash and there is occasionally a reward system tied to these payment solutions.
My observations about paying as a traveller
Making payments overseas is becoming increasingly frictionless and cheaper. For my trip to Malaysia, I paid in cash when necessary (which was mostly the case) but when card payment methods were accepted, I used a debit card linked to my Wise (LON: WISE) account.
Wise is an app that makes sending money overseas or paying money in a foreign currency convenient and cheap.
To set up, all I had to do was top up my Wise account and apply for a debit card. When paying with the Wise debit card in Malaysia, the Wise app would automatically deduct the amount from my Wise balance. Even though I kept the cash in my Wise balance in Singapore dollars, I could still make payments in Malaysian ringgit as the app would automatically deduct the appropriate amount of Singapore dollars at a competitive rate.
Wise markets itself as a company that provides very competitive rates and low commission fees for transfers and payments made using its solutions.
Travellers today can use apps like Wise or Revolut for more competitive foreign exchange rates than standard credit cards.
The payment ecosystem in each country is unique. Countries such as Malaysia are still highly reliant on cash but are fast transitioning to other forms of digital payment methods.
And with companies such as Wise, travellers are getting cheaper ways to pay for goods overseas. All of these developments are great for merchants and consumers as it decreases the fractional cost of transactions, enabling more commerce to occur seamlessly.
Note: An earlier version of this article was published at The Good Investors, a personal blog run by our friends.
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Disclosure: Jeremy Chia owns shares of Wise.