The government has opened the door to foreign investors to participate in Nepal's digital payment system under a newly amended policy.

The revised guideline issued on January 5 by the central bank allows foreign direct investment in payment service providers (PSPs) and payment system operators (PSOs) of up to 15 percent of the total capital.

PSPs like eSewa, Khalti and IME Pay help merchants accept online payments while PSOs are banks and non-banks that process the payments.

Nepal Rastra Bank has also allowed PSPs to merge under the new policy. “Regulations related to merger will be introduced accordingly,” the central bank said.

The central bank has increased the paid-up capital requirement for firms engaged in digital payment systems.

The minimum paid-up capital for a PSP operating instruments other than payment cards has been raised from Rs10 million to Rs50 million.

A PSP operating payment cards and other instruments needs to have a paid-up capital of Rs250 million, up from Rs50 million.

The paid-up capital requirement for a PSO has been increased from Rs100 million to Rs400 million.

A PSO handling payment transactions outside Nepal through payment instruments issued in the country now needs to have a paid-up capital of Rs800 million, up from Rs250 million.

“There are already 10 PSOs and 27 PSPs in Nepal, and most of these firms do not have the required amount of capital. Most of them are running at a loss,” said Guru Prasad Poudel, executive director of Nepal Rastra Bank and chief of the payment department.

The central bank moved to increase the capital requirement for digital service and system providers to ensure that they have adequate cash resources.

“These are the companies working in technology. Inadequate capital may create problems for them as they don’t make an immediate profit as other companies do. They have to operate with less return on profit for many years, and it is necessary to increase their paid-up capital base,” he said.

New PSPs and PSOs need to have a paid-up capital as per the new provision while the existing companies have been given until mid-July 2028 to increase their paid-up capital. Some of the companies have already increased their paid-up capital.

Payment system operator Smart Choice Technology has increased its paid-up capital to Rs500 million.

Nepal Clearing House has a capital base of more than Rs400 million, and plans to increase it to Rs600 million in the near future.

Fonepay is also increasing its paid-up capital, according to Poudel.

Digital payment has been growing in Nepal. “Along with the growth, there are many risks associated with it, including capital base,” said Poudel. “The increased capital will boost their risk-bearing capacity.”

There are more than 20 million mobile wallet users in the country. The number of e-wallet users is more than 10.6 million, and internet banking users total 1.9 million.

According to the central bank, quick response (QR) transactions worth Rs18 billion are made from around 5.5 million transactions per month.

“The real-time gross settlement (RTGS) transaction is going very well,” said Poudel. The RTGS is a funds transfer system between banks in real time.

Telecommunications service providers can also operate as a PSP through a subsidiary company. Nepal Telecom operates Namaste Pay which has a paid-up capital of Rs400 million.

PSPs operated by telecommunication service providers can lose their licence if they don’t serve other customers besides their own subscribers, according to the new policy.

Nepal’s telecommunication service providers have been given permission to operate digital payment services because the scope of the work is related to technology and telecommunications, officials said.

Visa Worldwide of Singapore, Mastercard of Singapore and Union Pay International of China have obtained licences from the central bank to function as PSOs.

The policy for permit issuance to firms engaged in payment systems was originally unveiled in 2016.

The central bank’s monetary policy for the current fiscal year has provisioned the merger and acquisition of PSPs. It also mentions opening up the digital payment sector to foreign direct investment.

Anil Upadhyay, former president of the Nepal Bankers Association, said that as the country is moving towards cashless payment, the system needs to be strengthened.

“The security system needs to be updated and strengthened. Investment is needed to secure the software and hardware, and they require continuous investment. That’s why the capital base should be strong enough for the companies dealing with financial transactions,” Upadhyay said.

“With the growth in digital transactions, a strong capital base will strengthen the company's risk-bearing capacity. This will help them to focus on institutional development too,” he said.

"Investment is needed in research and development, and regular updates are required in software and hardware. As the regulator has given a time frame of five years to raise the paid-up capital, there is no need for panic," he said.

According to officials, allowing foreign direct investment in technology helps the country’s economy to grow.

In many countries, the technology cost has made banks, software companies and payment gateways to go for merger under regulatory pressure after they became unable to obtain returns in a short period, officials said.

Nepal’s electronic payments during the autumn shopping season were down 20 percent, overturning expectations of a spending surge due to the occurrence of sacred festivals, general elections and the FIFA World Cup.

According to Nepal Rastra Bank, digital payment transactions during the period mid-October to mid-November amounted to Rs3.94 trillion, down sharply from Rs4.93 trillion last year.

Economists blamed the import restrictions imposed by the government to save foreign exchange for the drop in digital payments, as people made fewer purchases.