THE PEOPLE ARE READY FOR DIGITAL BANKING,THE INDUSTRY
Technology is enabling an ecosystem where customers are acquired and served differently than traditional ways. While designing a digital strategy, it is important to understand how customers are acquired and how they are served. Let’s consider the process of opening a bank account. People used to have to personally go to the bank to open a bank account which is slowly changing now. The Know Your Customers (KYC) of banks and other set processes are still the same, but what is changing is the process.
It is becoming more user-friendly through the use of digital technologies and infrastructure. We can also consider the example of the Windows operating system; it used to come as a package in disks in the past, but today the most widely used computer OS has become a cloud-based service. So digitization is disrupting many traditional processes and changing them for the better.
This disruption is also being seen in the financial sector. We can take pride in the fact that Nepal is one of the few countries which is working towards creating a digital ecosystem for remittance transfer. Our company Machnet Inc may not directly be engaged in remittance services. However, we are active in the sector of digital banking and remittance is a significant part of it. What we are trying to do is create a type of digital banking service where Nepalis residing outside Nepal can also open a bank account, make deposits and withdrawals and also get a loan. And we plan to do this within the next two months.
In Nepal, the biggest gap I have seen is the lack of a consolidated digital banking platform. Private companies make different platforms for themselves. But we do not have an integrated industry-wide system. The services being provided by the Nepal Clearing House Limited (NHCL) is a good step forward in this respect but they need to be scaled up to have a greater impact. And a major hurdle still remains which is the KYC.
The issues of digital identity, digital signature and digital anti-money laundering (AML) compliance also need to be properly acknowledged when talking about digital banking. There are various tools available to address these issues but they are fragmented. They need to be integrated into a larger infrastructure system which we do not have at the moment. And this is the irony with Nepal. The customers are prepared to adopt digital banking services but the industry is not.
The government is very cooperative and the central bank does try to support digital entrepreneurs. But the problem is that they lack the technical know-how and thus, cannot make the right decisions at the right time. They approach new technologies with an old mindset and that is what is preventing this sector from progressing.
In terms of developing a digital ecosystem, technology is not the problem, policy is. Not allowing Nepalis to use PayPal is a policy limitation, not a technological one. Nepal is able to host big multinational companies but the policy is what keeps them away. The cost of compliance is so high here that any company willing to come and work in Nepal faces a risk higher than the potential profits.
My company thamel.com was not only the first e-commerce company of its kind in Nepal but it was the first of its kind in the world. But, I could not scale up. Even when I tried scaling up, I could not make a profit.
It was not the finances that were holding me back, it was the logistics. A company cannot scale up its activities until it is able to automate its logistical system. The environment is a bit different today. Companies like Daraz and SastoDeal are doing well. But there is still a long way to go.
The digital sector in Nepal also lacks a reliable source of funding. Investors have little knowledge about the technologies and I also think that the Nepali IT sector is small. So, they hesitate, thinking that they can’t make a profit.
Our company Machnet is the only company in the world to have an entirely new system in money transfer business. We operate an engine which allows people to transfer money worldwide without any sort of a license. Today, 15 percent of the remittance coming from The United States to Nepal comes through our platform of Thamel Remit.
Today’s generation is tech-savvy and we need to facilitate their life and work by implementing pragmatic policies. At present, thousands of people in Nepal work in the cloud ecosystem and earn money. If there are no policies to govern their activities, such people won’t have documented sources of income.
We are now at the age of sharing our resources, but the problem is our mentality. Today, cloud services have become a big thing. Now software is taken as services rather than products; it is why software-as-a-service (SAAS) modality has gained prominence in the software development industry.
Today, innovation is in connectivity. In digital banking, thinking that we will do everything by ourselves will lead to failure. Rather we should connect the Application Programming Interfaces (APIs).
If we are able to connect all the small components, then there will be a huge advantage. But here in the country, people feel that everything should be done by them only. We don’t have a proper ecosystem, clear policy, critical components. So, I think due to this, we are lagging behind.
E-READINESS WILL ONLY DEVELOP WHEN THE ENTIRE ECONOMY IS FORMALISED
The growth of digital payment system in Nepal is good. However, we still have a long way to go compared to the global growth. While the scope of digital payment systems are much broader, these services are only taken as means of utility payments such as mobile SIM recharge, balance top-up and paying electricity, water and phone bills and buying movie tickets. Nevertheless, growing use of digital wallets has been an achievement for service providers like us.
