Nepal’s banks on the brink of digital change

Nepal, a country with a unique culture and the majestic Himalayas, is on the cusp of significant economic change. According to the UN classification, Nepal is among the “least developed countries.”¹The annual per capita income in the 2022-2023 financial year was US$ 1,410¹, and GDP per capita at purchasing power parity (PPP) in 2022 reached $4,776.²These figures highlight the urgent need for economic transformation to improve the standard of living of citizens.

Despite notable success in reducing extreme poverty, Nepal’s economic growth in recent decades has lagged behind many of its neighbors and other countries with similar economic structures. Real GDP growth averaged 4.2% per year between 1996 and 2023, ranking Nepal sixth out of eight South Asian countries.³These dynamics create an urgent need to find new growth drivers, and one of the most promising areas is the digitalization of the financial sector. The country’s economy is largely dependent on remittances from migrant workers: in 2023, their volume amounted to about a quarter of Nepal’s GDP.³This dependency highlights the importance of creating efficient, fast and inexpensive channels for financial transactions, where modern financial technologies (fintech) can play a key role. Low GDP per capita and a high share of remittances make the population particularly sensitive to the cost and convenience of financial services. In this environment, fintech solutions that offer cheaper and faster transfers have every chance of widespread adoption, potentially bypassing traditional, more expensive banking channels. This is becoming not just a fashion trend, but a pressing economic necessity.

Traditional banks have historically been the backbone of Nepal’s financial system. There are a number of Class A commercial banks operating in the country.⁶, which play an important role in providing credit to the economy and facilitating payments. However, Nepalese banks need to undergo a major modernization to support sustainable economic development and enhance the country’s competitiveness in the global arena. Nepal’s lagging economic growth can be partly attributed to the inefficiency and limited reach of the traditional financial sector. If the financial system, which is the lifeblood of the economy, is inefficient or inaccessible to a significant portion of the population and businesses, it inevitably hinders investment, trade, and innovation. Digital transformation of the banking sector is not just a technology upgrade, but a potential tool to accelerate the country’s overall economic development.

What is digital transformation in banking? In simple terms, it is the shift from traditional paper-based processes and physical branches to the active use of digital technologies – the Internet, mobile applications, big data analytics – to provide banking services. Global trends show how fintech companies are rapidly changing the global banking landscape, offering customers faster, more convenient and personalized financial products and services.⁷For Nepal, the relevance of these processes cannot be overestimated. Digitalization can increase the availability of financial services for the population and businesses, especially in remote areas, reduce transaction costs for banks, stimulate innovation, and promote greater involvement of citizens in the formal financial system (financial inclusion).

Fintech Era in Nepal: New Players Change the Rules

The fintech revolution has not bypassed Nepal, bringing with it new technologies and approaches to providing financial services. The first steps in this direction were taken quite a long time ago: back in 1990, Nabil Bank (then Nepal Arab Bank) introduced credit cards in the country.⁸However, the real catalyst for the accelerated adoption of digital financial technologies was the COVID-19 pandemic. Lockdown restrictions and the need to maintain social distancing have dramatically increased the demand for remote financial services such as mobile banking, QR payments and other forms of cashless payments.⁹This period can be considered as the starting point for the rapid development of fintech in Nepal.

Today, the country’s fintech landscape is rapidly evolving. As of mid-July 2024, there were 9 payment system operators (PSOs) and 26 payment service providers (PSPs) operating in Nepal, excluding commercial banks and other financial institutions that also hold PSP licenses.¹¹Other sources indicate the presence of 10 PSO and 27 PSP.⁸The number of fintech startups is also growing: as of 2022, there were about 70 of them.⁸ Among the key players in the Nepalese fintech market, there are several companies that have already managed to win the trust of millions of users.

eSewa is a leading digital wallet and online payment service provider in Nepal. The company is operated by Fonepay Payment Service Limited¹², was founded in 2009.¹³Today, eSewa serves over 8 million users and cooperates with over 350,000 merchants.¹³eSewa app became the first digital wallet in Nepal to reach 10 million downloads on Google PlayStore.¹³eSewa services cover a wide range of needs: topping up a mobile account, paying utility bills, purchasing airline and bus tickets, making payments in online stores, and money transfers.¹²The company also recently launched a digital lending service for its agents.¹³An important aspect of eSewa’s activities is its contribution to financial inclusion: the company is present in all 753 local governments through its agent network, actively working to improve digital literacy of the population and build trust in digital payments.¹⁴

