Digital transactions in Nepal experienced a significant surge after 2020, driven by the lockdowns enforced to contain the spread of Covid-19. As Nepalis found themselves confined to their homes, digital payment methods quickly became not just convenient, but essential. Platforms like connectIPS, digital wallets, mobile and internet banking, and QR codes rapidly gained popularity, becoming the go-to payment options for many.
All forms of digital transactions experienced a substantial increase during the period. Notably, digital wallets saw significant growth. When Nepal imposed the lockdown, the monthly volume of transactions through digital wallets, according to the Nepal Rastra Bank (NRB), soared to approximately Rs 7 billion. Similarly, the number of digital wallet users increased from 8.88 million in mid-July 2020 to 18.94 million in mid-July 2023. Banks and financial institutions and payment service providers as well as wallets processed digital transactions worth Rs 114 billion in the fiscal year 2020/2021. It increased by 61% to Rs 184 billion in 2021/2022. Volume of such transactions increased further to Rs 219 billion in FY 2022/23, marking a 19% year-on-year growth.
There has been a significant uptick in the number of mobile wallet companies and payment service providers (PSPs) over the past three years. Nearly 50% of these PSPs began operations after the COVID pandemic. The total number of PSPs rose from 14 before the pandemic to 26 during the review period.
As the mobile wallet market has become saturated, the growth rate for wallet businesses has recently slowed. Industry insiders suggest that the golden period for wallet companies has ended, and they are now facing an sustainability crisis. Many CEOs of wallet companies acknowledged that, except for a few, most wallet companies are currently operating at a loss and may soon shut down their services, as other digital payment methods have become more dominant.
"The revenue growth of wallet companies is on a declining trend, and this is becoming increasingly evident," Jagadish Khadka, CEO of eSewa - Nepal's largest digital wallet, said. PSP operators say there is a lack of clear distinction between digital wallets and mobile banking in terms of their roles and transactional boundaries. The market has become oversaturated, with no noticeable distinction between payments made through mobile banking and those made through digital wallets.
Growth Stagnates
The number of wallet users in Nepal was growing at a rapid pace until 2022/23. However, a recent report from the central bank shows that the growth has shown signs of stagnating. According to the report, the number of wallet users in Nepal increased from 22.2 million in mid-April to only 22.6 million in mid-May. According to Binay Khadka, Chief Executive Officer of Khalti, the growth in the number of wallet users is stagnating because banks and financial institutions have extended their mobile banking services and now provide all the services that wallets offer through their own applications.
Experts say that digital wallets in Nepal do not support large-value transactions, pushing users to opt for mobile banking and systems like ConnectIPS. Currently, the central bank has set a limit of Rs 200,000 per day and Rs 1 million per month for mobile wallet transactions. Experts argue that this limit is extremely low and inconvenient for users.
"When wallet companies were first introduced in Nepal, there was no QR payment system. Later, when the QR system came, wallet companies witnessed rapid growth. Over time, new technologies will emerge,” Khadka said. “I believe systems like insurance through wallets will be developed, which will again boost the business of wallet companies in Nepal."
Another reason for the stagnation of digital wallets in Nepal is their lack of interoperability. For instance, a user of eSewa cannot make payments to Khalti because wallets in Nepal are not interoperable. This is a major hurdle for widespread adoption. Despite the central bank's push in 2022 for wallet companies to make their systems interoperable, they have yet to comply. Khadka acknowledges that the lack of interoperability has hindered the growth of wallet companies in Nepal.
According to Sanjeeb Subba, a digital banking expert, digital transactions surged during COVID-19 as consumers had no alternative but to go online. “The pandemic, coupled with swift regulatory support, drove digital transactions to unprecedented heights. However, the rapid growth observed during the early pandemic has gradually subsided, primarily due to the increased accessibility of various payment methods, including cash. Every sector experiences growth phases, influenced by necessity or other factors. Without new innovations or disruptions, digital transactions may not see reach the same levels of growth as before,” said Subba.
On the Brink
There are 26 payment service operators in Nepal. Knowledgeable sources say only two/three companies are currently profitable. Several are operating at a loss, and others are struggling to sustain their operations. The major players in the wallet business are eSewa, Khalti, IME Pay and Prabhu Pay, industry insiders say. eSewa holds approximately 60% of the market share, while Khalti, IME Pay and Prabhu Pay are engaged in intense competition.