We lag behind in terms of e-readiness because an ecosystem is yet to be created. People are habituated in using cash because only banknotes are accepted in most of the places. They aren’t fully assured about payment of their bills through online platforms. There is a need to formalise the informal economic activities. E-readiness will only develop when the entire economy is formalised.
However, we are positive because Nepal is relatively smaller country and it is easy to implement things here. Currently, the highest cashless groups in the society are the students. 48 percent of the college students use digital wallets for payments. Though the number of subscribers of e-payment systems can go around 2 million, there are only 400,000 - 500,000 active wallet users in Nepal.
We will observe noticeable growth of e-payment systems in the next few years. By 2022, many more people in the urban areas of the country will use digital payment. This will take more time in rural areas.
Currently, just 3 percent of the total transactions in the country take place digitally. A holistic approach is necessary to help propel the growth of digital payment system in the country. There have been some steps taken that can broaden the horizon for electronic transactions. For instance, the Financial Comptroller General Office (FCGO) is working to facilitate the proposed online payment of taxes.
Our goal is to create an environment where people can do 90 percent of their banking transactions through e-wallets. This will enable people to do banking transactions 24 hours a day. This will ease the lives of the people in the rural areas as they don’t need to travel long distances to go to banks or cooperatives. This kind of behavioral change will aid to a faster economic growth. Infrastructures in banking, telecommunications and internet are essential in creating an environment conducive to digital payment systems. These infrastructures have been improving gradually in our country. Mobile penetration rate, for example, has reached 100 percent. Similarly, smartphone penetration is also growing every year. Telecommunications services providers have also shifted from 3G to 4G networks and the internet infrastructure too is improving.
Going forward, creating digital identity of citizens will be an important step. These will form essential parts of national ID card which will have all information of individual citizens stored digitally.
Robust digital banking and payment infrastructure are essential elements of digital economy. As there is no unified payment system in Nepal, many international digital wallets such as Google Pay and Amazon Pay do not want to come here. This is because they have to integrate their systems separately with every bank. These global payment platforms entered India after the Unified Payment System was launched there. Nonetheless, there have been some good initiations lately such as the implementation of the Real Time Gross Settlement (RTGS) by Nepal Rastra Bank (NRB) for bigger transactions.
The government has announced a rebate of 10 percent of VAT to consumers who pay digitally on purchase of goods and services under VAT. This will be a good start. However, it will be difficult to implement because the government took the decision without taking suggestions from stakeholders. The merchants have to completely change their billing systems adding to their costs. There is also a question whether or not this refund of small percentage of VAT encourages consumers to adopt digital modes of payment. Again, there will be hassles if the consumers return the goods they purchase. It will be more difficult for bank card payments because the settlements of card payments are carried out by the Visa Inc. However, if we bring SCT card into use again, VAT refund to consumers can be implemented. If this system is implemented on the use of e-wallets, there will be hassles due to problems merchant billings and changes in software. We want to do this because we want to experiment and see.
Technology and innovation always run ahead than rules and regulations; laws should facilitate innovation not impede it. NRB started providing licenses to digital payment service providers just three years ago, but eSewa began its services 11 years ago. Foodmario sells homemade foods, but no rules have been set for this type of business. Selling food through a platform like Foodmario is economically beneficial for many women in our country who have good cooking skills. Risks are always associated with new things and mitigation of risks is the duty of the government. There should not be much gap between innovation and regulations. The authorities need to view the use of new technology proactively, not reactively.
INTERNET PRICES MUST COME DOWN FOR OUR ECONOMIC DEVELOPMENT
We hold a reputable place in the world when it comes to access to the internet and penetration of the service. Our internet penetration rate stands at 63 percent, according to the Nepal Telecommunications Authority, which is respectable by any standard. However, our internet prices are very high which is a major hindrance to our growth.
Cellular data prices are still unaffordable to a huge chunk of our population and not everyone has access to Wi-Fi connectivity. So, internet still remains a luxury to many people. And this, in turn, is preventing the growth of many other related sectors like digital payments and e-commerce.
The government has been encouraging online payment platforms and relaxing many of the restrictions it had previously placed on e-payment companies. Similarly, the market of e-commerce companies like Daraz, SastoDeal, Foodmandu and City Cargo is expanding continuously and new companies are entering the online business arena regularly. But their growth will stagnate if the accessibility of the internet does not increase – both financially and technologically. The government is very positive about enhancing and expanding digital connectivity in the country. Even when the government has played an antagonistic role like in the cases of Tootle and Pathao, the level of public outcry forced it to back down. So clearly there is public demand for internet and internet-based services. We also have a very young, tech-savvy population; many Nepalis are under the age of 30 and own a phone. Domestic and foreign investments in the telecom sector are growing too. So it is only the high prices that are holding us back which is really a shame because Nepal’s digital sector holds so much potential.
