Google Gemini's Deep-dive I: Digital Payments & Fintech Opportunities in Nepal

Nepal is undergoing a significant digital transformation. While traditionally reliant on cash, Nepal is rapidly embracing digital payments and fintech innovations. This report delves into the dynamic landscape of Nepal's fintech sector, exploring the key trends, investment opportunities, challenges, and success stories shaping its future. Studies suggest that Nepal's unique blend of economic growth, increasing smartphone penetration, and supportive government policies is creating a fertile ground for fintech to flourish.

Key Trends in Nepal's Digital Payments Landscape

Several factors are driving the surge in digital payments in Nepal:

Increased Smartphone Penetration: The widespread adoption of smartphones has provided a fertile ground for digital payment solutions to thrive.

Government Initiatives: The Nepali government has actively promoted digital transactions through initiatives like the Digital Nepal Framework, which aims to create a national payment gateway and foster digital technology adoption across various sectors. This framework has also led to relaxed regulations on digital transactions and increased transaction limits.

E-commerce Growth: The rise of e-commerce has fueled the demand for secure and convenient online payment options, further accelerating the shift towards digital payments.

Cross-Border Payment Systems: Nepal has made significant strides in facilitating cross-border transactions, particularly with India. The introduction of a cross-border digital payment mechanism between Nepal and India in 2019 marked a significant step towards seamless regional transactions2. This was further strengthened by allowing Indians to make mobile payments in Nepal starting in March 20243. In November 2024, Nepal expanded this system by enabling tourists from 10 countries and regions to make payments using their local e-wallets via NEPALPAY QR codes.

QR Code Payments: QR code-based payments have witnessed a remarkable surge in popularity. Nepal Rastra Bank (NRB) data reveals a 300% increase in QR code transactions between mid-March 2022 and mid-March 20232. This growth can be attributed to the ease of use and accessibility of QR code technology.

Decline in Cheque Transactions: As digital payments gain traction, traditional payment methods like cheques are declining. In the fiscal year 2022-23, cheque transactions at banks dropped by 8.97%4. This trend underscores the rapid shift towards digital alternatives.

Government VAT Refund Policy: To further incentivize digital adoption, the government of Nepal has implemented a policy to refund 10% of the 13% value-added tax (VAT) on online payments. This refund applies to payments made at various businesses, including bars, restaurants, hotels, and guesthouses.

Growth in Real-Time Gross Settlement (RTGS) Systems and Internet Banking: Alongside mobile payments, other digital transaction methods like RTGS and internet banking are also experiencing significant growth in Nepal. This indicates a broader trend towards the digitization of financial services.

Contrasting Trends: The decline in cheque transactions coupled with the surge in digital payments, particularly QR code payments and mobile banking, paints a clear picture of Nepal's rapid adoption of fintech. This shift is driven by the convenience, affordability, and accessibility of digital solutions.

Investment Opportunities in Nepal's Fintech Sector

Nepal's evolving fintech landscape presents a wealth of investment opportunities across various segments:

Digital Wallets: Platforms offering a range of services, including bill payments, mobile recharges, and online shopping. eSewa, Khalti, IME Pay

Digital Lending: Providing accessible loan options to individuals through partnerships with banks. Foneloan

Remittance Services: Facilitating cross-border money transfers with competitive fees and efficient services.

Crowdfunding: Enabling individuals and businesses to raise funds for social causes, healthcare, and ventures. Milaap

Insurtech: Leveraging technology to provide innovative insurance products and services.

Regtech: Ensuring compliance with regulatory requirements and managing risks in the fintech sector.

In addition to the opportunities listed above, several factors contribute to making Nepal an attractive investment destination for fintech companies:

Regulatory Support: Nepal Rastra Bank (NRB), the central bank, plays a crucial role in regulating and promoting fintech development. It has licensed numerous Payment System Operators (PSOs) and Payment Service Providers (PSPs) and created a dedicated department for payment systems.

FinTech Alliance Nepal: The FinTech Alliance Nepal is a key initiative that connects investors with fintech companies, fostering collaboration and innovation within the sector.

Challenges and Risks

Despite the promising growth trajectory, Nepal's fintech sector faces several challenges:

Digital Divide: A significant portion of Nepal's population, particularly in rural areas, lacks access to digital infrastructure and financial literacy. This digital divide hinders the widespread adoption of fintech and limits its potential to drive inclusive economic growth. To address this, initiatives are needed to expand internet connectivity, improve digital literacy, and promote access to digital financial services in underserved areas.

Cybersecurity Risks: With the increasing reliance on digital platforms, cybersecurity threats like identity theft, data breaches, and online scams pose a significant risk. Strengthening cybersecurity infrastructure, implementing robust security measures, and educating users about online safety are crucial to mitigate these risks.

Regulatory Framework: While Nepal's regulatory environment for fintech is evolving, there is a need for a more robust and supportive framework to foster innovation and manage risks effectively8. Clear guidelines on areas like data privacy, consumer protection, and licensing requirements are essential to build trust and attract investment.

Lack of Trust: Some consumers remain hesitant to embrace digital payments due to concerns about security and data privacy. Building trust and awareness is essential for wider adoption1. Public awareness campaigns, transparent data handling practices, and robust security measures can help alleviate these concerns.

