The Nepal Rastra Bank (NRB) has directed the country’s digital financial service (DSF) providers to become interoperable with other DFS providers in the next 6 months. Interoperability in simple terms is the ability of one system to make use of another system’s components. Nepal’s telecom networks are interoperable: you can call and communicate with someone from another network. Nepal’s card network is also interoperable: your bank card can be used at any ATM and at any PoS merchant machine. NRB’s recent imperative primarily falls upon two categories of licensed service payment providers – payment service operators (PSOs) and payment service providers (PSPs) – to enable their internal technologies and operations to communicate and be used by other PSPs and PSOs. Such a move will push the boundaries of the country’s digital payment system forward and expand financial inclusion. These initial steps can be invaluable in improving competition in the payment space, the quality of services and systems offered, and consumer welfare. If Nepali consumers continue to transact mostly in closed-loop wallet/payment networks, DFS providers will continue to replicate overlapping services in the market, market concentration can deepen, and innovation can stagnate. Mobile banking users have grown incredibly by 180% from July 2018 to July 2021.[1] Now, the 51 banks with PSP licenses, 28 non-bank PSPs, and 10 PSOs need to collaborate to accelerate digital financial inclusion in Nepal. Greater interoperability is the starting point.
As DFS providers explore partnerships and unique ways to build their businesses together, the NRB will have to better define the frameworks for interoperability. It will need to introduce more guidance and support to enable the many PSOs and PSPs to better partner with one another. The guidance should help make clear the governance models for interoperability, the structure for economic arrangements, and criteria for robust operating models. [2]
What’s the point? Consumer welfare
Greater fintech interoperability can improve the Nepali consumer’s welfare. For example, I have 6 mobile money applications that all do the same thing. All are needed because none communicate with one another and it’s a hassle to identify the cheapest and most reliable service. Still, I always carry my wallet and cards as failsafe. With more interoperability, I will not need all applications, nor will I need idle cash sitting in those applications. I can pay someone even if we use different DFS providers and belong to different networks. In India, for example, the Unified Payments Interface (UPI) has allowed banks to exchange information with non-bank firms and enabled users to transact with all actors in the financial system.[3]
Newer PSPs, bank/non-banks especially with small customer bases, can now compete in niche and specialized services rather than replicate the same wallet model that early DFS movers developed to dominate the market. For example, as a customer I may use E-Sewa as my preferred wallet, but maybe another PSP has a better remittance service, another is better at managing my savings and insurance products, and other PSP may have a better QR code merchant network. I benefit immensely if I can access services from those other PSPs through E-Sewa. With interoperability, Nepal’s many PSPs and PSOs must compete on service quality and the customer’s digital banking experience.
Governance scheme will drive DFS partnerships
Interoperability can allow Nepal’s numerous licensed DFS providers to focus on service delivery rather than market domination. Changing this strategic focus and competing for consumer welfare won’t be easy. Much of the heavy lifting on how the ecosystem progresses, will depend on how the NRB outlines the governance scheme for financial service actors to work together. The table below highlights roles that the payments ecosystem will need to enable proper governance.[4] The NRB is the de-facto Overseer and Scheme manager in Nepal. It has delegated much operational capability to Nepal Clearing House Limited (NCHL) to become the de-facto payment gateway and switch. Other private PSOs also play the operator’s role in the market. The PSPs are taking the role of the settlement agent.
The latest NRB circular on Interoperability has identified some rules and is a step in the right direction to better define the governance in the ecosystem. DFS providers can collaborate with whomever they want, yet they need to report on the use of their telecom network data and on the fees structure for interoperability. DFS providers cannot make policies or technological moats to prevent interoperability with other payment entities, while bank DFS providers need to allow non-bank DFS providers to make settlements in their banks. Entities should ensure customer data safety and privacy and must share customer grievances and provide customer support within their interoperable partner network.
In the next months and years, these above baseline rules must evolve to solve the needs of the ecosystem and in improving consumer welfare. Small PSPs need to innovate and identify new payment arenas, demographics, and geographies to digitize. Dominant PSPs and PSOs, need to open their customer bases and data to specialized PSPs who can strengthen the value proposition to consumers and contribute to revenue generation. Data-sharing norms and protocols, and fee structures must be fleshed out.
If it gets expensive, what do I have to pay for?
Many retail payment functions in the market today, particularly with wallet payments and QR code payments, are free. There are charges typically when making bank-to-bank payments or transferring funds from a wallet to a bank. As the ecosystem becomes more interoperable, and DFS providers introduce more services to customers, customers should have to pay for services.
Building interoperability is costly. Someone must pay for the technological and operational backbone needed to allow different PSPs and PSOs to communicate and transact with one another. There will be technological development time, data sharing protocols to build, financial settlements to conduct, and promotional spending, among other costs. Bigger PSPs may be able to absorb those costs and defer revenue, but smaller PSPs will find that proposition tougher. Newly licensed PSPs with smaller financial and operational muscle will need a revenue model with customer fees or they will need to monetize customer data.
