The path ahead for Nepal's digital payment ecosystem is riddled with challenges, particularly in securing data and ensuring cybersecurity.

In a rapidly evolving, interconnected world, technology is reshaping every aspect of our lives, including how we handle financial transactions. Digital payments have emerged as a transformative force, redefining how we conduct transactions. The concept of digital payment can be traced back to the 1870s, with significant milestones including the introduction of the first automated teller machines (ATMs) in the UK in 1967 and the founding of PayPal in 1998, revolutionising online payments. The global digital payment market is projected to reach a total transaction value of $11.55 trillion in 2024 and $16.62 trillion by 2028. By region, the Asia-Pacific region is experiencing a surge in demand for digital payment solutions, driven by rapid economic growth, widespread adoption, a tech-savvy population, e-commerce boom, government initiatives, fintech innovation and a focus on financial inclusion.

In this context, Nepal's journey mirrors the global trajectory of digital payment evolution, showcasing both the opportunities and challenges inherent in this rapid transformation. As the world witnesses an unprecedented surge in digital transactions driven by technological innovation, cross-border payments and increased mobile penetration, Nepal too is navigating this dynamic landscape. The country's efforts to modernise its financial infrastructure and promote digital inclusivity reflect broader global trends. However, this transition also brings to light critical data security and cybersecurity issues, calling for robust measures to protect financial systems and build user trust. As we delve into the specifics of Nepal's digital payment systems, it becomes evident how these global influences shape local initiatives and responses.

Digital Payment System in Nepal

Nepal too has witnessed significant advancements in its digital payment system. Introduction of e-banking services by Kumari Bank in 2002 and the inaugural SMS Banking service by Laxmi Bank in 2004 marked the country's entrance into the digital payment world. The launch of eSewa mobile wallet by F1Soft in 2009 further promoted digital payments and facilitated financial inclusion for Nepal people, with its licensing in 2017 paving way for other banking services companies. Additionally, establishment of Nepal Clearing House (NCHL) in 2008 facilitated clearing and settlement operations, electronic cheque cleaning services, and Interbank payments system. The Nepal Payment System Development Strategy (NPSDS), formulated with assistance from development partners in 2014, laid the foundation for the integrated and strategic development of the national payment system. Furthermore, establishment of Digital Nepal Framework in 2019 aimed to tackle low adoption rates and address trust issues surrounding digital payments, particularly in rural areas, by implementing consistent national policies and leveraging disruptive technologies to drive socio-economic growth.

The COVID-19 pandemic acted as the much needed catalyst in accelerating the shift towards digital payments for the entire nation. As lockdowns and social distancing measures forced people to stay indoors, the necessity for contactless transactions became apparent. QR codes have now become widely popular for digital payments in Nepal because of the simplicity and efficiency of online transactions and bill payments.

Current Status

Digital payments in Nepal are growing quickly with a considerable size of population using e-wallets (like Fonepay, Khalti, eSewa, IME Pay, and ConnectIPS), mobile banking, debit and credit cards, barcodes, internet banking, POS transactions and cardless ATM withdrawals. E-wallet users saw an almost threefold increase from 6.27 million in mid-August 2020 to 18.94 million by mid-July 2023, while the number of ConnectIPS users surged from 160,000 to 1.10 million over the same period. The fiscal year 2022/23 also witnessed significant growth in mobile banking and internet banking users, underscoring the broadening acceptance and reliance on digital banking solutions among the Nepali population.

Digital Payment Infrastructure

The rapid growth of digital payments inevitably invites significant regulatory challenges. The NRB has proactively addressed these by establishing a Central Bank Digital Currency (CBDC) unit within the Payment Systems Department (PSD) to foster payment-related innovations. Additionally, a strategic partnership between NCHL and ACI Worldwide, in February 2024, to implement the National Payment Switch (NPS) system is set to create a unified infrastructure to support interoperability between various card payment systems through the NPS National Card Switch (NPS-NCS) solution. This initiative is expected to launch a domestic card scheme called Nepalpay thereby enhancing transaction acceptance, enforcing data localisation and lowering transaction fees. The integration of ACI's globally recognised end-to-end payments hub solution is anticipated to ensure seamless compatibility of retail card and non-card transactions, reducing dependency on international gateways in Nepal.

Cross-border Initiatives

The global push to improve cross-border payment systems has been gaining traction, offering significant benefits for businesses and households, especially in emerging markets and developing economies. Worldwide, public institutions, particularly central banks, are upgrading backend infrastructures to support digitisation and connect domestic fast payment systems.

Following this global trend, Nepal is actively advancing cross-border payment initiatives to ensure seamless digital payments for travellers in the country. Through strategic collaborations with international entities, Nepal aims to bolster local commerce, reduce reliance on cash transactions and enhance financial connectivity within the region. These efforts are particularly evident in partnerships with neighbouring Asian countries like India and Sri Lanka. By integrating with global digital payment systems, Nepal is trying to position itself as a player in the regional digital economy, fostering economic growth and financial inclusion.

