Nepali fintech companies have achieved a commendable level of parity with their counterparts in India and, in some aspects, are even ahead in the South Asian region.
I recently returned from a memorable road trip to Lo Manthang in Upper Mustang, where I experienced the convenience of digital payments firsthand. From fuel stops to tea houses, lodges to meals, and even a visit to the barber, nearly 90% of my transactions were conducted digitally. It was a proud moment to seamlessly pay for meals at an altitude of 3700 metres. Such a remarkable feat was made possible through the collaborative efforts of multiple parties.
Banks leading the charge with technology integration, merchants placing their trust in innovative solutions, consumers embracing the power of technology, fintech companies driving forward with their innovations, and regulators providing crucial support through policy frameworks, acts, regulations, directives and proactive leadership. Together, these stakeholders formed a collaborative ecosystem that propelled the success of digital payments in remote regions like Lo Manthang.
The Nepali fintech industry has undergone significant evolution in recent years, spurred by the challenges posed by the pandemic and bolstered by the proactive vision and strategic initiatives of regulatory authorities. This conducive environment has empowered Nepali fintech companies to flourish and introduce innovative solutions. With cutting-edge technology and products, coupled with an impressive adoption rate, Nepal's fintech landscape is poised for further growth and advancement.
Fintech is a vast universe encompassing a multitude of areas, products and services, although it is frequently associated with payment technology, which tends to capture more attention due to its glamorous appeal. In the Nepali fintech landscape, licensed entities like Payment Service Operators (PSOs) and Payment Service Providers (PSPs) play crucial roles. PSOs typically offer backend solutions, while PSPs engage directly with end consumers through services such as digital wallets.
Additionally, there are a multitude of unlicensed entities contributing to the advancement of fintech activities, often operating in collaboration with banks or licensed PSOs and PSPs. The surge in transaction volumes post-pandemic is indeed remarkable, continually escalating and propelling the growth potential of local fintech companies to new heights.
The swift embrace of digital payment solutions has brought about tangible economic transformation, particularly at the retail and consumer levels. The ability to send and receive payments in real-time carries profound implications, especially in countries like Nepal, where geographical barriers and digital disparities are prevalent. This empowerment through instant transactions is bridging divides and catalysing progress in previously underserved regions.
Nepali fintech companies have achieved a commendable level of parity with their counterparts in India and, in some aspects, are even ahead in the South Asian region. However, there are areas where further evolution is needed, particularly in the lending space. Digital lending presents unique technical and logistical challenges compared to more straightforward retail payment systems. Factors such as credit scoring, underwriting, mortgage, collateral and compliance with regulatory guidelines all require careful consideration before implementing comprehensive full-stack lending products. This underscores the complexity inherent in digital lending and the need for continued innovation and development in this area within the Nepali fintech landscape.
The primary hurdles lie in the expenses associated with compliance and cybersecurity measures. With fintech experiencing exponential growth, there's an urgent demand for robust compliance frameworks and cutting-edge cybersecurity technologies. Investing in these areas is imperative for the industry's sustainability and security. Additionally, licensing costs for compliance pose a significant challenge which is affecting not only fintech companies but also all users of proprietary software. It is crucial to address these challenges for fostering a resilient and secure fintech ecosystem that can thrive in the digital age.
The next frontier could be digitising transactions at the base of the pyramid, encompassing Microfinance Institutions (MFIs), Rural Financial Institutions (RFIs) and Cooperative transactions, alongside extending base-level retail payments nationwide.
We have rapidly achieved urban mid-level retail payment solutions. The next frontier could be digitising transactions at the base of the pyramid, encompassing Microfinance Institutions (MFIs), Rural Financial Institutions (RFIs) and Cooperative transactions, alongside extending base-level retail payments nationwide. This expansion holds immense potential for financial inclusion and in driving economic empowerment to the grassroots level across the country.
Digital lending and marketplace platforms, such as a Digital Haat Bazar, have the potential to catalyse further evolution in our economy. By democratising the fintech space, these platforms empower both producers and consumers alike. They facilitate access to credit for entrepreneurs and small businesses while providing consumers with a wider array of products and services. This democratisation fosters economic growth and inclusivity, while unlocking opportunities for all participants in the marketplace.
Nepal Rastra Bank (NRB), as a proactive regulator, is already working towards amendment in acts to pave the way for Digital Bank. The Digital Bank initially is expected to serve the unbanked and underbanked within the financial inclusion framework by lowering the cost of transactions and providing seamless banking and financial services irrespective of geographical boundaries. In its evolution and towards maturity, the Digital Bank is expected to replace the legacy banks operating in bulky age-old technology amongst others. In addition, the Digital Bank would be the Bank of choice for micro, small and medium enterprises (MSMEs) and retail consumers which otherwise would have to depend on traditional legacy-based bank and financial institutions (BFIs).
NRB is also working towards CBDC - Central Bank Digital Currency and P2P - Peer to Peer Lending. All these initiatives would help boost the digital economy in the country positively.
The government plays a pivotal role in fostering an enabling environment for technological advancement. It must prioritise the completion of DPI, or Digital Public Infrastructure, which comprises three key components: digital ID, payment rails, and data exchange platforms. To kickstart this process, the government should expedite the release of APIs for the National ID, enabling banks and the financial industry to integrate it seamlessly into their digital identity systems. Subsequently, efforts should be directed towards building data exchange platforms. In Nepal, data is often compartmentalised in verticals which necessitates horizontal integration to establish comprehensive exchange platforms. This collaborative approach will facilitate greater data accessibility and interoperability, while driving innovation and efficiency across sectors.
(Sanjib Subba is a Kathmandu-based fintech enthusiast and chairperson of Fintech Alliance Nepal.)