Khalti – another major player in the digital wallets and payment gateways market, founded in 2017.¹⁵Khalti provides users with a similar range of services, including bill payments, mobile phone top-ups, ticket purchases and money transfers.¹⁵Although there is no exact data on Khalti’s individual user base, the total number of mobile wallet users in Nepal is estimated at 25.85 million.¹⁶, and Khalti is certainly a significant contributor to this figure. A major strategic move for the company could be the mooted merger with another major player, IME Pay, potentially creating a dominant force in Nepal’s digital wallet market.¹⁶

Fonepay, known as a wallet-enabled payment solution.⁸A significant achievement for the company was the launch of cross-border QR payments with India in March 2024¹⁷, which opened up new opportunities for tourists and businesses.

The popularity of digital payments in Nepal is growing at a rapid pace, as confirmed by statistics.

Table 1: Growth Dynamics of Digital Payments in Nepal (FY 2022/23 – 2023/24)

Note: Data on mobile wallet users and their transactions may vary slightly across sources due to calculation methodology or reporting period. The table primarily uses data from the Central Bank of Nepal (NRB) report to ensure comparability.

This chart clearly shows the explosive growth in the use of digital payments, especially QR codes and mobile banking. It is a quantitative confirmation of the qualitative change taking place in the financial behavior of the Nepalese population. The phenomenal growth in the popularity of QR payments suggests that Nepal may be “leapfrogging” the plastic card dominance stage that was typical for many developed countries. The low cost of implementing QR technology at the point of sale and the high prevalence of smartphones among the population make this payment method ideal for the Nepalese market. Unlike card POS terminals that require investment in equipment and maintenance, QR codes can be easily generated and displayed even on a simple piece of paper or a smartphone screen. This significantly reduces the barrier to entry for small businesses and street vendors, as evidenced by the presence of about 2 million merchants accepting QR payments.¹¹High growth in mobile banking users (24.65 million¹¹) provides a ready-made base for using QR payments through banking apps or digital wallets. This means that Nepal can achieve a high level of digitalization of retail payments faster, bypassing the costly and time-consuming phase of developing card infrastructure.

Along with the growth of digital payments, there has been a decline in the use of traditional financial instruments. The growth rate of ATM usage has slowed down significantly, with the number of ATMs actually falling by 5.3% in the last financial year, to 12.89 million users. This indicates a clear shift in preference towards QR payments and other digital alternatives.¹⁷The slowdown in the growth of ATM and check usage is not just a statistical fact, but an indicator of changing behavioral patterns of the population. In the long term, this will lead to a reduction in operating costs for banks, since each refusal to use an ATM or check in favor of a digital payment reduces the costs of collection, ATM maintenance and processing of paper documents. For users, this means greater convenience and time savings.

The number of cheques presented and processed also fell by 4.5% (from 12.29 million in the 2020/21 financial year to 11.97 million in the latest reporting year), a trend driven by the growing popularity of QR codes, mobile banking and e-wallets.¹⁰Credit card usage is also showing a slowdown, with numbers falling by 1.9% in the last financial year to just 289,000 users. One reason for this is the integration of e-wallets with popular e-commerce platforms, reducing the need for credit cards for online purchases.¹⁷

Launch of Cross-Border QR Payments with India⁵– This is not only a convenience for the many Indian tourists visiting Nepal, but also a potential catalyst for small business development and formalization of some cross-border trade. Simplifying payments directly stimulates spending in the local economy, especially in the SME sector. The ability to conduct easy and traceable transactions can facilitate the transition of some informal trade to the legal channel. At the same time, the active penetration of Indian payment systems such as UPI can create competitive pressure on local Nepalese fintech companies, prompting them to further innovate or integrate with larger players.

Table 2: Leading Digital Wallet Operators in Nepal

*Exact individual user and merchant data for Khalti and IME Pay is not always available, but they are among the market leaders with a combined mobile wallet user base of over 23 million in Nepal.

