Nearly one-and-a-half decade after digital payment services began operating in Nepal, the government has initiated a process to formally define the sector by amending Nepal Rastra Bank Act 2002.

A bill drafted to amend the Act, recently published for public consultation, proposes expanding the definition of ‘financial institution’ to include payment system operators (PSOs) and payment service providers (PSPs). The move has generated cautious optimism among digital payment stakeholders, alongside concerns about possible legal ambiguities and tax implications.

At present, banks and financial institutions are regulated under the Banks and Financial Institutions Act 2017 (BAFIA), while PSOs and PSPs operate under the Payment and Settlement Act 2019. Some experts fear that bringing these distinct entities under a single umbrella definition within the central bank’s governing law risks potential overlaps between the two Acts and confusion over which provisions would prevail in case of conflict. They therefore suggest additional legal provisions relating specifically to digital payment services should be clearly defined to avoid future ambiguity.

Parashuram Kunwar, a financial sector analyst, warned that redefining PSOs, PSPs and remittance companies as financial institutions could have unintended tax consequences. “This is a time when Nepal should be encouraging investment in the information technology sector,” Kunwar said. “If these companies are subjected to the same 30 percent income tax as banks and financial institutions, it could discourage investors and shareholders.”

Currently, banks and financial institutions pay 30 percent income tax under the Income Tax Act 2002. “There have already been calls to reduce the tax burden on banks to 25 percent,” Kunwar added. “Extending the 30 percent rate to digital payment firms would be inappropriate.”

He also expressed concern that if classified as financial institutions, PSOs and PSPs might be required to divide shares into promoter and public categories, as mandated for banks. “Banks must obtain approval from Nepal Rastra Bank before selling promoter shares to the public,” he said. “Stakeholders fear similar restrictions could apply to digital payment companies, limiting flexibility in raising capital.”

The PSOs include entities such as Nepal Clearing House Limited, Smart Choice Technologies and F1Soft International, which operate the infrastructure enabling, switching, clearing and settlement among banks, wallets and card networks. The PSPs, by contrast, provide front-end services directly to consumers through mobile wallets and QR-based payments. Major PSPs include eSewa, Khalti, IME Pay and Prabhu Pay.

Digital payment services began gaining traction around 2009 with platforms like eSewa and Hello Paisa and gradually expanded into a nationwide system. It appears that the government is seeking to broaden both the definition of such service providers and the scope of regulatory jurisdiction governing them. In recent years, the government has been pushing for a cashless economy.

Chandra Prasad Dhakal, president of the Federation of Nepalese Chambers of Commerce and Industry, said PSOs and PSPs should continue to be regulated separately rather than being included into the broader financial institution category.

“Nepal’s financial sector has made remarkable strides in digital banking in a short span precisely because these companies were encouraged,” he said. “With artificial intelligence advancing globally and Nepal Rastra Bank studying central bank digital currency, the role of PSPs and PSOs will be even more critical in the coming years.”

Dhakal added that promoting the expansion of PSPs and PSOs is vital not only to modernise Nepal’s financial system but also to make digital banking more widespread and accessible.

Payment service providers and experts have expressed mixed reactions to the proposed amendment to the Nepal Rastra Bank Act, which was recently made public for feedback and consultation.

A chief executive of a leading payment service provider, speaking on condition of anonymity, described the amendment as largely positive. “Previously, we operated within narrow legal clauses,” he said, welcoming the inclusion of concepts such as digital currency and digital banks in the draft. “This amendment explicitly recognises our existence.”

Guru Prasad Paudel, spokesperson of Nepal Rastra Bank, who also heads the Payment Systems Department, said the primary objective of the act's amendment is to broaden the definition of financial institutions in line with international practice.

“Under the Basel principles, only commercial banks are defined as banks; others are categorised as financial institutions. Globally, we need banking rather than banks,” he said, adding that including licensed PSOs and PSPs would not create confusion but rather streamline oversight.

On taxation, Paudel argued that similar transactions should not attract different tax treatment based on the channel used. “Paying for tea through a bank or a wallet should not lead to different tax outcomes,” he said, though he acknowledged that final tax rates are determined by the government.

