Myanmar’s central bank has opened up the local market to international payment companies such as Visa and MasterCard. But how will they help modernise the payments sector and drive financial inclusion in this newly opened frontier market? Stefania Palma investigates.

Myanmar

Cash is king in Myanmar. Almost no transactions at all – 0.5% to be exact – are carried out electronically. A cash-based economy means it is hard to monitor transactions or prevent tax avoidance, and keeps the country’s payments system at rudimentary level. Transactions take longer to execute and are often not executed safely. 

This almost complete reliance on cash goes hand in hand with the high number of financially excluded citizens in Myanmar – a mere 10% of the population has a bank account.

Until recently, only local payment company Myanmar Payment Union (MPU) was permitted to offer payment services in the local currency, the kyat. But in January 2017, the central bank said this would be extended to international payment companies, which have comparatively better networks and technology. Pundits view the entry of these international firms as a watershed moment for Myanmar's payment sector, the local banking market and for financial inclusion.

Opening up 

Before this reform, international payment companies operating in Myanmar could only provide pre-paid cards in foreign currency. This meant their user base was limited to foreign tourists and local merchants operating in tourist destinations. 

But the new government, which was elected democratically in 2015 after almost 50 years of military rule, has prioritised economic growth, a reduction in the grey economy (including tax evasion) and an increase in financial inclusion. For this to happen, an end to the country’s reliance on cash is fundamental. International payment companies’ hi-tech processes, global networks and valuable know-how could be key to achieving this.

“The government sees electronic payments as low-hanging fruit to accelerate [the] path towards those objectives. There is a dire need for it. Also, a lot of the [local] banks were already ready to embark on this journey,” says Arturo Planell, Myanmar country manager at Visa, which has launched two new kyat credit cards with KBZ Bank this year.

Donald Ong, Thailand and Myanmar country manager at MasterCard, is also impressed by the government’s “bold steps” to opening up the economy. “As a result, we see opportunities for us to collaborate with local partners to help bring innovative payment technologies that can help drive commerce and spur growth. As a developing market, there is a real economic and development need to be committed to financial inclusion in order to bring about inclusive growth,” he says.

MasterCard entered the market in 2012 and launched the market’s first pre-paid travel card for locals to use when travelling abroad.

At present, foreign companies can only provide credit cards, not debit cards, in the local currency, but this could soon change. “The government’s intention is to see what type of impact we’ll bring to the market and then make a decision about opening up more and letting us operate also in the debit [sphere],” says Mr Planell.

Modernising the banks

Besides giving market access to international payment companies such as Visa, MasterCard, China Union Pay and Japan’s JCB, Myanmar central bank's reforms will also bring benefits to the local banking sector, which was virtually a closed market for almost two decades. 

“[These firms] will transfer their strong technology and experience to local banks, and that will help market penetration. Most local banks don’t have that much experience,” says Thein Lwin, CEO of Yangon-based United Amara Bank. Mr Lwin hopes to acquire technology from international payment firms to improve card certification at ATMs. So far, local banks have mostly used MPU, but the certification process is not very efficient, according to Mr Lwin.

Thein Zaw Tun, managing director at CB Bank, hopes to get support in managing and growing its merchant network, in dealing with charge-back disputes (that is, refunding card owners) and in anti-money laundering issues. “We are a fairly young bank to understand this complexity in detail; we will now get a lot of guidance,” he says. 

Myanmar charts

Technology and knowledge transfers will also help local banks improve payment security, according to Mr Lwin. “We can learn from international players,” he says.

Building human capital will also be crucial to modernising the banking sector. After being subject to sanctions from the US and the EU for more than 10 years, local banks are playing catch up. “It’s a massive issue. There are very few attorneys in Myanmar [for instance]. They have been in an outdated, fragmented system for decades,” says Keith Pogson, EY’s global assurance leader, banking and capital markets.

“Human capacity is a top concern for local banks,” says Mr Planell. “Talent and know-how is scarce. After such a long time in isolation, there is little home-grown talent, so they rely a lot on expats.” For this reason, Visa set up its own business school in Myanmar to train local market participants. “Our success hinges on educating the local industry. It can only move as fast as its resources can,” he adds.

Growing adoption

Modernising the banking sector alone, however, is not enough to grow credit card usage in Myanmar. The country’s consumer confidence is the second strongest in Asia, according to a MasterCard index. But increasing electronic payments also requires changing a cultural attachment to cash and a strong distrust of the banking sector.

According to Aung Kyaw Myo, senior managing director at KBZ Bank, rapid internet and mobile penetration in Myanmar presents exciting potential for digital leapfrogging. “However, just as important as building the technology infrastructure will be building trust and confidence in a stronger banking culture,” he adds.

But reforms such as that of January 2017 to open the market to international payment companies are an important step in the right direction. “Although acceptance is currently low at approximately 7000 [card] acceptance points, we are confident that with the concerted efforts of Myanmar banks in collaboration with [MPU] and international card operators, the acceptance points in Myanmar will grow quickly,” says Mr Myo. 

For CB Bank, growing acceptance among consumers and merchants is also vital. “To make these cards successful, we need to increase acceptance. The network has to be wide so that people can do transactions easily without needing cash. Having said that, we are the largest merchant services provider in the country; 5000 merchants use our terminals,” says Mr Tun.

