Nepal’s annual budget has promised the launch of fully digital financial institutions—neo-banks—within the current fiscal year 2025-26. The Nepal Rastra Bank’s monetary policy, announced in July, also supports this pledge.

But in a move that has left thousands of customers and fintech entrepreneurs dismayed, the central bank has ordered Laxmi Sunrise Bank to shut down its digital-only banking service named OrangeNXT, which it had been running for the past year and a half in partnership with fintech company FoneNXT.

The service was designed for a generation of customers who dislike long queues and paperwork, especially Gen-Z, migrant workers abroad, and those in remote areas of the country with limited access to banking services. Through a mobile application, users could open an account online, verify it through video-based KYC (Know Your Customer), and carry out transactions without ever visiting a bank branch.

More than 65,000 customers had opened accounts, and deposits had already reached Rs170 million. Now, following the central bank’s directive, those customers are stranded, as they have been forced to migrate their digital accounts into traditional ones—a process that FoneNXT executives say is technically complex.

According to NRB officials, the service had been operating without proper legal and regulatory framework. The central bank, citing the absence of specific provisions for digital-only banks, last week ordered the service suspended until further notice.

“We are the first bank to launch a fully app-based digital banking product, so the central bank is examining its potential risks, compliance issues, and other legal dimensions,” said Piyush Raj Aryal, information officer at Laxmi Sunrise Bank. “Once the NRB completes its assessment, it may provide a way forward. For now, the product has been put on hold.”

Despite repeated requests, central bank officials declined to comment. But insiders confirmed that during an inspection earlier this year, there were discussions in the NRB on whether a separate licensing regime should be introduced for neo-banks or digital-only banking products. The bank had even instructed Laxmi Sunrise and FoneNXT to eventually migrate all OrangeNXT accounts to other formats.

For many in the digital finance sector, however, the central bank’s move is seen as regressive. “We have been working on this service for two and a half years in order to remove the hassles of filling eight-page forms and physical verification, which discourage young and tech-savvy customers. Laxmi Sunrise Bank started the service on January 25, 2024,” said Subash Sharma, director of F1Soft, the parent company of FoneNXT. (Kantipur Media Group’s Managing Director Sambhav Sirohiya has investment in F1Soft and sits on the company’s board.)

“Instead of a house map, customers could simply provide a location link. This was meant to increase financial inclusion and bring the younger generation into banking. We had even informed the banking regulator about the product long ago. How fair is it to suddenly shut it down now, when the government itself has committed to promoting neo-banks in the budget and monetary policy?” said Sharma.

FoneNXT had partnered with Laxmi Sunrise Bank under a “Banking-as-a-Service” (BaaS) model, offering both technical and advisory support. According to Sanat Kumar Paudel, chief executive officer of FoneNXT, their round-the-clock call centre mostly served Nepali migrant workers abroad, who frequently called in the middle of the night with queries.

“These were the people who could not go to banks physically, and OrangeNXT was tailored for them. It was 100 percent digital-only, and adoption was strong among urban youth, mainly those aged 20 to 45, and Nepalis abroad,” Paudel said.

The OrangeNXT app had introduced innovative, gamified features such as “Save As You Pay,” where small amounts were automatically set aside in a digital piggy bank each time a QR payment was made, along with expense trackers and personalised notifications. Customers could choose between Elegant Saving, Remit Saver, and Kids Saving accounts. Some had even inquired about credit services, though loans were not yet available.

Globally, digital-only banks have grown rapidly. India has platforms like Jupiter, Niyo, and RazorpayX, which operate in partnership with licensed banks as the Reserve Bank of India is yet to issue separate neo-bank licenses. While these services have expanded digital inclusion, they are also criticised for cybersecurity vulnerabilities and weak consumer protection frameworks.

Brazil’s Nubank has become the world’s most successful neo-bank, with over 100 million customers and a market capitalisation exceeding $60 billion. Britain’s Revolut, launched in 2015, plans to issue IPO (initial public offering) in 2025, while China’s WeBank and the US-based Cash App have also amassed millions of users.

Germany’s N26 and the UK’s Starling Bank have gone further, securing independent digital-only banking licences that put them on par with traditional banks.

These global experiences highlight both the opportunities and risks. Most neo-banks don’t have their own banking licence and rely on partnerships with licensed institutions to hold deposits. This model makes them less directly regulated and raises concerns about customer fund security in case of the partner bank’s failure. Regulators in developed economies have tried to address such gaps by creating new licensing frameworks.

Nepal has yet to develop any such system. Though the NRB has said in its monetary policy that legal and procedural arrangements for neo-banks will be advanced this fiscal year, there are as yet no clear rules. Experts argue that this policy vacuum is no excuse to halt innovation.

“It is the NRB’s responsibility to ensure that banking applications protect depositors’ money, but instead of blocking new ideas, the regulator should create safeguards,” said fintech expert Bibek Rana.

“Digital-only banks haven’t even been tested in Nepal. We don’t yet have the infrastructure, nor the principles. That’s precisely why regulators should be proactive in enabling, not stifling, such pilots.”

Globally, video KYC has been questioned for its vulnerability to deepfake attacks, but OrangeNXT’s developers said they were already working with AI engineers to design stronger verification solutions. They insist their model was fully compliant with NRB’s supervision, though without a separate licence category, it fell into a regulatory gray zone.

The contradiction is glaring. This year’s federal budget, in point 327, promises to expand branchless banking and set up neo-banks to promote rural financial inclusion. The NRB’s own monetary policy, in section 100, echoes this commitment, pledging to create legal and procedural arrangements. Yet the same regulator has now shut down the country’s first such attempt.

“If there were no regulatory provisions, the NRB could have stopped it at the start,” said a central bank official familiar with the case. “Instead, they let it run for a year and a half and then pulled the plug.”

This is not the first time the regulator has resisted the term “neo-bank.” Earlier, Nabil Bank was prevented from branding its digital product as “Nabil Neo” and instead switched to calling it “NBank”. Critics say the central bank’s caution risks leaving Nepal far behind in a global fintech race.

For the 65,000 customers who embraced OrangeNXT, the suspension means going back to conventional banking, filling out long forms, and enduring branch visits—exactly the kind of hurdles digital banking had promised to eliminate. For policymakers, it signals a sharp disconnect between the government’s digital finance vision and the regulator’s hesitancy.