In a landmark development that could reshape Nepal’s digital payment ecosystem, two of the country’s leading payment service providers (PSPs), Khalti and IME Pay, have announced that they are undergoing a merger. This marks the first such consolidation in Nepal’s digital wallet industry since the Nepal Rastra Bank (NRB) opened the door for mergers and acquisitions of payment system operators (PSOs) and PSPs nearly two years ago.

The merger is still in its preliminary phase as both companies have approached the central bank for regulatory approval. Although they have also not made share swap ratio public, industry experts see this development as a crucial step toward consolidation in an increasingly crowded market. Commenting on the development, NRB Spokesperson Ramu Paudel said the revised Payment and Settlement Bylaws, 2020 is designed to encourage mergers and acquisitions in the payment sector. “The central bank is prepared to approve merger plans of companies that meet the required criteria,” he said. IME Pay, backed by the IME Group, was the first to obtain a PSP license in June 2017, followed by Khalti, which received its license in April 2019. IME Pay has a paid-up capital of Rs 300 million which is considerably larger than Khalti’s Rs 50 million. However, Khalti has a larger user base with five million downloads on the Google Play Store compared to IME Pay’s one million users.

The merger has come at a time when the Nepali PSP industry is facing significant challenges. Experts say only a handful of companies—eSewa, Khalti, IME Pay and Prabhu Pay—are currently profitable. eSewa holds about 60% of the market share, while Khalti, IME Pay and Prabhu Pay are in intense competition for the rest.

A Strategic Consolidation

Although eSewa has dominated the market for years, the proposed merger between Khalti and IME Pay could create a formidable competitor in Nepal’s digital payments landscape. If the merged entity prioritizes customer-centric innovation and seamless financial solutions, it could be a game-changer for the industry, say experts. Analysts say the Khalti-IME Pay merger comes at a challenging time for the industry and is likely driven by resource optimization and synergy to emerge as a stronger player.Despite being in the industry for nearly a decade, Khalti has been struggling financially and was reportedly seeking investments.

"IME Pay and Khalti may be looking to leverage each other's strengths. With its ties to banks, insurance companies, brokers, cooperatives and vendors, IME Pay already has strong strategic positioning," said a fintech analyst. "This merger could further strengthen its position, especially since IME Group has also acquired InfoDevelopers and owns Midas Technology and Sastodeal."

The source added, "From Khalti's perspective, the move may have been driven by the need for resource optimization, as the company's cash burn rate has been high."

Stagnating Growth

Digital payments in Nepal have grown significantly, particularly since the onset of the COVID-19 pandemic in early 2020. According to the latest NRB statistics, Nepal now has over 23.46 million digital wallet users and 24.65 million mobile banking customers. In 2023/24, transactions worth Rs 3,478.66 billion were conducted through mobile banking, while digital wallets processed transactions totaling Rs 302.69 billion, according to NRB.

But a key issue plaguing the digital wallet sector is the stagnation in the growth of wallet users. Over the past two years, banks and financial institutions have ramped up their mobile banking offerings, which now provide the same features as digital wallets, making it difficult for PSPs to differentiate their services. As a result, the distinction between digital wallets and mobile banking services has become increasingly blurred.

Revenue generation remains another major hurdle for digital wallet companies. With many services, such as government payments, school fees and utility bill payments, offered with minimal or no fees, the main source of revenue for wallet companies has traditionally been merchant transaction processing. However, as merchants continue to reduce their commission and service fees, wallet providers are seeing their revenues decline. Currently, digital wallets are primarily used for top-ups, airline ticket purchases, and ISP payments—transactions that do not generate substantial revenue for PSPs.

A major challenge for wallet companies is their struggle to make profit while offering numerous free services. They are allowed to charge only minimal or no fees for services like government payments, school fees, and Nepal Electricity Authority bills under Rs 500. "The scope for digital wallets has narrowed as they must both collaborate and compete within the same ecosystem," an observer told New Business Age. "We now need to broaden our perspective from wallets to fintech, where both banks and digital wallets are vying for the same market."

Another observer noted that the merger could challenge eSewa's market dominance while also creating opportunities for further innovation. eSewa reportedly has around 13 million registered users. However, there exists a significant gap between the number of registered and active users in Nepal's digital wallets, say experts.

The Nepali PSP industry has the potential to generate an annual business turnover of Rs 7-8 billion, but a lack of digitization has been a major obstacle. Digital wallets continue to struggle with adoption in government agencies and the healthcare sector. "Moreover, the free QR payment service has only helped onboard users to a limited extent," observers say, adding that the actual annual turnover of Nepali PSPs may reach, at most, Rs 3 billion.

Despite the growth in transactions, revenue has declined due to reduced commission rates. Offline agents receive a 6-7% commission, whereas wallets are limited to 2.5%—despite the fact that wallet companies have enhanced efficiency, supported digitization and optimized business costs. "Even those selling physical recharge cards earn higher commissions," observers say.

The key question now is: How will eSewa respond? More importantly, what new possibilities will this merger unlock for digital transactions, financial inclusion, and everyday payments in Nepal? Jagdish Khadka, CEO of eSewa, told New Business Age that the existing 25 PSPs will not survive. "If we correctly identify and target the right segments, at most, five PSPs would be an optimal number for Nepal," he added.

Push for Consolidation

The central bank is pushing for consolidation in the digital payments sector. The new provisions in the Payment and Settlement Bylaws, 2020, allow PSOs and PSPs to merge or acquire similar organizations. Beyond voluntary mergers, NRB has the authority to enforce them in cases where payment companies have cross-holding share structures. If directors own more than 10% of shares in multiple payment companies, the central bank can enforce a merger or acquisition to streamline operations and reduce market fragmentation. Ten PSOs and 25 PSPs are currently in operation. Despite the growing number of players, business growth has not matched expectations. Among the PSOs, three are international giants—Visa Worldwide and Mastercard, both from Singapore, and UnionPay International from China. NRB officials believe the high number of service providers, coupled with slow market expansion, has made consolidation necessary

(This news report was originally published in  March 2025  issue of New Business Age Magazine.)