Identifying the dominant players and their characteristics is important to understand the structure of the digital wallet market. Information on the number of users and merchants provides insight into the penetration and influence of these platforms. The mentioned possible merger of Khalti and IME Pay¹⁶ is a significant factor that could lead to significant market consolidation and a change in competitive dynamics, potentially creating a very large player that could pose even more serious competition to both other fintech companies and traditional banks in the retail payments segment.

Traditional Banks in Nepal: Steps Towards a Digital Future

Amidst the rapid growth of the fintech sector, traditional banks in Nepal are not staying on the sidelines. They are increasingly realizing that digital transformation is not just a trend, but an urgent need to survive and remain competitive in the face of changing customer expectations and the emergence of new, agile players in the market.⁷

The banks’ response is evident in several key areas. First, there is investment in technology and infrastructure upgrades. While specific figures on Nepalese banks’ investments are not provided in the materials provided, the general global trend for financial institutions embarking on the path of digitalization includes the transition to cloud technologies, strengthening cybersecurity measures, and developing application programming interfaces (APIs) for integration with external services and fintech platforms.⁷Secondly, there is a paradigm shift in working with clients: from the traditional product-oriented model, banks are striving to move towards building long-term relationships, offering more personalized services and improving the customer experience.⁷

Leading commercial banks in Nepal are already demonstrating concrete steps towards digitalization.

NIC ASIA Bank is actively implementing a strategy aimed at expanding digital banking, improving the quality of customer service and optimizing its branch network.¹⁹One of the landmark events was the bank’s recent move to a new state-of-the-art headquarters in Kamaladi, Kathmandu. The move is designed to centralize management, improve operational efficiency, and create a technological base for further development of digital initiatives.²⁰The bank is also focusing on expanding its presence in rural and underserved areas of the country such as Mugu, Kaliket, Bajhang and others. Financial inclusion in these areas is ensured through a network of physical branches, branchless banking outlets and mobile platforms.²⁰Among the innovative solutions implemented by the bank (as well as other commercial banks in Nepal), one can note QR voice payments, designed, in particular, for the convenience of visually impaired users.⁹

Nabil Bank has a long history of innovation, beginning in 1990 with the introduction of Nepal’s first credit cards.⁸Today, the bank is actively developing partnerships with fintech companies. An example of such cooperation is a strategic partnership with Cashmallow, within the framework of which a service for incoming money transfers to Nepal was launched. Transfers are carried out through the global API aggregator MallowLink, and recipients can receive cash at Nabil Bank branches or choose direct crediting of funds to their bank accounts.²¹This initiative aims to improve the efficiency of global remittances and expand financial inclusion for the people of Nepal.²¹The Bank is also involved in broader projects to integrate domestic and international payment systems, as confirmed by reports from the World Bank and the Central Bank of Nepal.²²

Other commercial banks such as Machhapuchhre Bank, are also implementing innovative solutions, including the previously mentioned QR voice payments.⁹The list of Class A commercial banks in Nepal is quite extensive and includes institutions such as Nepal Bank Ltd., Rastriya Banijya Bank Ltd., Standard Chartered Bank Nepal Ltd., Himalayan Bank Ltd., Nepal SBI Bank Ltd., Everest Bank Ltd. and others.⁶It is safe to assume that most of them are also developing and implementing their own digital transformation strategies in an effort to meet the demands of the times.

When looking at the actions of traditional banks, it can be noted that they often employ a dual strategy. On the one hand, they develop their own digital channels, such as mobile and internet banking, to interact directly with customers. On the other hand, they increasingly enter into partnerships with fintech companies to expand the range of services offered and speed up the introduction of new products to the market, as in the case of Nabil Bank and Cashmallow.²¹This is a pragmatic approach that allows banks to combine the reliability of their brand and extensive customer base with the flexibility and innovative potential of fintech. Developing all digital solutions from scratch is an expensive and time-consuming process, especially for organizations with an established structure and technologies. Partnerships allow for a faster response to market changes, using existing fintech platforms and expertise. Banks’ own developments can focus on key banking services, where security, risk control, and regulatory compliance are especially important. Such a hybrid model may be most effective in conditions of limited resources and the need to quickly adapt to a changing competitive environment.

