Opinion in lead

Digital payment integration to facilitate cross border payment in South Asia

Despite a large volume of movement of payments between Nepal and India, a lack of digital payments integration between the two countries has been creating issues for tourists. The MoU signed by the two countries’ national payment system providers in June this year has paved the way for cross-border digital payment integration.

Globally and in Nepal, the COVID-19 pandemic accelerated the use of digital and contactless payments as the fear of direct contact through transfers has accelerated the use of cashless transactions. New payment instruments have evolved in the payment system: Quick Response (QR) codes, Instant payment systems (IPS), cardless withdrawal, Smart Point-of-Sale (POS), NFC technologies and virtual cards. Digital payment is transparent compared to cash transactions and can reduce the circulation of cash, whose printing costs are quite expensive to the national coffer. Nepal Rastra Bank (NRB), the central bank, has been encouraging the use of digital payment systems.

The Nepali digital payment system started in 1990, when private banks of the country started issuing credit cards and installed the country’s first automated teller machines that dispensed cash. Since then Nepal has seen the emergence of homegrown digital payments systems such as the Smart Choice Technology (SCT), Nepal Clearing House Limited (NCHL) and numerous digital wallets run by private sector. In the past decade, the payment landscape has been on a rapid expansion with the introduction of non-bank operated mobile wallet, increasing the use of digital payment methods in the country. The evolution of the online payment system has made it easier for customers to carry out financial transactions.

According to a recent report by NRB, the number of digital wallet users more than doubled between August 2020 and July 2022. It used to be 6.27 million in 2020, and surged to 13.68 million in 2022 July. As of mid-April, 10 payment system operators (PSOs) and 27 payment service providers (PSPs) operating in Nepal.

Table 1: Access on Payment Systems

With the domestic digital payment system fast expanding and maturing, Nepal needs to venture into integrating its digital payment system globally as there is high demand for it by students, businessmen, travelers (e.g., medical tourists, pilgrims), and migrant workers. Mastercard and Visa card issued by Nepali banks are accepted at Indian and Bhutanese PoS machines and can be used to withdraw cash for a transaction fee. Cross-border operability of digital wallets would make payments easier. South Asia is least integrated in terms of payments connectivity, apart from the much-discussed poor physical connectivity within the region. Regular payments connection between other countries in South Asia have to be undertaken using dollar-denominated credit or debit cards.

A Memorandum of Understanding (MoU) between NCHL Nepal and NPCI Payments Limited (NIPL) India was signed during Nepali PM’s state visit to India in June 2023 for facilitating cross-border digital payment between the two nations. The MoU intends to establish cross-border connectivity for financial transactions between the two countries in order to ease fund transfers and merchant payments by users including students, travelers and migrant workers. The initial engagement is set for inward and outward transfers between banks in Nepal and India. India has reached agreement on integration of digital payments with other South Asian countries such as Bhutan, Sri Lanka and Nepal.

This is planned to be achieved through integration between Unified Payments Interface (UPI) of India and National Payment Interface (NPI) of Nepal to enable existing instruments for cross-border transactions, which will be subsequently extended for other merchant payments. The UPI and NPI are real-time payment systems that provide person-to-person (P2P) and person-to-merchant (P2M) transactions.

The flow of remittance between Nepal and India is estimated to be around US$4 billion in 2017, as per a World Bank report, with Nepal receiving US$1.02 billion from India and sending US$ 3.04 billion to India. The digital payment system integration between the two nations will also help help migrant workers in remitting money back home cost effectively, conveniently and securely.

According to official figures, between 2010 and 2021, the annual average arrival of Indian tourists by air to Nepal was around 140,000. The number is expected to be much higher, given the porous land border and ease of movement between the countries. As Indian banknotes of denominations above INR100 are banned in Nepal, Indian tourists have to carry money in bundles while in Nepal. Enabling digital payment services will eliminate the hassle of carrying large numbers of banknotes and boost tourism in Nepal. Enabling cross-border digital payment will also make cross-border financial transactions convenient, safe, instant, cost- effective and transparent.

Although details such as transaction limits, transaction fees and other control aspects are to be finalized, the MoU is one of a major milestone, which could connect the domestic real-time retail payment systems of the two countries to enable cross-border payments.

Nepal needs to explore similar arrangements with other countries in South Asia. Hotels in Nepal have been urging the government to ease the exchange of currencies for tourists from other South Asian countries. The need to convert their local currencies into dollars and then convert into the Nepali rupee increases the cost for tourists.

Ms Bista is Research Officer at SAWTEE. This article was published in Trade, Climate Change and Development Monitor, Volume 20, Issue 07, July 2023.