Balanced and inclusive Fintech – Case of Nepal

As technologies keep changing, Nepal must embrace the new dimensions of fintech. This endeavor requires the change in the pattern of antiquated banking and financial system laws and regulations to steer the Nepalese economy towards the concept of inclusive fintech. Capitalizing on the fervor of Nepalese youth in embracing technology, the burgeoning interest in startups, and the potential to export technology-based services is crucial. Simultaneously, efforts must focus on achieving balanced technological development that promotes financial inclusion and access.

In the contemporary landscape, financial transactions have seamlessly transitioned into a technologically-driven paradigm. Mobile devices have emerged as versatile instruments for conducting a diverse array of payments. Use of internet has effectively placed the world at our fingertips, owing to the transformative innovations in smartphones. Technology has pervaded our daily existence to such an extent that the mere notion of interruption has become inconceivable.

We are presently at a juncture where the necessity to carry physical currency has been rendered obsolete. Within the domains of hospitality and dining, transactions are effortlessly settled through the utilization of Quick Response (QR) codes. The realms of mobile banking and QR-based payment systems have become integral components of financial transactions. This technological revolution has extended its reach to encompass various facets of modern life, including air travel, commerce, money transfers, and mobile-based payments, exerting its influence ubiquitously.

The financial services sector in Nepal has witnessed a noteworthy integration of technology, yet it is essential to recognize that the complete realization of technology-driven financial services, commonly known as Financial Technology (FinTech), is still in its nascent stages. The true potential and extent of its impact are yet to be fully realized.

Fintech goes beyond payment & transfer

Within Nepal's expansive fintech ecosystem, the prevailing perception among the general populace is that fintech primarily revolves around payment processing and fund transfers. This limited understanding has led many to mistakenly equate fintech exclusively with these functions. Consequently, there exists a pervasive misconception among both customers of financial services and employees within banks and financial institutions that mobile and internet banking encompass the entirety of digital financial services. This partial grasp of the fintech landscape may prove counterproductive in the long term, inhibiting the broader expansion of financial services within the fintech domain.

The prevailing paradigm of customer onboarding within the fintech realm is unduly focused on payment processing and money transfers. However, it is essential to recognize that fintech encompasses a multifaceted spectrum of financial services, including investments, lending, remittances, personal financial management, as well as the integration of technology-driven regulatory frameworks (RegTech) and supervisory mechanisms (SupTech). Furthermore, fintech extends its purview to incorporate technology-driven insurance solutions (InsurTech) that rely on the seamless integration of multiple application programming interfaces (APIs).

The infusion of technology into the financial services landscape extends beyond conventional banking to encompass open finance and a diverse array of alternative financial instruments. This transformative shift also encompasses the integration of cutting-edge biometric and security-related devices, thus heralding a new era in the fintech space.

Historical Evolution

In accordance with the scholarly insights provided by Arner, Barbaris et all in their seminal work titled "The Evolution of Financial Technology: A Novel Post-Crisis Paradigm," the fintech landscape has traversed a multifaceted trajectory, encompassing discrete phases designated as stages 1, 2, and 3, with its current state manifesting as the evolutionary epoch of 3.5, spanning the chronological spectrum from 1866 to 1967.

During the inaugural phase, an accentuation on financial globalization was underscored, concomitant with the nascent deployment of analog technologies, notably the transatlantic cable system. Subsequently, during the second phase spanning from 1967 to 2008, the analog foundation was progressively fortified by the advent of digital technology, culminating in the emergence of innovative financial instruments such as Automated Teller Machines (ATMs) and telex machines.

Noteworthy is the pivotal juncture of 2008, which the authors designate as the inception of the third fintech era. This epoch witnessed the onset of an innovation paradigm catalyzed by the global financial crisis of 2008, wherein an array of cutting-edge technologies, including machine algorithms, artificial intelligence, data analytics, and robo-advisory services, were seamlessly integrated into the existing fintech ecosystem, facilitated by the widespread adoption of mobile communication networks.

Notably, Chris Skinner a distinguished British author, prolific fintech blogger, and erudite fintech thought leader, posits that the evolutionary continuum of technological financial services (fintech) has reached its fourth epoch since the inception of the new millennium. In his framework, he delineates distinct periods within this trajectory: from 2005 to 2014 as the "disruption" phase, followed by the "comprehensive discussion" era spanning from 2014 to 2017. Subsequently, the timeline from 2017 to 2022 is designated as the "partnership" era, with the subsequent period extending from 2022 to 2027 characterized as the "integration" phase. Ultimately, Skinner anticipates that fintech will reach a zenith of innovation in the period beyond 2027, denoting it as the era of "renewable fintech."

