Navigating Uncertainty: Emerging Fintech Challenges

The fintech landscape in Nepal holds promising prospects, evident from recent trends. The growth of digital transactions coupled with the expansion of delivery channels and increased acceptance, demonstrates this trajectory. The Covid-19 pandemic acted as a catalyst, as cash transactions were perceived as a health risk, leading to a surge in paperless transactions such as mobile top-ups, bill payments, insurance purchases, and more. These digital solutions offer convenience, cost savings, and environmental benefits.

Digital financial services play a crucial role in ensuring business continuity, particularly during times of crisis such as the Covid pandemic. Strengthening the international payment system within the South Asian region is crucial, as it facilitates seamless financial transactions and promotes financial literacy and inclusion through the concept of open banking.

Remarkable progress has been made in Nepal concerning political and technical infrastructure development in various aspects of digital payments, international payment mechanisms, customer protection, and microfinance services. The widespread adoption of mobile banking has reached two-thirds of Nepal's population, while the utilization of QR codes and digital wallets has witnessed a significant surge in payment transactions. To mitigate potential risks, Nepal has implemented robust mechanisms to address the security concerns associated with digital payments. Furthermore, the country has initiated system audits of banks and financial institutions, with a specific focus on cyber security risks, while implementing supervisory monitoring measures to ensure regulatory compliance.

However, a notable challenge lies in the urban-centric nature of the digital payment ecosystem, which impedes its widespread adoption in rural areas. Furthermore, the market is currently dominated by a few major players, resulting in a lack of interoperability. This absence of interoperability prevents new entrants from establishing their presence and maintaining a competitive environment, leading to a monopolistic scenario.

In response to this issue, the Nepal Rastra Bank has entrusted the Nepal Clearing House Limited (NCHL) with the introduction of Nepal Pay. However, it is crucial for the government to refrain from directly entering the market as a Payment Service Operator (PSO). Instead, the focus should be on ensuring the interoperability of PSOs. With multiple players in the market, the government's role should be centered around monitoring, regulating, and promoting a consumer-centric and user-friendly market environment.

The lack of interconnectivity among service providers poses a significant growth challenge in Nepal, impeding seamless interoperability. While there is some level of interconnectivity between PSOs and PSPs, further efforts are required to establish a cohesive interoperable framework, as highlighted by industry experts.

Despite the strides made thus far, digital service operators contend that the current level of interconnectivity falls short of industry requirements. Recognizing the gravity of this issue, the Nepal Rastra Bank (NRB) has mandated a deadline of May-mid 2024 for PSOs and PSPs to achieve comprehensive interoperability. This implies that by that specified timeframe; these companies must facilitate frictionless transactions and data exchange across their respective platforms. As a matter of fact, gaining such a level of interconnectivity will cultivate a resilient and inclusive digital ecosystem, benefiting both service providers and end-users.

Over the past decade, the policies of the Nepal Rastra Bank (NRB) have prioritized digital transactions and the creation of a conducive environment. As a regulator, the NRB's responsibilities encompass safeguarding consumer interests, regulating service providers, and facilitating the introduction of new technologies. Consequently, the implementation of new policies aligned with these objectives has been a priority.

Despite the immense potential, the Nepali fintech industry confronts various hurdles primarily arising from the emigration of proficient IT professionals seeking superior employment prospects abroad. Tech experts, including those proficient in digital payment technologies, opt to depart Nepal for more lucrative positions overseas. This brain drain detrimentally impacts the local fintech ecosystem's development and growth. Even those who remain in Nepal often gravitate towards freelance opportunities with foreign enterprises, enticed by higher salaries. Consequently, there is a scarcity of skilled professionals within the country, straining local companies that must continually train newcomers who eventually migrate elsewhere after gaining professional experience, thus perpetuating the cycle.