As things stand, the NRB prevents service providers from monetizing user data. Financial information is sensitive, therefore maintaining customer privacy and ensuring data security without monetizing customer data will place more financial and operational burden on service providers. Newer PSPs will need to be creative and aggressive to find different paths to profitability than how the incumbents have learned to make money.
What is observable is that switch operators for now are both private entities. The two PSOs that dominate this scene, NCHL and FonePay, are for-profit entities who will look to cover their expenses to facilitate payment interoperability. Their expenses must be factored in, and customers may have to pay extra for digital financial services. As PSPs aggressively move to digitize much physical banking functions, the fees and time costs consumers pay for banking will have to flow to the PSPs. As a millennial, I care about my data, and I am willing to pay security costs. Benefits of data-security and data privacy must be conveyed to customers, and the NRB’s governance scheme should help PSPs and PSOs transfer that cost to consumers.
The NRB undoubtedly has a plan to drive interoperability. It will need to create a fine balance in the ecosystem such that the dominant players feel competition to continue to improve their service offerings and newer non-bank PSPs survive and build viable business models.
Can we get space to experiment?
The NRB has drawn a line in the sand: DFS providers cannot create technological moats to preclude others from plugging into their network, and bank DFS providers cannot preclude others from using their bank account for settlement. This is an excellent starting point for PSPs to start collaborating and discovering new business models. This guidance is a welcome move for the industry.
Though the NRB has opened the possibility of collaboration, Nepal’s payment ecosystem will evolve in its own way. Each market participant whether it is a PSO, a bank PSP or a non-bank PSP has its own technological stack and operational stack. Business models for now are narrow, based on commission on transactions, rather than fees on truly value-added services. What and how industry collaborations happen will be up to how DFS providers sit across the table from each other and negotiate. In fact, there are ample frameworks available for how DFS providers structure partnerships.[6]
What the NRB may do next is to help the ecosystem operationally move towards an open banking culture. The NRB, over the next 6 months and even after, should be pushing for PSPs and PSOs to move towards an Application Programming Interface (API) based architecture. In open-banking, DFS providers make available their core finance/transaction services through APIs, which can be accessed and utilized by other service providers. Data sharing in such a scheme would need to ensure privacy and security of customer information. For now, a regulatory sand-box – where the NRB sets up a framework for PSOs and PSPs to conduct live experiments in a controlled yet supervised environment – may be a welcome move for quick and rapid prototyping. The NRB has just recently released a circular on digital lending. They can take a bolder step forward to create a sandbox so that companies can explore digital lending, digital insurance, digital brokerage, and more.
The NRB has taken a welcome step to improve interoperability in Nepal’s payment ecosystem. It will need to provide more technical and operational frameworks for companies to do. With the progress in the payment landscape over the past 10 years and the push towards digital transaction from COVID-19, Nepal has all the recipes in place for the fintech landscape to accelerate. It is my hope that the NRB, in the next few months, introduces measures such as regulatory sandboxes and open-banking architecture guidelines to push DFS players to expand their customer base and expand financial inclusion; expand higher-quality banking services; and ensure safety and privacy of customers.
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[1] NRB (2021) Payments Oversight Report FY 2020-2021 <https://www.nrb.org.np/contents/uploads/2022/01/Oversight-Report_FY-2020-21_Final.pdf>
[2] CGAP (2021) Interoperability in Digital Financial Services <https://www.cgap.org/sites/default/files/publications/2021_01_Technical_Note_Interoperability_Digital_Financial_Services.pdf>
[3] IMF (2021) Stacking up Financial Inclusion Gains in India <https://www.imf.org/external/pubs/ft/fandd/2021/07/india-stack-financial-access-and-digital-inclusion.htm>
[4] ibid
[5] CGAP (2021) Interoperability in Digital Financial Services <https://www.cgap.org/sites/default/files/publications/2021_01_Technical_Note_Interoperability_Digital_Financial_Services.pdf>
[6] IFC (2016) Wallet to Wallet Interoperability Rules <https://www.ifc.org/wps/wcm/connect/69298f2a-2e5f-4914-a450-2fe7b081c6c0/Example+Account+to+Account+Operating+Rules.pdf?MOD=AJPERES&CVID=lA4nGWX>
Ashraya Dixit is the technical lead of Center for Digital Transformation, an Incubation Program under Nepal Economic Forum that addresses cross-cutting themes related to digital adoption and revolution in emerging and frontier markets of Asia and Africa. He has a Master of International Business from the Fletcher School of Law and Diplomacy at Tufts University. He also has a Bachelor of Arts in Economics and Mathematics from Grinnell College.