Automation & Integration also matters

In the context of fintech expansion, it is imperative to underscore the pivotal role of regulatory oversight and market preparedness. Concurrently, a comprehensive understanding of the crucial developmental phases within this domain is indispensable. While the convergence of digitization, automation, and integration remains a fundamental tenet for the creation and efficacious deployment of fintech products, it is noteworthy that within the burgeoning fintech landscape of Nepal, there exists a predominant emphasis on digitization-centric activities.

In the realm of fintech, the prevailing approach primarily centers on digitization, encompassing system optimization, process enhancement, mobile banking integration, and internet accessibility, especially in the context of loan origination. However, regrettably, ancillary facets of this transformation, including stakeholder readiness, the cultivation of skilled manpower, infrastructure augmentation for embracing digital technologies, and the vital automation and integration prerequisites facilitating seamless service exchange among stakeholders, often languish in neglect. Consequently, the overall development of financial services within the fintech ecosystem remains significantly under-addressed.

The forthcoming epoch heralds a data-driven paradigm, wherein ecommerce has gained substantial traction by leveraging customer data. Given that the future trajectory of financial services is intrinsically tied to data, it is crucial to extend the purview of open banking, employing Application Programming Interfaces (APIs) as the linchpin for regulatory engagement with key financial transaction stakeholders. This imperative aligns with the contemporary zeitgeist.

Furthermore, open finance represents an evolved iteration of digital technology, encompassing non-banking financial transactions that operate beyond the purview of conventional regulatory frameworks. Simultaneously, by aggregating data from diverse sources, including email communications, social networks, telecommunications providers, and individual or group-based interactions, there exists a profound opportunity to harness the vast expanse of open data, which underpins the fabric of financial transactions. Consequently, there is an unequivocal need to expand the domain of ecommerce through the extensive adoption of API-driven banking solutions and to pivot towards the burgeoning digital economy.

Why Fintech is lopsided in Nepal?

In 2016 article titled "Assessing the Fintech Landscape in Nepal," Alex Kong expounded on the prevailing state of financial technology (fintech) within the Nepalese context. At that juncture, fintech in Nepal predominantly revolved around remittance services, banking infrastructure, and mobile technology. However, Kong underscored that the fintech domain had not yet witnessed an extensive diversification of its offerings.

Fast forward to 2023, it is evident that the fintech ecosystem in Nepal remains somewhat nascent. Notably, core financial services like investment and lending have not fully embraced the fintech revolution. Digital investment options are conspicuously absent from the landscape, especially in the realm of share trading, with virtually no alternatives to traditional methods beyond trading on the Nepal Stock Exchange's Trading Management System (TMS). The appetite for online investment in the commodity market seems tepid, suggesting a lack of user engagement and interest.

To address this situation, there is a pressing need for the introduction of digital avenues for alternative investment, such as crowdfunding and peer-to-peer lending, to catalyze the evolution of Nepal's fintech sector. However, the regulatory framework governing technological financial services in Nepal appears to be trailing behind industry developments. This regulatory lag, compounded by existing legal constraints, has resulted in a disproportionate focus on mortgage-based lending.

Consequently, credit investments in Nepal are predominantly channeled into mortgages, contributing to an unnatural inflation of real estate prices. Paradoxically, this surge in real estate values has occurred at a time when businesses and entrepreneurs are eager to extricate themselves from mortgage-based financial strategies and explore alternative avenues. This misalignment between banking institutions' mortgage-centric investment strategies and the broader economic landscape has inadvertently fueled speculative economic trends.

Foreign investors and development partners have scrutinized Nepal's credit system, concluding that it primarily revolves around mortgage financing. Objectively, the nation has yet to embark on a phase of genuine credit expansion, characterized by a more holistic approach that considers production capacity and industry risk profiles. In essence, the shift towards a credit ecosystem aligned with the productive sector remains an unfulfilled aspiration within Nepal's financial landscape.

Lending in Fintech domain

Nevertheless, electronic lending does have a presence in the Nepalese financial landscape. As per the Digital Lending Guideline issued by the Nepal Rastra Bank (NRB) in 2021, the primary objectives entail the expansion and familiarization of electronic loan systems among customers. This initiative aims to streamline the loan origination process, align with the burgeoning expectations of loan consumers, enhance loan accessibility, and curtail lending costs. Within these guidelines, specific loan caps have been stipulated at five lakhs rupees for salaried, professional, and business clientele, and two lakhs rupees for other categories.