Efforts by banks to expand their physical and digital presence in rural areas, such as NIC ASIA Bank²⁰, coupled with the implementation of digital initiatives, have significant potential to accelerate financial inclusion in Nepal. Physical presence (branches, agents) in remote areas remains important to establish initial trust and engage the population in the formal financial system. Digital channels can then provide convenient and affordable access to a wide range of services. However, to fully realize this potential, existing challenges related to low levels of digital literacy among the population and uneven access to stable internet need to be overcome. This points to the need for a comprehensive approach that includes not only the banks’ own initiatives but also government support for the development of digital infrastructure and educational programs.

Are traditional banks ready for competition?

Despite the steps taken, traditional banks in Nepal face a number of significant challenges in their digital transformation journey that will determine their readiness to compete with more agile fintech startups.

One of the most significant obstacles is Legacy IT Systems Many banks still operate on technology platforms that were introduced decades ago, such as mainframes. These systems are characterized by monolithic architecture, making them inflexible for integrating with new technologies and difficult to scale operations.⁷As a result, banks face operational delays in processing transactions, high maintenance costs and constant patching of outdated code, as well as increased cybersecurity vulnerabilities.²³Modernization of such systems is an expensive, complex and time-consuming process, but it is absolutely necessary for successful digitalization.⁷These legacy IT systems are not just a technical problem, but a fundamental barrier that slows down all aspects of digital transformation: from introducing new products and improving customer experience to reducing operational costs. This creates a “window of opportunity” for fintech players built on modern technology stacks that can develop and launch innovative products faster.

An equally important challenge is corporate culture and resistance to change within the banks themselves. Established hierarchical structures and conservative approaches to doing business can hinder the implementation of innovations.²³Employees accustomed to traditional work processes may perceive digital transformation not as an opportunity, but as a threat to their position or their usual way of life.23Research conducted in Nepalese context shows that different types of corporate culture (hierarchical, clan, market, adhocracy) have significant impact on financial and service performance of commercial banks in Nepal.24In particular, a hierarchical culture based on bureaucratic principles can slow down innovation processes.24In addition, there is a need to adapt Western-style HR management models and innovation promotion to Nepal’s local cultural context.25Without active support and a clear vision from senior management, digital transformation initiatives risk being left unimplemented or failing to deliver the expected impact.23Corporate culture in Nepalese banks may be an even bigger barrier to innovation than technological limitations. Overcoming cultural inertia and developing a risk-oriented mindset that encourages experimentation and initiative is critical to successfully competing with fintech.

Regulatory restrictions and the need to comply with compliance requirements also pose challenges. Banking is one of the most highly regulated industries. The introduction of new technologies, especially in partnership with fintech companies, creates new challenges in terms of compliance with regulations related to customer data protection, cybersecurity, anti-money laundering (AML) and countering the financing of terrorism (CFT).⁷Banks have to find a delicate balance between the desire to innovate and the need to comply with all regulatory standards, integrating compliance procedures into the design of digital solutions from the very beginning of their development.⁷

Changing customer expectations – another factor putting pressure on traditional banks. Modern consumers, especially the younger generation, increasingly expect from banks services that are as fast, convenient, personalized and accessible through various channels as those offered by fintech companies and other digital services.⁷

Finally, shortage of qualified personnel is a significant obstacle. Digital transformation requires specialists with new competencies: data analysts, cybersecurity experts, software developers, digital marketing and product management specialists. Banks need to both attract new talent and invest in retraining and upskilling existing employees.⁷Nepalese commercial banks are recognizing this need and are investing in developing the capabilities of their staff.²⁵

Comparing the strengths and weaknesses of traditional banks and fintech startups helps to better understand their competitive positions.

Table 3: Comparison: Traditional Banks vs. Fintech Startups in Nepal

This comparison shows why fintech startups have been able to quickly occupy certain niches, especially in payments and remittances, and where banks are struggling to adapt to the new environment. It also highlights potential areas for collaboration, where the strengths of some players can compensate for the weaknesses of others. For example, banks have trust and capital, while fintechs have flexibility and innovative solutions.