Interoperability: The lack of interoperability between different digital payment platforms can create inconvenience for users and hinder seamless transactions3. Establishing common standards and promoting interoperability between platforms will enhance user experience and encourage wider adoption.

Government Stance on Cryptocurrency: The Nepali government has deemed blockchain technology and cryptocurrency illegal, citing concerns over outward remittances and high-risk transactions6. This restrictive stance could potentially hinder innovation and limit the growth of certain fintech segments.

Digital Literacy: A significant challenge is the lack of digital literacy among a large segment of the population8. Many individuals, especially in rural areas, may not be familiar with digital tools and services, hindering their ability to participate in the digital economy.

Financial Inclusion: Despite progress in digital payments and financial services, a significant portion of the population may still be unbanked or underbanked. Ensuring broader financial inclusion is essential for the success of the digital economy.

Infrastructure Development: Beyond internet connectivity, other infrastructure challenges, such as reliable power supply, are important for sustaining digital services8. Uninterrupted power is crucial for the functioning of digital platforms.

Economic Disparities: Economic disparities between urban and rural areas can affect the equitable distribution of digital benefits. Bridging this gap is crucial to ensure that the benefits of fintech reach all segments of the population.

Interbank Money Transfer Costs: Concerns have been raised about the costs associated with interbank money transfers. While digital banking services offer convenience, the fees associated with these transactions can be a barrier for some users, particularly those who make frequent small transfers.

Success Stories

Nepal's fintech sector boasts several success stories:

eSewa: Founded by Biswas Dhakal, eSewa is Nepal's first and most comprehensive online payment gateway. It has played a pivotal role in driving financial inclusion by providing millions of Nepalis with access to digital financial services. eSewa's success can be attributed to its early mover advantage, its comprehensive range of services, and its focus on user experience.

Khalti: Amit Agrawal co-founded Khalti is another leading digital wallet platform that has gained significant traction in Nepal. It offers a wide range of services, including mobile banking, bill payments, and online shopping10. Khalti has differentiated itself through its user-friendly interface, its focus on security, and its strategic partnerships with banks and merchants.

Fonepay: Launched in 2019, Fonepay has emerged as a key player in Nepal's digital payments ecosystem. It provides interoperable payment solutions, enabling transactions between bank accounts and mobile wallets. Fonepay's success can be attributed to its focus on interoperability, its strong partnerships with banks, and its commitment to innovation.

Overall Growth of Digital Payment Platforms: The success of digital payments in Nepal is evident in the overall growth of digital payment platforms. Between mid-July and mid-October 2022, the number of online transactions increased from 34.23 million to 54.12 million11. The highest monthly turnover of digital payment platforms was recorded between mid-September and mid-October 2022, reaching Rs 470.51 billion, coinciding with the festival shopping season.

Insights and Recommendations

Financial Literacy: Investing in financial literacy programs is crucial to empower consumers and promote the responsible use of digital financial services6. These programs should focus on educating users about digital financial products, online safety, and responsible borrowing practices.

Cybersecurity Measures: Strengthening cybersecurity infrastructure and implementing robust security measures are essential to mitigate risks and build consumer trust3. This includes investing in advanced security technologies, promoting secure coding practices, and establishing clear incident response protocols.

Regulatory Clarity: A clear and supportive regulatory framework is needed to encourage innovation and provide a level playing field for fintech companies. This includes establishing clear guidelines on data privacy, consumer protection, and licensing requirements.

Collaboration: Fostering collaboration between fintech companies, banks, and the government is crucial for driving the growth of the sector. This can be achieved through initiatives like the FinTech Alliance Nepal, which promotes dialogue and partnerships between stakeholders.

Infrastructure Development: Continued investment in digital infrastructure, particularly in rural areas, is essential to bridge the digital divide and ensure wider access to financial services8. This includes expanding internet connectivity, improving mobile network coverage, and promoting the use of digital devices.

Tech Fund Potential: One potential opportunity is the establishment of a dedicated tech fund for Nepal. This could provide much-needed capital for fintech startups and encourage innovation within the sector.

Conclusion

Nepal's digital payments and fintech sector is poised for continued growth, driven by increasing smartphone penetration, government support, and evolving consumer behavior. The decline in cheque transactions and the surge in digital payment methods, particularly QR code payments and mobile banking, highlight the rapid adoption of fintech in Nepal. By addressing the challenges, such as the digital divide, cybersecurity risks, and the need for a more robust regulatory framework, and capitalizing on the investment opportunities, Nepal can leverage fintech to promote financial inclusion, economic growth, and a more digitally empowered society.

Furthermore, Nepal has the potential to become a regional leader in fintech. The country's young population, increasing smartphone penetration, and government support for digital innovation create a favorable environment for fintech to thrive. By fostering a culture of innovation, promoting collaboration between stakeholders, and addressing the challenges, Nepal can establish itself as a hub for fintech in South Asia.

For investors, Nepal's fintech sector presents a compelling opportunity. Segments like digital lending and insurtech, which are still in their early stages, offer significant growth potential. By conducting thorough due diligence, understanding the local market dynamics, and partnering with experienced local players, investors can capitalize on the opportunities and contribute to the growth of Nepal's dynamic fintech ecosystem.

Works cited

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