In response to this guideline, most banks and financial institutions have developed innovative products tailored for mobile-based loan applications. Notably, F1 Soft International, a leading fintech company in Nepal, has introduced three distinct lending products, comprising payday loans, Equated Monthly Installments (EMIs), and Buy Now Pay Later (BNPL) loans. Several prominent banks, including NIC Asia, Everest Bank, Kumari Bank, Prabhu Bank, Nabil Bank, Lakshmi Bank, Citizens International Bank, Machhapuchhre Bank, and NIMB Bank, have leveraged these offerings to provide digital loan services through mobile banking platforms. Additionally, NMB Bank has ventured into the digital lending space, offering loans of up to two lakh rupees, with a specific focus on farmers and QR merchants through their Kheti App.

While digital loans have made inroads in Nepal, encompassing phone loans, QR loans, EMIs, and Buy Now Pay Later options, their reach remains somewhat limited, targeting specific demographics or groups. To facilitate a comprehensive shift towards fully digitalized lending, a holistic approach involving various facets of customer engagement, including onboarding, credit assessment, approval, disbursement, installment management, and interest payment, becomes crucial. This necessitates the utilization of specialized Loan Origination Software (LOS) and Loan Management Software (LMS). LOS facilitates customer onboarding for loan applications, encompassing the collection and verification of all requisite documentation. Conversely, LMS handles loan analysis, approval, distribution, and repayment processes. As such, the implementation of LOS and LMS for digital loans or phone-based loans in Nepal's banking domain is still a work in progress.

Furthermore, diversification of digital lending is essential to cater to evolving market demands. Beyond traditional consumer and business loans, there is a discernible uptick in the demand for digital lending solutions such as invoice financing, Buy Now Pay Later schemes, and Eat Now Pay Later arrangements. This underscores the need for financial institutions to adapt and expand their digital lending portfolios to remain competitive and meet the evolving needs.

Regulator's aggression

In the ambit of NRB's Fourth Strategic Plan spanning from 2022 to 2026, a concerted focus on the cultivation of a digital financial ecosystem is manifest. Within this strategic framework, the formulation and advancement of the Central Bank Digital Currency (CBDC) feature prominently. Furthermore, the monetary policy articulates an intention to pivot towards empirical action predicated upon research outcomes.

Concomitantly, comprehensive studies pertaining to regulatory sandbox paradigms and the establishment of an innovation hub, specifically tailored for the purpose of testing and incubating fintech services and technologies, have culminated. These initiatives are underpinned by an overarching objective of engendering substantive maturation, expansive proliferation, and heightened dependability within the fintech landscape. The envisaged outcome is the seamless integration of innovation into financial services, accompanied by efficacious mitigation of regulatory impediments.

Additionally, extensive examinations concerning peer-to-peer lending/crowdfunding modalities and credit scoring mechanisms are currently underway. These research endeavors are poised to pave the way for the facilitation of full-fledged digital lending. Such proactive measures conspicuously underscore the regulator's commitment to staying at the vanguard of technological advancements within the banking sector.

It is also noteworthy to highlight the recent landmark agreement brokered between India's National Payments Corporation of India (NPCI) and Nepal's clearing house, designed to streamline cross-border payments between the two nations. This accord is poised to markedly ease international payment transactions and stands as a testament to Nepal Rastra Bank's recognition of the imperative to modernize its information and technology infrastructure in tandem with cross-border transactions and automated systems.

Within Nepal Rastra Bank, the Payment System Department diligently shoulders the responsibility of crafting payment-related policies, imparting guidance, licensing, and overseeing operational facets. This department has evidently discharged a commendable role in proffering guidance pertaining to digital transactions, encompassing payments, credit directives, cyber security protocols, and more.

In contemplation of fully harnessing the potential of fintech, the Monetary Policy for 2022-23 envisages the establishment of a digital bank. To materialize this vision, proactive steps will be taken to amend the Bank and Financial Institutions Act 2016, concurrently culminating in the structuring of requisite institutional underpinnings.

Aligned with the strategic blueprint laid out by the Central Bank, the financial system is poised to experience an infusion of innovation and technology-friendly regulatory policies. This augurs well for the modernization, streamlining, and simplification of startup industries and financial transactions, thereby fostering a more dynamic and agile economic ecosystem.

Rapid emergence of Users

In accordance with a recent survey conducted by Start.io , the demographic breakdown of smartphone users in Nepal reveals intriguing insights. Approximately 50.6% of smartphone users fall within the age bracket of 25 to 34, while 34.3% belong to the 18 to 24 age group. Furthermore, there is a noticeable gender distribution among smartphone users, with men constituting a substantial 78%, in contrast to women who comprise only 22% of the user base.