Industry pundits highlight the lack of interoperability within the digital payment ecosystem as another prominent challenge for the fintech sector. Presently, merchants and consumers must employ multiple networks and wallets to facilitate transactions. This lack of interoperability engenders a fragmented and inefficient system as each network and wallet operates independently. Merchants are compelled to accept payments from diverse platforms, intensifying complexity and potentially incurring elevated costs. Conversely, consumers bear the burden of maintaining multiple wallets and adapting to various payment methods depending on the merchant they engage with. This absence of standardization and interoperability impedes the seamless and convenient adoption of digital payments.

Simultaneously, limited digital literacy, particularly among rural populations and older demographics, also hinders the expansion of fintech services in the country. In rural areas, restricted access to digital technologies and the internet, coupled with unfamiliarity with devices and online platforms, pose significant challenges. Additionally, inadequate education and awareness, language barriers, and infrastructure limitations further contribute to the low digital literacy rates. Mitigating these issues necessitates targeted educational programs, awareness campaigns, user-friendly interfaces in local languages, improved infrastructure, and endeavors to bridge the digital divide between rural and urban regions.

Foreign companies are actively seeking the expertise of numerous Nepali fintech professionals for backend operations, particularly in Level 3 domains, attesting to the exceptional skills possessed by Nepali experts. The attractive remuneration packages offered by fintech companies augment the growing interest among young individuals in pursuing careers within the fintech field. Nepali fintech experts are in high demand by foreign companies, for their expertise in backend operations. This demand is an evidence to the exceptional skills possessed by Nepali professionals. The financial incentives associated with the industry have become a key driver in attracting youths to the fintech sector.

Nepal has recently witnessed a substantial surge in the adoption of digital payment systems, evident from the statistics. Presently, 30% of the government's total revenue collection originates from digital payment methods such as e-wallets, mobile banking, online banking, and bank transfers. Moreover, an astounding 90% of government transactions are conducted through digital payment systems. This transition towards a cashless society has been particularly notable during the month of Chaitra, with recorded transactions of 7.7 million, amounting to Rs 77 billion.

Despite this remarkable progress, several challenges persist. Digital payment systems are predominantly popular in urban areas, while rural regions necessitate the involvement of banks, the government, and the Nepal Rastra Bank (NRB) to enhance financial literacy. Another obstacle is the issue of interconnectivity. The growth of the digital payment system and digital economy relies on seamless interconnectivity between service providers. In order to address this, the NRB has directed all Payment Service Operators (PSOs) to adopt technologies enabling interconnectivity by mid-April 2023. However, further comprehensive interconnectivity is still required, as the current progress falls short. For instance, while a user can currently transfer funds from mobile banking on one network to a wallet on a different network, broader interconnectivity is necessary.

Data protection poses another significant challenge. The government stakeholders, including the Nepal Rastra Bank, are committed to safeguarding consumer data and privacy. However, issuing circulars by the NRB alone will not be sufficient in the long run, necessitating the enactment of appropriate legislation by the government. Extensive discussions with all stakeholders are underway to address this issue.

Fintech encompasses a diverse range of technologies and services aimed at simplifying payment processes, including digital payment platforms, insurance, health, education, and more. It plays a pivotal role in facilitating seamless transactions and has garnered significant attention in Nepal due to the presence of highly skilled professionals.?

While progress has been made, challenges such as regulatory compliance, technical interoperability, and the adoption of standardized protocols still need to be addressed. Central banks, regulators, and payment infrastructure providers play a vital role in facilitating collaboration, standardization, and the creation of a conducive environment for payment integration. Emerging technologies like blockchain and digital currencies offer potential benefits but require careful evaluation before implementation. Security and fraud prevention are also important considerations, and measures are being taken to ensure the protection of cross-border payment transactions. The future of payment integration in Nepal and its regional partner involves further collaboration, standardization, and the adoption of innovative solutions to make cross-border payments faster, more secure, and more user-friendly, fostering economic growth and financial inclusion in the region.

Expressed opinion are personal.