Introduction
It has been more than a decade since digital payments were first introduced in Nepal, with Kumari Bank being the pioneer in 2002. At present, there are more than five digital payment platforms established that have been operating digital payment services. Similarly, the majority of banks have e-banking services as well. We can also see the growing number of applications relying on digital payments for the exchange of goods and services. Nepal’s journey from a traditional cash-based economy to a burgeoning digital payment ecosystem is a remarkable transformation that holds significant implications for the nation’s economic development; with Nepal Rastra Bank (NRB) reporting significant growth in digital transactions. Between Mid July 2021-Mid August 2021, the NRB recorded approximately 1.3 million QR-based payments, totaling NPR 5.1 billion. Fast forward to 2023, and this figure has surged to 11.2 million transactions, amounting to approximately NPR 30 billion, marking a sixfold increase in just two years. This exponential growth underscores the remarkable journey of Nepal’s digital payment system, driven by the concerted efforts of various stakeholders.
Historical Perspective
The roots of Nepal’s digital payment revolution can be traced back to a time when the country operated with a dual currency system, with Indian currency (INR) coexisting alongside the Nepali rupee. The establishment of the NRB in 1956 marked a pivotal moment as it aimed to eliminate the dual currency system and instill confidence in the Nepali rupee. This laid the foundation for the modern payment system that would gradually evolve in the coming decades.
The advent of information technology, particularly the discovery of personal computers and the internet in the 1980s and 90s, along with a more liberalized economic regime adopted in the 1990s, created an environment conducive to digitalization. During this period, Nepal’s banking industry embraced innovation by introducing card-based payment systems, internet banking, and SMS banking, facilitating the transition from a cash-dependent economy to a cashless one.
However, this transition was not without its early challenges, including limited digital literacy, infrastructure constraints, and regulatory complexities. Despite these hurdles, the adoption of digital financial services began to gain momentum.
Factors Driving the Digital Payment Revolution
The digital payment revolution in Nepal has been propelled by several key factors. Government policies and historical initiatives have played a crucial role in promoting digital payments, aligning with the NRB’s mandate to develop a secure and efficient payment system. This commitment to infrastructure development led to the establishment of the Nepal Clearing House Limited (NCHL) in 2008, which facilitated clearing and settlement operations.
The Nepal Payment System Development Strategy (NPSDS), formulated with assistance from development partners in 2014, set the stage for integrated and strategic development of the national payment system. The creation of the Payment System Department (PSD) in 2015 within the NRB further emphasized the importance of formulating policies, issuing licenses to Payment System Operators (PSO), and regulating and inspecting PSOs and Payment System Providers (PSP).
The government’s Digital Nepal Framework (DNF) in 2019 identified eight priority sectors, including finance, and provided a roadmap to unlock growth potential. With the implementation of systems like the Treasury Single Account (TSA) and Sub National Treasury Regulatory Application (SuTRA), the government has made significant strides in electronic fund transfers.
The digital financial ecosystem that has emerged in Nepal consolidates digital infrastructure and resources into a synchronized platform, enhancing financial inclusion, reducing gender gaps, and empowering vulnerable populations. It also fosters transparency, good corporate conduct, and prudent regulatory mechanisms, making it a prerequisite for sustainable economic development.
Cross-Border Initiatives
Nepal’s digital payment revolution has not been limited to its borders. Nepal and India are set to launch a cross-border digital payment system. The first phase of this initiative, a person-to-person fund transfer system, is expected to go live by November 2023. This system will simplify financial transactions between the two neighboring countries for business people, students, and tourists.
Furthermore, Nepal is extending its digital payment partnerships beyond its borders. In June, Fonepay signed a memorandum of understanding with Sri Lanka’s National Payment Network: LankaPay, to develop an interoperable digital payment system enabling seamless transactions between the two countries.
Chinese digital payment service WeChat Pay has also made inroads into Nepal, allowing Chinese nationals visiting the country to make payments using their mobile devices. While currently limited to Chinese visitors, this initiative demonstrates the global reach of digital payment systems.
Future Challenges
While Nepal’s digital payment ecosystem has made remarkable strides, it still faces several challenges. Cybersecurity concerns and the need to protect data privacy remain paramount. Additionally, promoting digital literacy and awareness, especially in remote regions, is essential to ensure that all segments of the population can participate in the digital economy.
Expanding digital payment initiatives across borders and addressing regulatory challenges will be vital for sustained growth. Nepal has the potential to become a hub for cross-border digital transactions, further enhancing its role in the regional economy.
Predicted growth indicates a promising future for Nepal’s digital payment ecosystem, but addressing these challenges and seizing opportunities will be crucial for realizing its full potential.
The Positive Aspect
Amidst the transformative journey of Nepal’s digital payment ecosystem, emerges a significant positive aspect. Recent data showcases a remarkable surge in mobile and broadband penetration, indicating the beneficial impact of the digital payment revolution on the country’s financial landscape. Mobile money transactions, in terms of value, have witnessed substantial growth, surging from a modest 1.47 percent of GDP in 2019 to a substantial 10.97 percent in 2021. This notable increase signifies a growing acceptance and reliance on mobile-based financial transactions among Nepali citizens. Moreover, the expansion of the population with at least one deposit account in the Nepali financial system is a promising development. This metric rose from 60.9% to 67.3% during the period spanning 2019 to 2021, as per the Financial Access Report of 2021. This growth reflects a broader financial inclusion trend, as more individuals, particularly those in underserved areas, gain access to formal financial services through digital channels.
Further indicators of the digital payment revolution’s impact include the proliferation of payment service providers, an increased number of wallet users, a growing customer base for internet and mobile banking services, a rise in point-of-sale and card-based payments, and an expanding adoption of QR-based payments. All of these trends collectively underscore the deepening of digital payment usage and the adoption of digital financial instruments by Nepali consumers.
Way Forward
To sustain and accelerate the digital payment revolution in Nepal, a collaborative effort is needed from all stakeholders. Policymakers should prioritize investment in digital infrastructure, streamline regulatory processes, and promote digital financial literacy. Private sector players must continue to innovate, reduce transaction costs, and enhance interoperability.
Individuals, as the ultimate end-users, should embrace digital services while taking necessary precautions to protect their financial transactions. The momentum of the digital payment system in Nepal offers a promising path towards a complete digital ecosystem that can drive sustainable economic development. Continued support, innovation, and international cooperation will be key to overcoming future challenges and maximizing the benefits of digital payments in Nepal.
Animesh Shrestha is a recent A-Level graduate from Little Angels College. He is currently working at Nepal Economic Forum as an intern wherein his interest lies in development economics, macroeconomics, and international relations.