Growing regulatory environment for fintech created by Central Bank of Nepal¹¹, although aimed at protecting consumers and ensuring financial stability, may gradually “level the playing field” between banks and startups. Increasing capital requirements, transaction security, AML/CFT procedures and reporting for providers and payment system operators increases their operating costs and barriers to entry for new players. This brings fintech companies closer to the level of regulatory burden of banks. Although such measures are necessary for market maturity and protecting the interests of users, they may also somewhat reduce the initial competitive advantages of fintech associated with less regulation.

Business Benefits: What Digitalization Brings to Nepali Entrepreneurs

The digital transformation of Nepal’s financial sector holds significant benefits for local businesses, especially small and medium enterprises (SMEs), which form the backbone of the country’s economy.

First of all, it is simplification of financial transactions and increasing their efficiency. The ability to make and receive payments via mobile apps, QR codes and online banking allows entrepreneurs to save time and resources that were previously spent on visiting bank branches or handling cash.⁹Reducing reliance on cash also reduces the risks associated with its storage, transportation and collection, and reduces the associated costs.¹³In the future, digital payment solutions can be integrated with SME accounting and management systems, which will lead to further automation of business processes.

Digitalization is conducive to expanding access to financial services for SMEs. Digital channels allow businesses located in remote or rural areas to access banking services without having to physically visit branches, thus overcoming geographic barriers.²⁷Particularly important is the potential for digital lending. Fintech platforms and, increasingly, banks themselves can use alternative data sources, such as account transaction history and sales data through digital platforms, to assess the creditworthiness of SMEs. This opens up opportunities for financing for businesses that previously had no access to traditional bank loans due to a lack of sufficient credit history or collateral.⁸Nepal has a significant SME financing gap, estimated at US$3.6 billion in 2020 by the Economic and Social Commission for Asia and the Pacific (ESCAP). Fintech solutions can play an important role in bridging this gap.³⁰An example is eSewa’s initiative to provide digital loans to its agents, many of whom are small entrepreneurs.¹³Also, the Honey Koney platform mentioned in the video footage³¹, helps microentrepreneurs, especially women, gain access to finance by bringing together lenders, suppliers of goods and services, and borrowers on one digital platform.

Digital payments play a key role in the development of e-commerce in Nepal. Reliable, convenient and secure digital payment systems are the foundation for the growth of online commerce.⁸Payment gateways provided by companies like eSewa and Khalti integrate with various marketplaces and online stores, simplifying the buying process for consumers and the selling process for businesses.¹²The ability to accept online payments allows Nepalese businesses to reach a wider audience, including customers from other parts of the country and, with the development of cross-border payment systems, potentially overseas markets.

In addition, the digitalization of financial transactions leads to increasing transparency and reducing transaction costs. Digital payments leave an electronic trace, which contributes to greater transparency of financial flows. This, in turn, can help combat the shadow economy and tax evasion.⁵Reducing paperwork and manual labor associated with handling cash and paper documents also results in lower operating costs for businesses.

There are already examples of successful use of digital financial instruments by Nepalese SMEs. eSewa management notes that merchants and enterprises are increasingly aware of the importance of digitalization, which leads to active integration and gradual implementation of digital instruments in their daily operations.¹⁴Small businesses and retailers, including even small tea stalls, are increasingly accepting payments through digital wallets like Khalti, helping to expand the digital transaction ecosystem.²⁷For example, a small handicraft business in the tourist city of Pokhara can now easily accept payments from foreign and local tourists through eSewa, significantly expanding its potential customer base.²⁷Research also shows that the adoption of Internet of Things (IoT) technologies, which are often closely linked to digital payments and inventory and sales management systems, improves customer satisfaction, overall productivity and management efficiency, helping Nepalese SMEs operate more successfully and competitively.³²Projects supported by international organisations demonstrate how women microentrepreneurs who have accessed finance through digital platforms (for example, to purchase better batteries for their electric vehicles) have been able to significantly improve their businesses and increase their incomes.³¹

Thus, digitalization of financial services for SMEs in Nepal is not just a matter of convenience. It is a key factor in overcoming structural problems of the economy, such as the significant financing gap for SMEs.³⁰and still a high share of the shadow sector.⁵Traditional banks are often wary of lending to SMEs due to perceived high risks and the lack of sufficient collateral for entrepreneurs. Digital platforms, using alternative data for credit scoring (e.g., analysis of account turnover, sales data, social media activity, etc.), can open access to credit resources for those enterprises that were previously “invisible” to the banking system. Transparency of digital transactions also helps bring businesses “out of the shadows”, which leads to increased tax revenues to the budget and an improvement in the overall business climate in the country. This, in turn, can have a multiplier effect on the entire economy.

