Balancing AML/CFT Compliance and Digital Payment Innovation among Small and Medium Enterprises in Malaysia

Abstract

The Money Services Business (MSB) Act was passed to stop money laundering and combat the funding of terrorism in Malaysia. However, the Act is limited to licensed MSB operators, like money changers and remittance providers, not SMEs in general. Many SMEs function as users of digital payment systems rather than possessing MSB licenses. This distinction is therefore important when assessing the regulatory impact. The current review study contextualises the effects of the MSB Act and more general AML/CFT regulatory requirements on the adoption of digital payments among Malaysian SMEs, with a focus on (i) licensed MSB operators and (ii) non-MSB SMEs interacting with regulated payment intermediaries. The study examines the regulatory requirements, such as Know Your Customer (KYC), Customer Due Diligence (CDD), Ongoing Due Diligence (ODD), and suspicious transaction reporting, using institutional theory, Diffusion of Innovation Theory (DIT), and Technology Acceptance Model (TAM). The results show that while non-MSB SMEs experience indirect compliance effects because of onboarding requirements, payment provider controls, and documentation demands imposed by regulated intermediaries, MSB-licensed SMEs bear a great deal of the direct compliance burdens. The article offers policy recommendations to regulatory bodies, including Bank Negara Malaysia, SMEs, payment service providers, and technology providers, to achieve a balance between financial integrity and digital payment innovation in emerging economies like Malaysia.