Nepal's fintech industry has rapidly grown in recent years thanks to the government’s prioritisation of digitisation through the Digital Nepal Framework 2019 and significant actions taken by the Nepal Rastra Bank (NRB), with crucial role played by Banking and Financial Institutions (BFIs) and Nepal’s private companies. The NRB is the main regulatory body that forms policy provisions and oversees the BFI's fintech development. The NRB has licensed numerous Payment System Operators (PSOs) and Payment Service Providers (PSPs), created a department dedicated to payment systems and passed the required legislation.

Fintech’s rapid growth

As of mid-August 2024, 107 BFIs have NRB licenses; 20 commercial banks, 17 development banks, 17 finance companies, 52 microfinance financial institutions and one infrastructure development bank are operational. There were 11,541 BFI branches in the same period, a slight decrease from 11,530 in mid-July 2024. There has been a decline in interbank transactions (from Rs 52.15 billion to Rs 655.44) compared to mid-August 2024 and the corresponding previous year. Real-Time Gross Settlement (RTGS) systems, mobile banking, QR-based payments and Internet banking are all seeing strong growth in usage and transaction values, indicating that digital transactions at the consumer level are increasing. For instance, ConnectIPS, introduced by Nepal Clearing House Limited (NCHL) in 2018, which allows users to link bank accounts via mobile banking apps and specialised ConnectIPS platforms, have become a major player in the instant payments market. Its convenience increased its user base from 162,117 in 2020 to 1,108,436 by 2023.

Growing concern

In today’s digital age, transferring money between banks should be fast and convenient. However, it comes with a fee: The directive from NRB caps interbank ATM fees at Rs15 per transaction. The monthly transfer cap of Rs1 million has not changed. The daily limit for wallet-to-wallet transactions was decreased to Rs50,000, with a maximum wallet balance of Rs50,000. For transfers up to Rs5,000, the charge is Rs5; for transfers between Rs5,000 and Rs10,000, Rs8, and amounts over Rs10,000, Rs10; the previous fees ranged from Rs5 to 20.

Recently, concern over the costs associated with interbank money transfers has become a hot topic on social media. Anupama Sangraula, a Chartered Accountant who frequently produces informative short videos to spread financial awareness, covered this issue succinctly. The costs typically include Rs10 in bank fees and Rs1.30 in Value Added Tax (VAT), totalling Rs11.30. For example, if a person makes five or ten transfers daily, these costs in total can increase because of bank charges on every transaction. Although digital banking services are convenient, they are not free. For banks, digital transactions become economical instead of printing out physical checks as it adds more cost to invest in infrastructure and operating costs for new branches. Some businesses use digital payment from their account, and the customers who are unaware will end up paying banking charges while making digital payments. Hence, the government and NRB must enforce strict laws to track VAT-registered businesses and check if they use their individual or business accounts.

Is it justified to impose fees on every transaction? Bank charges help banks cover operational and infrastructure expenses and discourage unnecessary transactions that can burden the system. Alliance for Financial Inclusion’s (AFI) research on payment innovations and risks in South Asia highlights that consumers' growing dependence on digital financial services has made them vulnerable to cybersecurity risks, such as identity theft, money laundering and data breaches. Service disruption is also one of the operational issues that affect the reliability of digital payments.

A study in Tanzania on bank charges' effect on customer switching behaviour in selected commercial banks showed that high interest rates on loans, high transaction costs, and unfair charges were the major factors influencing customers' decisions to switch banks. Hence, the study suggests that it is essential to encourage digital payment and make it more accessible, considering bank charges. This will benefit low-income groups at large, especially the ones making frequent small digital transactions.

Recent key developments

Now, let us look at the critical development of Nepal's fintech industry. Nepal made some progress in cross-border transactions by introducing new NRB guidelines that permit foreign nationals to use QR codes to make digital payments in Nepal. Nepalis going abroad will benefit because they can pay for foreign exchange up to a total of $2,500 using QR codes connected to their Nepali bank accounts. The current cross-border payment arrangement with India, which allows Indians to make mobile payments in Nepal, is expanded upon by this new digital payment system. For Nepali residents living in India, a panel from NRB has suggested capping QR code payments at INR100,000 (Rs160,000) each month, with no restrictions on payments made at pharmacies, hotels or medical facilities. Nepalis with US dollar accounts can use QR codes to spend up to $2,000 annually on online purchases from third-party countries; those without can only spend $500.

Additionally, the NRB notice suggests that the National Payment Switch handles all retail QR code payments and will facilitate cross-border payment services with India. At the moment, the average number of QR code transactions made by Indian visitors each day is 600, amounting to Rs1.3 million. The volume tends to increase around Indian holidays and in border areas.

NRB Governor Maha Prasad Adhikari participated in the South Asian BFSI Tech '24 Summit, highlighting critical development on the Central Bank Digital Currency (CBDC) and the National Payment Switch. The central bank has set a timeline for CBDC according to its fourth strategic plan (2022-2026), following a tiered strategy that begins with research and pilot testing before a complete launch and deployment by 2026. In July 2023, the central bank established a separate unit related to CBDC under its payment systems department and made it operational. India gradually introduced the digital rupee and started the wholesale CBDC in November 2022. By December 2022, the retail segment pilot had concluded satisfactorily. The RBI intends to increase the number of banks and thematic areas included in the trial.

CBDC's main benefits are decreased reliance on hard currency (cash), lower printing costs and increased transaction efficiency, particularly in cross-border payments. Although CBDC can bring blockchain technology and reduce corporate costs, there are hazards to financial stability, monetary policy and privacy. Data security is a concern since studies indicate that centralising citizen data increases the likelihood of intrusions. NRB should work with other central banks to build a safe and technologically advanced financial system to overcome these issues.

Digital connectivity and innovations like the expansion of payment platforms have led to massive growth in the Fintech industry. However, issues over bank charges, security, regulatory monitoring and fair access in all areas have also been critical. Healthy competition in the fintech industry and customer prioritisation for a seamless digital payment experience will depend on innovation and addressing operational risks.