The growth of e-commerce in Nepal is directly dependent on the availability, reliability and convenience of digital payment systems. Fintech companies providing payment gateways and e-wallets⁹, act not just as service providers, but as creators of key infrastructure elements that ensure the development of an entire sector of the economy. Without the ability to easily and securely accept online payments, e-commerce cannot fully develop. Fintech solutions reduce transaction costs for both sellers and buyers, increase trust in online shopping and allow sellers to reach a much wider audience. Thus, investments in the development of fintech infrastructure are, in fact, indirect investments in the growth of e-commerce and all related industries, such as logistics, digital marketing and content creation.

Successful examples of digital payments use by small and medium enterprises¹⁴serve as a powerful incentive for other entrepreneurs and contribute to the formation of the so-called “network effect”, accelerating the overall digitalization of business in the country. When entrepreneurs see real benefits from the implementation of digital tools by their colleagues or competitors – saving time, expanding the customer base, entering new markets, simplifying reporting – this motivates them to also switch to digital solutions. This creates a positive feedback loop: the more businesses use digital payments, the more convenient and familiar their use becomes for customers, which, in turn, stimulates even more businesses to implement them.

Towards a Digital Nepal: Obstacles and Prospects

The development of the digital financial sector in Nepal is taking place with the active participation and supervision of the Nepal Rastra Bank (NRB). The regulator plays a multifaceted role, acting as a supervisory authority, operator of key payment systems, developer of industry policy, and catalyst for innovation.¹¹The basis for its activities is the Payment and Settlement Act, 2019, which empowers the NRB to regulate and develop payment systems in the country.²⁶

The NRB is responsible for licensing payment service providers (PSPs) and payment system operators (PSOs). As of mid-July 2024, there were 9 licensed PSOs and 26 PSPs operating in the country (excluding banks and other financial institutions that also hold PSP licenses).¹¹The Central Bank regularly issues circulars and directives aimed at ensuring the security and reliability of payment systems, the continuity of their functioning, as well as combating money laundering and the financing of terrorism (AML/CFT).¹⁶An example of such regulatory measures is the requirement for PSPs to transform into public companies by July 2028, which should increase their transparency and accountability.¹⁶

Along with regulation, NRB actively supports innovation. The bank encourages the use of mobile wallets, e-banking and QR payments to increase financial inclusion of the population.²²The NRB is currently exploring the possibility of issuing its own central bank digital currency (CBDC) and is preparing to launch a so-called regulatory sandbox – a special regime allowing fintech companies to test new products and services in a controlled environment before their full-scale launch.²²Particular attention is paid to systemically important payment systems (SIPS): special frameworks are being developed for their identification and regulation in order to increase their resilience to possible failures and risks.²⁶

Despite the positive developments and support from the regulator, there are a number of serious obstacles on the path to a fully digital Nepal.

One of the key issues is low level of digital literacy population, especially in rural and remote areas. This hinders the widespread adoption and effective use of digital financial technologies.⁹To stimulate trust in digital technologies and their active use, it is necessary to purposefully improve the financial and digital literacy of citizens.³³

Uneven access to the Internet and insufficient development of digital infrastructure are also a major deterrent, especially in rural areas.³⁰Although 4G/LTE mobile coverage covers 741 out of 753 local government areas, smartphone penetration is about 72.94%, personal computers or laptops are only 15%, and only 38% of households have regular access to the internet.¹⁰

Trust and Security Issues continue to raise concerns among some users. Concerns about the safety of personal data and the security of digital transactions remain relevant.¹²Rising fraud cases and increasing number of complaints related to digital payments have even prompted the NRB to introduce new, stricter rules for market participants.¹⁶

While digital transactions are often cheaper than traditional banking, for some categories of users mobile data cost or possible fees for individual services may still pose a barrier.

