Nepal, being a border for the two world’s fastest developing economies – India and China – has eight of the world’s largest mountains, a wealth of natural resources, and a multidimensional cultural legacy drawing sightseers universally. The mix of these captivating highlights and reformation progress like the appropriation of the new constitution, a change to a federal state, and the appointment of a steady government has given a lift to the economic and financial situation in Nepal. The economy is generally reliant on agriculture and remittances that is a primary contributor to the GDP. Also, 64.53% of the workforce is dependent on agribusiness for their living. The statistics provide no surprise on the demographic overview of Nepal that the rural sector forms a large chunk of the population consisting of farmers, irregular earners, and dependents. This populace has immense potential to legitimize digital transformation.
Talking about digitization, Nepal has seen incredible success in its digital landscape as mobile connections and internet penetration has witnessed massive growth. The burgeoning digital payment industry has scaled up rapidly in Nepal due to the steady growth of adults having an account at the financial institution. But still, 23% of the population depends on informal institutions, and 18% are unbanked, mostly from rural areas. (Exhibit 1) This gap can mitigate by digital financial services transformation.
Digital Financial services is a recent phenomenon, with Nepal showing a slow but steady transition from a cash-driven economy to a digital economy. It started with the emergence of internet banking by Kumari bank and leveraging the opportunity to build a digital ecosystem; Laxmi bank was the first mobile banking service provider in the country. Currently, there are 1 million internet banking accounts and 12 million mobile banking accounts that portray the rapid evolution of digital financial services in Nepal. To further reinforce digital financial inclusion, the government and the central bank of Nepal (NRB) issued essential policies and regulations that included the governments’ clear roadmap and vision to transform Nepal digitally. Nepal Rashtra Bank (Central bank of Nepal) is inclining towards establishing payment infrastructures, formulating and implementing legal and regulatory frameworks, encouraging innovations, and promoting awareness. But the geographical location of Nepal with vast unsteady terrains and the land prone to earthquakes faces a challenge for telecom operators and payment service providers to develop the infrastructure needed for digitization. Even after these issues, the financial inclusion trends for mobile banking, Internet banking, and other payment instruments usage have shown a positive growth from 2016-2020. (Exhibit 2)
There has been an immense growth of 59.32% in mobile banking users. This scenario indicates that the government, Central bank, Telecom providers, and PSPs are outfitting to digitize Pan Nepal. Mobile banking came into pace after Laxmi bank started its payments service through SMS banking. Mobile banking came into pace after Laxmi bank started its payments service through SMS banking. Since then, many traditional and commercial banks have initiated their banking operations through mobile. In 2007, E-Sewa was the first Digital wallet to enter the market, followed by other wallets like IME Pay, Khalti, Prabhu pay. E-Sewa still holds the largest market share but, with other players creating differentiated value propositions, the market is wide open to compete and gain market share. Not only Payment service providers but Payment service operators like FonePay have entered the battlefield and are bringing out services that can cater to the needs of maximum consumers in the digital payment landscape. There are 7 million active digital wallet users and increasing rapidly. With these favorable conditions for digital payments, it has become obvious that digital wallets have the potential to improve financial inclusion and cater to the needs of both rural and urban populations. Exhibit 3
Looking at the positive prospects of financial inclusion, NRB has stated few directives to promote digital wallets and financial inclusion. Some of them include defining transaction limits on different payment instruments, Facilitating merchant payments through unified QR and PCI-DSS mandated. Not only the digital financial services have aided the consumers, but it has also benefitted existing and upcoming payment services providers. There is a huge opportunity to tap the rural population for input financing and SVA. Remittance is a key source for GDP in Nepal, valuing $8.2 Billion in 2019. The E-commerce platforms are also rocketing their digital ecosystem in this pandemic. The country with unstable geographical terrains is overcoming its weaknesses by bringing out regulations and initiatives for digital payments, improving digital literacy, and growing its mobile and internet penetration. With these efforts, Nepal has laid its way to the Digitized Financial ecosystem.
NRB – Oversight-Report_2076-77
EN Digital Nepal Framework V8.4 15 July 2019
PwC report – digital-payment-opportunities-in-emerging-markets
Prateek Teotia, Senior Manager, Business Consulting, Digital Financial Solutions
Prateek Teotia has eight years of work experience in business consulting and business analysis in the digital payments domain. At Comviva, he is serving as a Senior Manager in Business Consulting for the Digital financial solutions portfolio. His areas of function primarily include identification of underlying needs of the organization globally and help them to assess, strategize and evolve continuously.
Aakar Shivankar, Assistant Manager, Business Consulting, Digital Financial Solutions
Aakar Shivankar has two years of work experience in diverse domains, starting from New Product development to Business Consultant. His responsibilities included creating strategies for Business expansion with the help of Market research, Analysis and strategic frameworks. At Comviva, he is working as a Global Business Consultant for the digital financial services portfolio. His role primarily demands identification of the underlying needs of organizations globally and help them to evolve their business continuously.