After the central bank’s policy reforms, CB Bank launched a local currency-denominated Visa card and changed the denomination of existing MasterCard and China Union Pay credit cards to the kyat. 

Meanwhile, international cards’ strong name recognition could help boost local demand. “Merchants know these brands and they will see customers being more encouraged to use [these cards],” says United Amara Bank’s Mr Lwin. Mr Tun agrees, saying: “People are much more excited about Visa or MasterCard than other brands – it is easier to market products.”

Cutting merchant costs

But growing demand on the merchant acquisition side will require cutting the fees and fixed costs associated with electronic payments. At $250 to $300, point-of-sale (POS) terminals are expensive for the local market. “For merchants doing small transactions, it might not be viable,” says Mr Tun. 

What is more, to process international card payments, banks charge merchants three to four times more than to process local MPU cards. After the January 2017 reform, market participants expect these fees to converge.

That is why Myanmar might be better suited to new, cheaper mobile POS devices such as dongles. “Given the vast mobile connectivity we have here, there is a chance to do things differently. In markets such as this where most merchants are small local shops, we need to find [a] low-cost solution,” says Mr Planell. 

No interoperability

Building interoperability among banks is also crucial to modernising the local payment system. Currently, making payments between two different banks is cumbersome because there is no instant clearing. “Myanmar’s banking system is massively fragmented – there are 60 to 70 local banks. And the big issue is that there is no interoperable payment mechanism. The ATMs may connect, but banks don’t,” says Mr Pogson.

“All telecom operators have their own wallets; all banks have their own payment systems. Everybody works on their own; there needs to be somebody that comes in and forces people to work together. The government could help [achieve that],” says Mr Tun.

According to Mr Pogson, the only way to overcome this problem is to use credit cards built on the back of mobile phones. “You essentially store the value of cards on mobile phones and then make payments. It would be a copy of M-Pesa in Africa,” he says.

Indeed, mobile payment potential in Myanmar is enormous, to the extent that the central bank announced new mobile financial services regulation in March 2016. 

The population is young, and mobile phone penetration has grown from about 10% in 2013 to 62% in early 2016, according to a report by GIZ, the German association for international development. Crucially, 80% of mobile phones used in Myanmar are smartphones.

As a result, e-commerce platforms and mobile applications are mushrooming. So far, these services have only offered cash payments due to poor local payment infrastructure, but following the January reforms, mobile apps such as car-hailing app Oway Ride (Myanmar’s version of Uber) will soon accept kyat payments from international credit cards.

Myanmar’s Uber

Launched one year ago, Oway Ride now registers 4000 transactions a day and works with nearly 3000 drivers. In the next six months, it wants to multiply those figures tenfold.

Nay Aung, CEO of Oway, a platform similar to Expedia that also includes the Oway Ride service, says: “We believe that a local service similar to Uber or China’s Didi is necessary to provide a better solution to Myanmar’s traffic. There are no taxi meters here, there is little organisation and training for drivers, and sanitation rules are not respected on normal taxis. We have managed to develop a stable supply of drivers and cars that is convenient.”

Before the January reform, Oway Ride customers could only pay drivers in cash. It used a cash collection system whereby drivers and customers had to deposit money at cash counters to top up their wallet on the Oway app, which was time-consuming.

Offering MPU payments was not an option since local cards do not feature the 3D security system needed for online payments, so customers had to set it up at their own bank in person. “We offered MPU payments, but people tried to use it and it didn’t work. There were a lot of technical issues. It didn’t gain traction in the e-commerce space,” says Mr Aung. 

Now, thanks to the January reforms, the entire Oway platform started accepting payments in kyat from international credit cards in February, making payments faster and cheaper as Oway no longer needs to convert international card payments from US dollars into kyat. “We needed to continuously update the exchange rate on our systems and there was always a central bank versus market rate,” says Mr Aung.

Mr Planell is particularly excited about implementing Visa’s payment system for platforms such as Oway. “We foresee partnerships coming up rapidly because there is a lot of demand. It is low-hanging fruit [in the market],” he says.

Myanmar cash balance

Future hurdles

Market participants, however, believe a national ID system is necessary for electronic and digital payments to grow at scale in Myanmar. There is currently no such system, which makes validating the identity of payers and payees difficult for banks. 

Myanmar could leapfrog into having a national ID card with a biometric chip, as has happened in India. This could overcome the fragmentation and lack of inter-operability of the banking system and could be used to allocate government subsidies electronically. But executing this project could be difficult with the country’s political fractures. “I don’t see going to the separatist Karenni state and convincing them to do an ID card happening easily,” says Mr Pogson.

Local banks’ ability to absorb higher payment volumes also needs to be addressed. The sector is quite small, so banks would need to build up deposits to manage payment settlement and avoid relying on the central bank to provide liquidity, according to Mr Pogson. “If the payment provider becomes a replacement for cash, its balance sheet becomes very large versus the banking system. That could be a problem to manage,” he says.

The potential for electronic and digital payments to facilitate financial inclusion is enormous. Myanmar's population is young, mobile phone penetration is increasing rapidly, and the central bank is opening up the market to international players such as foreign payment firms. But to fully capture this potential, the government will need to continue reforming fundamental structures of a financial sector that is only now catching up with global development.

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