FinTech innovations: Transforming Nepal's banking landscape

The Transformation of Nepal's Financial Sector through FinTech

 

The profound impact of Financial Technology (FinTech) companies is reshaping the finance industry in Nepal. In an era where financial transactions and services are undergoing a rapid evolution, FinTech is fundamentally altering how individuals save, spend, and invest, even amidst the hustle and bustle of small towns. The transition transcends mere convenience; it aims for financial inclusion and growth, positioning Nepal as a burgeoning digital force within South Asia.

 

The Shift Towards a Cashless Society

 

As of July 2024, there was a significant surge in banking transactions conducted through mobile phones, with users reaching 24.65 million, while e-wallet users in 2023 stood at 23.46 million. This shift is emblematic of the country's transition towards a cashless society, highlighting the growing acceptance and integration of digital financial systems.

 

Projected Financial Growth and Key Drivers

 

According to Statista, the overall transaction value in Nepal is anticipated to reach €3.94 billion (approximately USD 4.3 billion) by 2025, with an annual growth forecast of 12.17% post-2028. Key drivers such as the acceleration of QR code payments, mobile banking, smartphone adoption, favorable government policies, and the expansion of fintech services and digital wallets are expected to propel this figure to a compound annual growth rate (CAGR) of 30%, ultimately reaching US$11.14 billion by 2029.

 

The Role of the COVID-19 Pandemic

 

The COVID-19 pandemic served as a catalyst for this digital transformation, with FinTech users skyrocketing from 6.48 million in 2020 to over 20 million by 2023, marking an impressive 200% increase. This surge indicates a growing acceptance of digital financial services among the Nepali populace.

 

Prominent Players in Nepal's FinTech Industry

 

Nepal's FinTech sector is composed of 132 companies, with leading entities such as eSewa, Fonepay, Khalti, and PrabhuPAY playing significant roles. These payment systems have become integral to everyday transactions, including bill payments and shopping.

 

Integration of International Payment Systems

 

One noteworthy development is the integration of India's Unified Payments Interface (UPI) service with Nepal's National Payments Interface (NPI). This has enabled Nepali users to conduct over 100,000 transactions using UPI QR codes, totaling more than ₹250 million. This milestone facilitates seamless cross-border payment solutions for travelers and businesspersons alike.

 

Digital Finance Innovation and Regulatory Environment

 

In line with the burgeoning opportunities presented by FinTech, the Nepal Rastra Bank (NRB) inaugurated a Digital Finance Innovation Hub in March 2025. This hub allows FinTech companies to pilot their innovative solutions in a confined and controlled setting, verifying safety and ensuring reliability before a full-scale market launch. Such a regulatory environment is conducive to fostering innovation while maintaining financial stability.

 

Supportive Regulations in Nepal's FinTech Ecosystem

 

The regulatory landscape in Nepal is evolving to support the growth of FinTech companies:

 

Laws & Regulations:

- Several digital wallets, including eSewa, Khalti, IME Pay, and PrabhuPay, have acquired licenses from NRB.

- Licenses have been issued separately to wallet operators and switch/settlement platforms like Fonepay and Nepal Clearing House Limited (NCHL).

 

Guidelines:

NRB's directives encompass:

- The e-KYC (electronic know your customer) guidelines for seamless digital onboarding into financial services.

 

National Payment Switch (NPS):

Introduced by NCHL to provide interoperability among various wallets, banks, and cards.

 

QR Code Interoperability:

Initiatives like Fonepay QR, Smart QR, and NCHL integration aim to promote unified QR code usage.

 

Innovations in the FinTech Space

 

The FinTech landscape in Nepal is witnessing various innovations:

- API Banking and Open Banking Initiatives: Commercial banks now provide API access to third-party FinTechs for seamless integration, with NRB promoting collaborations between Banks and Financial Institutions (BFIs) and FinTechs.

- Lending & Credit Scoring Innovations: Digital lenders are leveraging alternative data such as mobile usage and transaction records, with automated credit scoring models gaining prominence.

- Blockchain & Cryptocurrency Exploration: While NRB hasn't legalized cryptocurrency trading, blockchain-based innovations such as digital identity and document verification are under study.

- InsurTech & AgriTech: Insurance aggregators and mobile microinsurance platforms are emerging, with fintechs offering loans, crop insurance, and market linkage in agriculture.

- Remittance Integration: Direct remittance transfers to user wallets are enabled through partnerships, exemplified by collaborations between FinTechs like eSewa and international money transfer firms like WorldRemit.

 

Challenges and the Way Forward

 

Despite significant progress, challenges persist. Studies reveal that financial literacy and government support, while necessary, do not directly influence FinTech adoption unless mediated by user innovativeness. Factors such as digital literacy, trust in technology, and social influence primarily drive adoption, notably among millennials in regions like Karnali Province.

 

Addressing these challenges necessitates education and awareness campaigns to build trust and familiarity with digital financial tools. The future of Nepal's banking sector is undeniably digital. Projections suggest that the digital banking market's net interest income will reach US$170.8 million by 2025 and grow to US$240.6 million by 2029.

 

Ensuring Inclusive and Sustainable Growth

 

For this growth to be both inclusive and sustainable, stakeholders must prioritize enhancing digital literacy, implementing robust cybersecurity measures, and fostering an innovative environment. By doing so, Nepal can transform its banking sector and set a precedent for digital financial inclusion in the region.