The challenges for wallet companies stem from their difficulty in generating profit while offering numerous free services. They are permitted to charge only minimal or no fees for government services, school fees, and Nepal Electricity Authority bills under Rs 500. The major source of revenue for wallets comes from payments made by merchants for payment processing. However, as merchants continually reduce commission and service fees each year, revenue for wallets is contracting. Currently, wallets are primarily used by consumers for top-ups, airline ticket purchases and monthly ISP payments. However, these transactions do not generate any revenue for them.
According to eSewa CEO Khadka, wallet companies rely on a limited number of merchants for revenue, and there is no established benchmark for merchant acquisition. "QR transactions incur no additional charges, whereas wallets must cover the costs of bringing funds to them. As a result, non-revenue generating transactions have risen,” Khadka said. “Wallets also face costs related to customer care and risk mitigation technology, which complicates their ability to operate profitably." Interestingly, wallet companies are seeing significant transaction volumes from flight ticket purchases. However, these tickets are approximately Rs 150-200 cheaper when bought directly from airline websites. As a result, consumers are gradually shifting to the websites of airline companies for tickets.
Experts say that digital wallets in Nepal do not support large-value transactions, prompting users to opt for mobile banking and systems like ConnectIPS.
According to Subba, cash still dominates the Nepali economy despite substantial growth in digital transactions in recent years. “Ninety percent of transactions are still conducted in cash. This presents a huge opportunity for wallets. Wallet companies need to be innovative and should not limit them on utility payments for their survival,” he said.
Subba suggests digital payment carriers should identify specific sectors as niches and target them accordingly. “They can focus on sectors such as health, agriculture, education and insurance. For instance, fintech companies could offer a full range of digital services in the insurance sector - from purchasing insurance policies to helping users find the right company and policy,” he added. “In the agriculture sector, they could facilitate everything from providing credit to farmers to purchasing fertilisers and essential tools. Future revenue growth opportunities for wallets lie in expanding into financial services, such as offering micro-lending, micro-payments, and similar services, or facilitating IPO payments. "If the central bank permits these provisions, it would be advantageous for us," Khadka said.
Involvement in Illegal Activities
Some wallet companies have been implicated in illegal activities such as cryptocurrency transactions, betting and smuggling recently. Nepal Police have uncovered the involvement of digital payment gateways - Paywell Nepal and Sajilo Pay - in gold smuggling payments. According to the Central Investigation Bureau (CIB) of Nepal Police, these two service providers facilitated digital payments for the illicit trade. Between April 26, 2023 and May 3, 2024, Rs 86.17 billion was electronically credited to Paywell’s wallet, with another Rs 61.50 billion coming through voucher deposits. Similarly, Rs 36.94 billion was loaded into Sajilo Pay’s wallet, with Rs 19.46 billion credited through voucher deposits between May 16, 2022 and June 3, 2024, according to the police.
According to a wallet company CEO, who requested anonymity, some wallet companies are turning to illegal activities due to difficulties in sustaining their operational costs. “Consumers are drawn towards companies that offer attractive cashback deals, but companies cannot always afford to provide these offers. This financial pressure is one reason why some companies resort to illegal activities,” the CEO explained.
Regulator’s Role
The central bank has directed all digital payment service providers to implement interoperability. According to central bank officials, this measure aims at enabling smaller players to compete with larger ones in the market. However, wallet companies have been reluctant to comply with the central bank’s directives. One reason cited by larger companies for their reluctance is their substantial investment in digital transaction literacy and technology. They question how smaller companies can expect the system to be interoperable without making similar investments.
According to Subba, wallet companies need to invest in and innovate to survive in the market. “The NRB, in its role as a regulator, is doing commendable work by facilitating the digital payment sector. Licensed entities, such as PSOs and PSPs, would benefit from consolidation strategies to enhance business sustainability,” he said. The NRB has raised the minimum paid-up capital requirement for Payment Service Providers (PSPs) from Rs 10 million to Rs 50 million. However, several companies have yet to meet this new requirement and have also failed to pursue mergers.
According to Khadka, merging small companies will not benefit the ecosystem because these companies are either not operational or too small to compete effectively in the market.
The central bank took action against several payment service providers in the last fiscal year for non-compliance. Such non-compliances included conducting annual general meetings without prior approval from the authorities, board members taking advances, selling promoter shares before the completion of the five-year lock-up period, and withdrawing cash in excess of permitted limits, among other issues, according to the Payment Systems Oversight Report, 2022/23’ report of the NRB. The central bank also took action against payment service providers for failing to report e-money transactions through the supervisory information system and for not maintaining sufficient balance in the settlement account for e-money.