According to the amendment proposed in clause (Chha) of Section 2 of the draft bill, any entity operating a payment system or providing payment services has been defined as a ‘financial institution’. The expanded definition also includes financial holding companies, agricultural cooperatives, industries or other institutions established under prevailing laws for the purpose of extending credit for specific economic objectives or mobilising deposits from the public as well as digital banks.

The term further encompasses remittance companies, payment system operators, payment service providers and any other institutions designated by the Government of Nepal through a notice published in the Nepal Gazette upon the recommendation of Nepal Rastra Bank.

Notably, the existing Nepal Rastra Bank Act does not explicitly mention financial holding companies, payment system operators, payment service providers or digital banks. Following this redefinition, service providers are uncertain about the legal implications. Will PSPs now be required, like banks, to classify their shares into promoter and public categories? Will provisions under the BAFIA, such as the lock-in period for promoter shares, also apply to them? These questions remain unanswered.

At present, banks and financial institutions pay 30 percent corporate income tax, while payment service providers are subject to a 25 percent rate. Many are questioning whether the new definition is intended to bring technology-based PSOs and PSPs within the same tax bracket as banks. Schedule 1 of the Income Tax Act 2002 clearly stipulates a 30 percent tax rate for banks and financial institutions. Clause 2(2) of the Schedule provides that banks, financial institutions, general insurance businesses, entities engaged in financial transactions, telecommunications and internet service providers are subject to tax at a rate of 30 percent on taxable income. By contrast, the same clause sets the rate at 25 percent for other general entities or companies.

Tanka Prasad Pandey, spokesperson of the Ministry of Finance, said the amendment to the Nepal Rastra Bank Act is still at a preliminary stage. “The ministry has made public the draft bill to seek feedback from stakeholders,” Pandey said. “It is currently under consultation. Concerns and suggestions raised by stakeholders are being discussed, and the Bill will be revised accordingly, including provisions relating to the classification of PSOs and PSPs as financial institutions.”

Information technology and digital banking expert Bibek Rana stressed that several aspects of the draft require greater clarity. While welcoming the introduction of the digital banking concept, he noted that the framework lacks clear basic rules for institutions operating without physical branches.

“Banks do not merely accept deposits and facilitate transfers; they also extend credit,” he said. “If loans are to be disbursed digitally, the law must provide for the digital acquisition and legal recognition of collateral documents such as land ownership certificates.”

Rana added that to fully operationalise digital banking, the act must incorporate the concept of digitally identifiable entities or digitally verified credentials, which is currently missing. He further observed that the draft is silent on legal coordination between banking institutions and non-banking systems such as the national identity card and land revenue systems.

Leaving such crucial issues unaddressed, he warned, could create unnecessary disputes and loopholes for fraud. “Leaving room in the act for later interpretation by the central bank could prove counterproductive,” he said. “A lack of legal clarity weakens the competitive environment and ultimately affects the broader economy.”

International practice

Regulatory models governing banks, financial institutions and payment service providers vary widely across countries. Some jurisdictions have enacted dedicated laws and established specialised authorities for payment systems, while others entrust oversight to the central bank under a broader financial regulatory framework.

In neighbouring India, the principal regulator for both banks and payment systems is the Reserve Bank of India (RBI). Commercial banks are governed under the Banking Regulation Act 1949, whereas payment systems operate under a separate statute, the Payment and Settlement Systems Act 2007.

Within the RBI, the Board for Regulation and Supervision of Payment and Settlement Systems oversees digital payments, prepaid instruments and wallets, reflecting a model in which a single central authority administers distinct legal regimes for banking and payments.

In the United States, regulatory oversight is more fragmented. The country’s central bank, the Federal Reserve, supervises major payment systems and certain banking institutions. However, regulation is divided between federal and state levels. National banks are primarily regulated by the Office of the Comptroller of the Currency, while deposit insurance and supervision of state-chartered banks that are not members of the Federal Reserve System fall under the Federal Deposit Insurance Corporation.

Payment service providers such as PayPal are generally required to obtain money transmitter licences in each state in which they operate, in addition to complying with federal anti-money laundering and consumer protection laws.

Singapore, by contrast, follows a more integrated framework. The Monetary Authority of Singapore functions both as the central bank and as a unified financial regulator. It administers the Payment Services Act 2019, a comprehensive law that consolidates the regulation of digital payment tokens (including crypto currencies), wallets and remittance services under a single umbrella.