In addition, the development of the fintech sector, especially if it relies on foreign investment or international partnerships, may be indirectly influenced by Common Challenges for Foreign Investors in Nepal. These include bureaucratic barriers.³⁴, ongoing political instability and its impact on economic predictability.³⁶World Bank reports, for example, point to the slow pace of development of large infrastructure projects (particularly in hydropower) due to regulatory issues and limited infrastructure.³, which may reflect general systemic challenges that are also relevant for other sectors of the economy, including fintech.

Despite these challenges, the future of fintech in Nepal looks promising, and there are several key areas for its further development.

Concept Open Banking, which involves the secure exchange of customers’ financial data (with their consent) between banks and third-party service providers (fintech companies) through standardized APIs³⁷, has great potential for Nepal. It can spur a variety of innovative financial products and services, increase personalization, improve financial education, and increase competition in the market. Traditional banks can evolve in this model by actively partnering with fintech companies to create more specialized and customer-centric offerings.³⁷NRB is actively working to develop payment infrastructure and improve the regulatory framework¹¹creates the necessary preconditions for gradual movement in this direction.

As mentioned, the NRB is exploring the possibility of issuing Central Bank Digital Currency (CBDC).²²The emergence of a national digital currency can radically change the country’s payment landscape, increase the efficiency of payments and reduce risks.

Technologies will find ever wider application artificial intelligence (AI) and machine learning (ML)They can be used to more accurately assess credit risks, especially when working with clients who do not have a traditional credit history, to personalize financial offers, and to identify and prevent fraudulent transactions.⁹

Expected further development of cross-border payments. Successful experience of launching QR payments with India¹¹could stimulate similar initiatives with other countries, which is especially important for Nepal with its large diaspora and growing tourism sector.

Work will continue on deepening financial inclusion, that is, the expansion of digital financial services to previously unreached segments of the population and categories of small and medium-sized businesses.

Fintech solutions will go deeper integrate with other sectors of the economy, such as agriculture, healthcare, education, offering specialized financial products and services for their needs.

The proactive stance of the Central Bank of Nepal¹¹in terms of regulation and support for innovation is a critical factor for the sustainable and balanced development of the fintech sector in the country. Finding the right balance between stimulating growth and technological innovation on the one hand, and ensuring financial stability, consumer protection, and risk prevention on the other, will largely determine the long-term success of the digital transformation of the financial system in Nepal. Without clear “rules of the game” and effective oversight by the regulator, the fintech market may face problems of fraud, systemic failures, and, as a result, loss of consumer confidence. On the other hand, excessively strict and detailed regulation can suppress innovation and slow down development. The NRB, judging by its actions (creation of a “regulatory sandbox”, development of a framework for systemically important payment systems, licensing of PSPs/PSOs), strives to find this balance by creating a predictable and safe environment for investors, developers, and users of financial services.

Overcoming the existing digital divide, which is expressed in a low level of digital literacy and uneven access to the necessary infrastructure (Internet, smartphones)⁹, requires a coordinated effort not only from fintech companies and banks, but also from the government, educational institutions, and civil society organizations. This is a national challenge, and its successful resolution will directly affect the inclusiveness of Nepal’s future digital economy. Fintech solutions may be as innovative and convenient as they are, but if a significant portion of the population cannot use them due to a lack of necessary skills, access to the internet, or suitable devices, their positive impact on the economy and society will be limited. This not only slows down the growth of the fintech sector itself, but also risks exacerbating the existing digital divide by leaving some citizens “overboard” from new opportunities. Therefore, programs to improve digital and financial literacy, as well as investments in the development of accessible and high-quality digital infrastructure across the country, must be implemented in parallel with the development of fintech services themselves.

