With the rapid evolution of financial technology, Nepal’s central bank has launched the Digital Finance Innovation Hub to support fintech innovators in testing their digital payment instruments and solutions before rolling them out to the public.

Nepal Rastra Bank announced the hub’s establishment in a notice published on Thursday, stating that it aims to foster innovation by providing fintech developers with a structured regulatory environment and appropriate policy facilitation.

The hub will assess both the opportunities and challenges that financial innovation presents while offering insights into developing financial services based on emerging technologies in banking and payments.

“This initiative will support new services in banking and digital payments, including quick response (QR) codes and virtual cards,” said Ramu Paudel, spokesperson for Nepal Rastra Bank.

He further explained that the hub would serve as a platform for fintech innovators to test their payment instruments using infrastructure provided by the central bank. After evaluation, the central bank will recognise viable solutions, enhancing its credibility.

Paudel highlighted that their reliability and testing status remain uncertain as new payment instruments and solutions enter the market. The hub addresses this gap by ensuring solutions undergo proper assessment. The initiative aligns with the central bank’s monetary policy for the current fiscal year and follows global best practices.

The hub will offer guidance on potential risks from users’ and buyers’ perspectives, fostering the maturity of fintech solutions. Participation from both the private sector and regulatory bodies will further strengthen the initiative. Currently, fintech innovators are not required to test their products before launching them.

Fintech innovators can contact the central bank’s payment system department to test digital payment instruments and solutions. A dedicated website, online proposal submission system, and detailed guidelines may be introduced.

“This is a highly commendable step,” said fintech expert Sanjib Subba.

“By launching the hub, the government has proactively coordinated with the private sector and fintech industry. From a regulatory standpoint, this marks a significant first for the fintech sector in Nepal.”

Industry experts view the hub as a milestone to boost confidence in the fintech sector, fostering innovation in digital payments.

“This initiative will enable fintech innovators to explore ideas, assess challenges, and refine their solutions while ensuring inclusivity and regulatory compliance,” Subba added.

He emphasised that fintech companies often face uncertainties regarding their solutions, including concerns about proof of concept, minimum value proposition, alignment with national agendas, security standards, compliance costs, and business viability. The hub will provide crucial insights into these matters, benefiting innovators and regulators.

Additionally, Subba suggested that this initiative could lay the groundwork for a ‘regulatory sandbox’—a controlled environment where firms can test innovations under regulatory supervision.

A regulatory sandbox allows fintech firms to test new products, services, solutions, technologies, business models, and policies in a safe and structured manner, fostering responsible innovation, according to industry experts.

Nepal's fintech industry has rapidly grown in recent years.

Nepalis are visiting ATMs less frequently as digital payment systems gain popularity.

According to the Payment Insight Report 2023-24 published by Nepal Rastra Bank, ATM users grew from 5.54 million in 2018-19 to 6.70 million in 2019-20, marking a 21 percent increase.

However, during the Covid pandemic, the year-on-year growth rate fell to 9.3 percent, with users rising to 7.32 million. This decline was attributed to a shift toward digital transactions as people stayed home.

Post-pandemic, ATM usage surged 20.6 percent in 2020-21, reaching 8.84 million users, and grew further by 22.8 percent to 10.85 million in 2021-22.

However, the growth rate began to slow, dropping to 12.8 percent in 2022-23, with 12.24 million users, and further declined by 5.3 percent last fiscal year, totalling 12.89 million users.

Cheque usage is on the decline. The number of cheques presented and cleared dropped from 12.29 million in 2020-21 to 11.97 million last fiscal year—a 4.5 percent decrease.

The rising popularity of QR codes, faster payment systems, mobile banking, and e-wallets is driving the decline in cheque usage.

QR codes, one of the most convenient forms of digital payment available in most places, have witnessed exponential growth. The year-on-year transactions surged 103.66 percent to Rs499.79 billion last fiscal year.

Its scan or transactions rose by 117.03 percent to 169.34 million in the review period.

E-Wallet and connectIPS uses have also surged. Wallet users quadrupled from 6.27 million in mid-August 2020 to 23.46 million in mid-July 2024, while connectIPS users increased from 0.16 million to 1.28 million in the same period.

As of mid-July 2024, 35 institutions have been licensed as payment service providers.