The collaboration between NCHL and Ant International in May 2024 paved the way for easier access to digital payments for travellers in Nepal through Alipay+. This strategic partnership now enables users of over 10 leading mobile wallets and banking apps associated with Alipay+ to make cashless payments at more than 800,000 merchants in Nepal, thereby enhancing consumer convenience and driving local business engagement which is vital for our tourism-dependent economy. With over 416,000 tourists visiting Nepal in early 2024, the widespread adoption of digital payments bolsters local commerce and reduces reliance on cash transactions.

The collaboration between the National Payments Corporation of India (NPCI) and NCHL to implement a cross-border e-payment mechanism allowing Indian nationals to use their UPI apps (digital payment platforms such as PhonePe, Paytm, BHIM, etc) in Nepal further depicts the impact of these initiatives. This not only simplifies transactions for a substantial number of visitors from India but also promotes financial inclusion and interoperability within the region, enhancing fund transfers by making them instant and cost-effective, and supporting the financial connectivity between the two nations.

Another cross-border payment initiative has been between Sri Lanka's LankaPay and Nepal's FonePay, which started in June 2023. This initiative aids QR-based mobile payments for travellers in both countries, strengthens economic ties and promotes digital financial literacy.

As Nepal enters the cross-border payment landscape, regulatory bodies like the NRB must address security concerns both at national and international levels. Establishing a global network of fast payment systems is crucial to ensure cybersecurity is robust, alleviating concerns for both tourists and domestic users in Nepal. If regulated and managed well, this initiative could transform Nepal's digital payment landscape, driving economic growth, reducing transaction costs and contributing towards a robust, cashless economy.

Data Breach

Amid the rapid expansion of digital payments, Nepal is grappling with serious data breaches and cybersecurity challenges. With 15.8 million internet users, 51.6% of the population, driving a surge in digital transactions, the risk of cybercrimes has escalated. This calls for the urgent need for robust cybersecurity measures and increased awareness to safeguard Nepal's growing digital economy.

In just one year, the Cyber Bureau of Nepal Police registered 4,937 cases related to cyber crimes. This rise in cybercrimes, including phishing attacks and data breaches, poses a serious threat to the security of digital payment users and the integrity of financial institutions. The vulnerability of Nepal's financial infrastructure was exposed in February 2024 when a 26-year-old individual claimed to possess source code and sensitive information of Nepal's largest bank, speculated to be the country’s central bank. Similarly, in 2019, hackers stole approximately Rs 18.9 million from 13 Nepali banks through ATM terminals using counterfeit cards, exploiting vulnerabilities in authentication processes. The 2017 NIC Asia Bank heist further exposed weaknesses in IT security, where cyber attackers executed $4.4 million in fraudulent SWIFT transfers during a holiday period, prompting the central bank to intensify regulatory measures and recovery efforts. These breaches further pinpoints the inadequacies of current cybersecurity measures and jeopardises the integrity of Nepal's financial system, necessitating immediate enhancements in digital defences. Additionally, Nepal's leading digital wallet experienced a data breach where user information, including emails, addresses, and account funds, was compromised due to inadequate OTP authentication during Internet login processes. Furthermore, the rise in phishing attacks, including attempts to obtain One-Time Passwords (OTPs) through calls and messaging platforms like WhatsApp, has become increasingly prevalent in the Nepali landscape. These cyber threats pose a significant risk to both financial institutions and individual users, highlighting the critical need for robust cybersecurity measures and proactive strategies to combat cyber crimes.

Conclusion

As Nepal's digital payment user base expands rapidly, the government has responded by introducing regulations to oversee transactions conducted through digital platforms, ensuring accountability and security in this evolving landscape. However, the cybersecurity gap and the prevalence of phishing attacks demonstrate that challenges persist due to insufficient public awareness and accessible guidelines from service providers. The NIC Asia Bank heist, where, despite efforts, only a portion of the stolen $4.4 million was recovered, underscores the ongoing gaps in regulation, monitoring, and risk mitigation. This shows that the path ahead for Nepal's digital payment ecosystem is riddled with challenges, particularly in securing data and ensuring cybersecurity. Failure to address these trends could undermine trust in the digital payment sector.

Despite Nepal being one of the 120 countries around the globe to establish privacy and security regulations that protect residents’ data privacy and security, it continues to face issues related to cybersecurity. Failure to address these gaps could have severe repercussions, potentially undermining Nepal's entire economy. Strengthening regulatory frameworks, establishing government-backed guarantee funds, and raising cybersecurity awareness are crucial steps to effectively mitigate these risks. Users should take proactive steps such as enabling two-factor authentication and biometric features for enhanced security, while also updating passwords regularly using strong and unique combinations. It is essential to avoid making transactions over public Wi-Fi networks and prioritise secure internet connections to safeguard personal information. As Nepal marches forward in its digital payment revolution, one cannot help but wonder: Can Nepal keep pace with the competitive global digital payment landscape? Are the users, regulatory bodies and service providers capable of collectively ensuring that the benefits of convenience and financial inclusion outweigh the challenges of cybersecurity and data protection?

(The authors are Research Analysts at Business Brainz, a global research firm.)