Potential implementation of the concept of open banking and the national digital currency of the Central Bank²²could be the next big thing for the fintech industry in Nepal. However, implementing these large-scale projects will require significant changes in legislation, a high level of technological readiness of all financial market participants, especially banks, and the formation of a high level of trust in new tools on the part of users. Open banking implies a radical change in the model of interaction between banks and customers and fintech companies, requiring banks to open their application programming interfaces (APIs) to third-party developers. CBDC has the potential to change the very nature of money and the principles of payments in the country. Both of these areas have enormous potential to stimulate innovation, increase competition, and improve the quality of financial services, but their successful implementation is complex and multifaceted. Success will depend on how effectively Nepal can prepare the necessary regulatory, technological, and social framework for these fundamental changes.

Conclusion: Digital Future of Nepal’s Banking Sector and its Implications for the Economy

The digital transformation of Nepal’s banking sector is no longer a distant prospect but an emerging reality. The country has seen impressive growth in the use of digital payments, especially mobile banking and QR codes, largely driven by the COVID-19 pandemic and the subsequent activity of fintech companies and banks. The emergence of dynamic fintech startups such as eSewa and Khalti has fundamentally changed the financial services landscape, offering users convenient and affordable alternatives to traditional banking products.

Traditional banks in Nepal, recognizing the challenges of the times, have also actively engaged in the digitalization process. They are investing in new technologies, upgrading infrastructure, reconsidering approaches to working with clients, and entering into partnerships with fintech companies. However, they face serious obstacles along the way, such as outdated IT systems, conservative corporate culture, the need to comply with strict regulatory requirements, and a shortage of qualified personnel. Therefore, it is too early to talk about the full readiness of traditional banks to compete with flexible fintech startups. The picture is rather mixed: there is noticeable progress and successful initiatives, but fundamental barriers remain that slow down the pace of transformation.

Despite the challenges, the ongoing digitalization of the financial sector has huge benefits for Nepali businesses and the economy as a whole. Simplifying financial transactions, expanding access to finance for small and medium enterprises, stimulating e-commerce, increasing transparency, and reducing costs all contribute to a more conducive business environment and open up new opportunities for economic growth.

For the further successful development of Nepal’s digital financial sector, several general recommendations can be formulated:

• Traditional banks should accelerate the modernization of its IT infrastructure, actively invest in changing the corporate culture towards greater openness to innovation and flexibility, and continue to develop mutually beneficial cooperation with fintech companies, using their expertise and technological solutions.
• Fintech startup It is important to focus on solving real problems of users and businesses, pay increased attention to security and compliance issues, and also look for niches for constructive partnership with traditional banks.
• For businesses, especially small and medium-sized enterprises, it is recommended to more actively master available digital financial instruments to improve the efficiency of your activities, expand your sales markets and gain access to new sources of financing.
• To the Regulators (NRB) and the Government of Nepal It is necessary to continue working to create a favorable and predictable regulatory environment that would stimulate innovation, but at the same time ensure consumer protection and financial stability. Investments in the development of publicly accessible digital infrastructure (Internet, communications) throughout the country and the implementation of large-scale programs to improve the digital and financial literacy of the population remain critically important.

The digital transformation of Nepal’s banking sector will undoubtedly continue, driven by both global technology trends and the pressing needs of the national economy. It is important to understand that this process is not an isolated one, but is part of a broader national strategy, Digital Nepal Framework 2019.³⁰Success in digitalizing the financial sector can be a powerful catalyst for similar transformations in other sectors of the country’s economy. The financial sector is the infrastructure for the entire economy, and convenient, accessible, and secure digital financial services make it easier to do business, stimulate trade, and drive consumption, which in turn creates demand for digitalization in other areas, from retail and services to agriculture and education.

The key to creating a more inclusive, efficient and competitive financial system in Nepal will be the successful collaboration and synergy between traditional banks, with their experience, resources and customer trust, and fintech startups, with their innovative ideas, flexibility and customer focus. The long-term success of this transformation will depend not only on the adoption of advanced technologies and improved regulation, but also on Nepal’s ability to develop its human capital. This includes both developing a sufficient number of skilled IT professionals capable of developing and supporting modern digital solutions and systematically improving the overall level of digital and financial literacy of the entire population. Without investment in human capital, Nepal risks facing a shortage of skills and low levels of consumer adoption of innovation, which will inevitably slow the pace of digital transformation and limit its positive impact on the country’s economic growth and prosperity.

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