While most other South Asian countries have switched to digital money, a report shows that Nepal's use of paper-based payment instruments has increased by 37 percent in the last five years.

According to Payment Innovations and Risks in South Asia published by the South Asian Region Financial Inclusion Initiative and a member of its Task Force, paper-based payment instruments like cheques and demand drafts increased in value to $13.92 million in 2022 from $10.12 million in 2018. However, the growth rate of cheque presentation experienced a 5 percent decline (from 21 percent to 16 percent) over the past year.

In countries like Bhutan and Nepal, challenging terrain, difficult topography, and scattered populations complicate the provision of consistent infrastructure, particularly in rural and remote areas where poor internet and service disruptions degrade digital payment services, the study showed.

Insiders say Nepal's digital payment race started quite late, and cash transactions still outweigh digital transactions. The country lags in digital infrastructure, as the National Payment Switch is still a work in progress, and retail payment and real-time gross payment were introduced in 2019. This shows that digital payment infrastructure was a late development in Nepal, pushing back digital payment adoption.

There has been a significant increase in mobile banking and quick response (QR) code-based transactions in the country in recent times. However, important factors like financial and digital literacy, uninterrupted internet connection, and people's adaptability are still lacking in the country, said Gunakar Bhatta, executive director of Nepal Rastra Bank. Also, there are areas where the security system needs strengthening.

As consumers prefer digital payments, the dependency on paper-based payment instruments has declined by 64 percent in Bhutan, 40 percent in India, 34 percent in Sri Lanka, 16 percent in Pakistan and 5 percent in Bangladesh.

In the context of Nepal, the constraints in the adoption of digital payment are many.

Through the Digital Nepal Framework, the country aims to address low digital literacy, which is a challenge to technology-based economic growth.

According to the report, 46 percent of Nepal's population is unbanked. Of those without access to banks, 25.05 percent are women and 20.95 percent men. The national financial literacy rate is 57.9 percent, with a gender gap favouring men.

A Nepal Rastra Bank report shows that Nepal’s payment service providers are grappling with a shortage of policies, insufficient physical infrastructure, subpar corporate governance, and a lack of proper strategy for sustained business operations during crises. Most e-wallet service providers are making losses and are unable to invest in infrastructure.

Nepal has a high mobile internet penetration rate of 98.46 percent (2022), against 140.07 percent mobile penetration in the South Asia region. However, this does not imply universal access to mobile phones and the internet across the region, as individuals may own multiple devices or connections, the report said. For instance, not everyone in Nepal with a smartphone has an internet connection. Despite high connectivity indicators, there remain significant disparities within countries regarding access to digital services, influenced by rural-urban divides, gender gaps, and geographical challenges.

The report showed a huge gap in smartphone and internet access between rural and urban Nepalis.

In Nepal, 52.55 percent of urban households have smartphones, while 20.45 percent of rural households have access to them. In urban households, 30.9 percent have access to the internet while only 6.96 percent of rural households have an internet connection.

Payment innovations in digital financial services are said to be reshaping consumer behaviour and serving as an important tool for financial inclusion, notably through direct-to-beneficiary transfers across South Asia. These innovations facilitate easier beneficiary identification, reduce intermediary involvement in government disbursement, and improve efficiency.

In Nepal, almost 90 percent of government expense transactions, including government-to-person payments such as salaries, pensions, and social security, are now digital, with about 30 percent of government revenue collected via digital platforms like mobile applications, online gateways, mobile wallets, or web applications, the report said.

Although digital payment innovations have proved instrumental in furthering financial inclusion, the growth in digital payments has also introduced new risks, including fraud, money laundering, cyber threats, and data breaches. Cybercriminals are increasingly targeting digital payment platforms, leading to data breaches and unauthorised transactions such as Hundi. This poses significant challenges to the safety and trust of the digital payment ecosystem in the region, the report said.