Regarding the choice of mobile platforms, Start.io 's data showcases a significant preference for Google's Android, which accounts for 94% of smartphone users, in stark contrast to the 6% who opt for Apple's iOS platform. This data underscores the dominance of Android-based devices in the Nepali smartphone market.

The use of smartphones in Nepal holds promising implications for the expansion of digital financial transactions. According to the World Bank's Global Findex report, 34% of South Asians and 29% of Nepali citizens are actively engaged in electronic payments. Furthermore, the Nepal Financial Inclusion Report 2023, published by the IFC, predicts substantial growth in mobile money, from a modest 1.47% of GDP in 2019 to a projected 10.97% by 2021. This suggests a substantial shift towards digital financial services in the country. Examining financial inclusion, the Nepal Rastra Bank's Financial Access Report 2021 reveals that financial access has increased from 60.9% in 2019 to 67.3% in 2021, indicating progress in providing financial services to a broader segment of the population.

Turning our attention to the neighboring nation, India, we observe a significant wave of automation and digitization in the fintech sector. Automation is becoming increasingly prevalent among service providers, particularly in areas such as payments and mobile wallets. This surge in automation can be attributed to government initiatives like the Pradhan Mantri Jan Dhan Yojana, the Aadhaar card program, and a surge in startups. Consequently, policies related to demonetization, central bank digital currencies, e-commerce regulations, P2P lending, and crowdfunding guidelines issued by SEBI have been effectively implemented in India.

However, in Nepal, the journey towards the full realization of a robust digital financial services network is still in progress. While digital banking predominantly encompasses payments and money transfers, other fundamental financial services remain underrepresented. Rural areas continue to favor cash transactions due to challenges like the absence of an integrated framework, issues related to customer identification, and mounting network security concerns. Despite the global trend towards advanced technologies, including cashless payments, online banking, mobile money, and payment gateways, Nepal has yet to fully embrace these innovations for services like investment, credit, and insurance.

Moreover, while open banking, open finance, and open data have gained globally, these innovations are still in their infancy in Nepal. The potential benefits of cutting-edge technology tools, such as data analytics, artificial intelligence for banking data integration, credit risk assessment, and consumer behavior analysis, have not been fully harnessed by customers, banks, or payment service providers in Nepal.

Nonetheless, there is a ray of hope, as the last decade has witnessed significant technological advancements in Nepal, particularly in the realm of payments. Technology has played a pivotal role in facilitating payment and money transfer processes across various sectors, including e-commerce, service purchases, revenue collection, and more. It remains to be seen how rapidly Nepal can adapt to and capitalize on these technological advancements to foster a comprehensive and modern financial ecosystem.

Growing Cybersecurity Concern

As society continues its rapid technological evolution, the field of cybersecurity has experienced a commensurate surge in interest and importance. The expanding technological landscape necessitates heightened attention to security measures. This challenge extends to the domain of cybersecurity within digital financial ecosystems, as outlined in the Central Bank's strategic plan. Timely government initiatives, such as Nepal's National Policy on Cybersecurity and the Cyber Resilience Guidance issued by the Nepal Rastra Bank, have fortuitously aligned with the burgeoning digital applications and extensive technological financial transaction networks.

Yet, in light of the ever-shifting technological paradigms, cybersecurity guidelines and policies must exhibit flexibility and adaptability. This requires robust implementation, effective regulatory oversight, and user feedback mechanisms. As the utilization of novel technological tools burgeons, financial service organizations must allocate a proportionate share of their annual budget to the critical realm of cybersecurity. Presently, reports indicate that merely 5 to 10 percent of Nepal's budget is earmarked for cybersecurity, but emerging economies like Nepal demonstrate a trend of allocating up to 20 percent toward security standards and preventative measures, essential for constructing a robust security apparatus. Budgetary constraints impede the capacity to absorb innovation and make agile decisions. Furthermore, investing in activities such as training and knowledge exchange is indispensable for optimizing the efficiency of human resources. ?The future of banking pivots towards data-centric operations, with financial criminals and hackers increasingly targeting data. Therefore, safeguarding data emerges as the paramount challenge.

As technologies keep changing, Nepal must embrace the new dimensions of fintech. This endeavor requires the change in the pattern of antiquated banking and financial system laws and regulations to steer the Nepalese economy towards the concept of inclusive fintech. Capitalizing on the fervor of Nepalese youth in embracing technology, the burgeoning interest in startups, and the potential to export technology-based services is crucial. Simultaneously, efforts must focus on achieving balanced technological development that promotes financial inclusion and access.

Ensuring resilience among users concerning financial access, usage, and quality is of equal import in the pursuit of inclusivity. A comprehensive initiative is vital for the immediate implementation of basic fintech-driven financial services.

(Views are personal)