Nepal Rastra Bank's (NRB) monthly payment system indicators show around 800,000 QR-based payments between mid-March to mid-April, 2021, amounting to Rs2.7 billion. The transactions grew to 7.7 million, amounting to about Rs23 billion during mid-March to mid-April, 2023. The tremendous growth in the frequency of digital commerce and the amount transacted (eightfold in two years) reflects the recent growth of the digital payment system in Nepal.

While there's a long way to go, the digital journey of the Nepali payment system spotlights the efforts made by concerned stakeholders, mainly the NRB, government agencies, the private sector, and the ultimate end user, the individuals.

The backstory

The Nepali payment system has travelled many miles to reach its current stage. Before the establishment of the NRB, there was widespread use of Indian currency (INR), and transactions were done in dual currencies. Against this backdrop, the NRB was established in 1956 AD to eliminate the dual currency system, among other customary central bank objectives.

Within the first decade of its establishment, the NRB expanded its branches to the country's major cities and successfully demolished the dual currency trading mechanisms. Building on the citizens' confidence in the Nepali rupee laid the foundation for the modern payment system in the succeeding decades.

The groundbreaking inventions in information technology, such as the discovery of personal computers and the internet during the 1980s and 90s, along with a liberalised economic regime adopted by the government during the 1990s, have enlarged the digitalised pathway for the payment system. The Nepali banking industry's introduction of card-based payment systems, internet banking, and SMS banking during the 1990s and 2000s has helped transition the Nepali payment system from cash to cashless.

Modernising efforts

With the promulgation of the NRB Act 2002, developing a secure, healthy, and efficient payment system has remained one of the primary objectives of the NRB. This legal mandate has enshrined the modern payment system by establishing and developing various legal and institutional arrangements.

The NRB, with the formulation of its first-ever strategic plan (2006-2010), emphasised infrastructure development for automated clearing systems. Within two years of implementing a strategic plan, the Nepal Clearing House Limited (NCHL) was established in 2008 to carry out multiple payments in addition to clearing and settlement-related operations.

The Nepal Payment System Development Strategy (NPSDS), formulated by the NRB with assistance from development partners in 2014, paved the way for the integrated and strategic development of the national payment system. A dedicated Payment System Department (PSD) was established in 2015 under the NRB organisational structure. The PSD deals with formulating policies, issuing licenses to Payment System Operators (PSO) and Payment System Providers (PSP), regulating and inspecting PSOs and PSPs, and facilitating private sectors to promote digital payments.

The government undertook the Digital Nepal Framework (DNF) in 2019 to provide the blueprint for digital initiatives. It identified eight priority sectors and provided a roadmap to unlock the growth potential in those priority sectors, which include agriculture, health, education, energy, tourism, finance, urban infrastructure, and digital foundation.

The government has expanded the electronic fund transfer by implementing various information management systems such as the Treasury Single Account (TSA) and Sub National Treasury Regulatory Application (SuTRA). Government officials claim that around 90 percent of government expenditure and about 30 percent of government revenue have been mobilised electronically, with the trend still upsurging.

Towards sustainable development

The digital financial ecosystem bundles the segregated digital infrastructure and resources to make a synchronised digital platform that provides financial products and services interoperably. The digital financial ecosystem overcomes the costs and physical barriers for similar countries like Nepal, which have rugged terrain and tiresome administrative procedures.

Digitalisation and financial innovations accommodate rural and vulnerable citizens by expanding financial inclusion. It lays the foundation for providing essential health, education, and other social safety nets. It reduces the gender gaps, empowers women, and makes the payment system accessible to differently able citizens.

Furthermore, digitalisation reduces multiple layers involved in the service delivery, identifies and tracks the targeted people, and puts off intermediaries. It also fosters competition, reduces the cost of conducting business, and stimulates foreign flow of capital. It is prominent for better transparency, good corporate conduct, and prudent regulatory mechanisms. Altogether, digital payment systems have been evolving as one of the prerequisites for the sustainable development of the economy.

The silver lining

Recent data from the Nepal Telecommunication Authority (NTA) shows that mobile and broadband penetration has reached over 140 percent and 130 percent of Nepal's total population, respectively. Increasing high-speed and reliable telecommunication services have been building the foundation of digital financial services. The Nepal Financial Inclusion Report 2023 shows that mobile money transactions in terms of value have increased from 1.47 percent of GDP in 2019 to 10.97 percent in 2021.

The population with at least one deposit account in the Nepali financial system increased from 60.9% to 67.3% during 2019-2021 (Financial Access Report, 2021). Digital payment indicators such as the number of payment service providers, wallet users, internet, and mobile banking customers, point of sales and card-based payments, and QR-based payments show that digital payments have been deepening. It also signifies encouraging customers' adoption of digital financial instruments.

Moving forward

The emerging digital payment system knocks further calibrated moves from regulators and operators. Despite increasing digital financial transactions and changing the transaction behaviour of customers, the payment system faces low digital literacy, inadequate and disaggregated digital infrastructure, insufficient interoperability among service providers, multiple regulatory windows and a lack of foreign investment.

The regulators and other stakeholders must collaborate to make digital financial systems universal. The government should gear up investment in digital infrastructure, bring a unified legal window for digital business, digitise services provided by government agencies, increase digital financial literacy, protect data and customers' privacy, and implement a digital transfer policy of social security schemes.

Private sectors should also invest in digital innovation, implement government policies such as fully digital banking, comply with regulatory norms, reduce digital transaction costs, and team up with other service providers to make interoperability of digital services. Likewise, individuals should move with the tandem of digital services, practice digital services as the ultimate end users, and take necessary precautions to protect digital financial transactions.

With these collaborative moves from all stakeholders, the current momentum of the digital payment system could lead to a new horizon and pave the way for the complete digital ecosystem required for developing the economy sustainably.

Neupane works at Nepal Rastra Bank.