We need only look at India to see what we are missing out on and what we can achieve. The entry of Jio revolutionised cellular data in India and forced the overall industry to lower their prices and today, internet has become a vital part of Indian livelihoods. Everything from buying groceries to ordering medicines and booking tickets is now done online – not just in urban India but in rural parts too. India’s connectivity greatly increased after Jio and Nepal’s can too if we make our internet cheaper. A cheap internet is the only way to realise our ambitions of a ‘Digital Nepal’.
With a cheaper internet, growth of online businesses will increase which will not only be convenient for the buyers and sellers but will also serve to wipe out the syndicate and middlemen currently operating in our society. Internet is inherently open and democratic and cannot be controlled by one individual or entity. This will change our entire way of life. A cheaper internet will expand our digital market. This means that there will be a growth in demand and foreign companies will come and invest here. Businesses like Airbnb and OYO already operate in Nepal. An expanded market will also entice other companies to come in. We will have a company like BYZU’s enter our education system and a technology like Hospital Management System will come up in our healthcare industry. Services like classroom teaching and doctor consultations can be done through video chats and virtual presence. This will especially be beneficial for the people living in the rural and remote areas of our country. People will have easy access to fast and reliable information so our media sector will get transformed. Almost all aspects of our society will undergo digitization. Of course, as the internet penetration grows and Nepalis gain access to more and more online services, certain policy and legal issues will need to be addressed. The government has proposed a new IT Bill which will require online companies operating in Nepal to register in the country. This needs to be taken positively as it will help bring these companies under the legal domain and will also regulate their payments. This law would also enable the government to collect taxes from these companies, thus benefitting our economy.
There are always a lot of things to be done by the government. But it is good that it has at least become aware of the working model of IT-based companies and the problems they face on a day-to-day basis. For instance, they are gradually understanding how Tootle and Pathao operate and the hurdles they are facing in the absence of a proper legal framework. The problem here is that digital entrepreneurs move faster than the government. Thus, there is a lag between government policy and the actual business environment. But the government is slowly trying to catch up. The issue of fintech was included for the first time in the last budget. It is promoting a transition to a cashless society, and it did provide some flexibility with Tootle and Pathao. All this shows that the government is trying to be supportive of the tech-sector. And we also have to understand that drafting and passing regulations take time. The tech-sector has to be patient and respectful of the bureaucratic and legislative process.
We at City Cargo are willing to support the government where possible. For instance, with respect to taxation, we collected VAT on all our 20,000 trips in the last fiscal year and paid it to the Inland Revenue Office. Before us, no one used to collect VAT on transportation. We have continued the practice this year as well. The current technology records each and every transaction made so there is no possibility of any misappropriation. So, supporting digital technology would also help widen the state’s tax net and increase its revenue.
So, internet has a huge potential to transform Nepal economically.
THE FUTURE OF BANKING IS DIGITAL MONEY
Let’s start off with an example of WeChat. It is primarily a social network, but it also a wallet service called WeBank. Now, WeBank is the second largest bank in the world with the one of the highest number of bank accounts and transactions – all of this just on the app. This alone shows the global trend of e-payment; or in a larger sense, the Money over Internet Protocol (MoIP).
MoIP is comparable to an email or SMS. We send money from one point and it reaches another point electronically. It is a convenient service and holds special relevance in the context of Nepal. The Nepali diaspora sends a huge amount of remittance into the country, as evidenced by the immense wealth of remittance-based companies. MoIP would make the flow of money from foreign countries into Nepal and into Nepali bank accounts a lot easier and faster – all with the help of the internet.
And internet too is becoming cheaper. India’s Jio brought about a revolution in cheap and reliable internet and others are also catching up. So the future of money is on the internet.
And encouragingly, the internet is becoming more open. People don’t keep their technologies to themselves. Even companies like Microsoft have adopted an open source software development model. So, as the tech world becomes bigger and more vibrant, financial institutions can harness it to expand their capacities and offer a host of new services that they currently can’t. But for this, they need to come out of their conservative shell and look beyond short-term profits. Something Nepali banks aren’t doing at the moment.
Of course, the banks are also held back by various security concerns. One has to acknowledge that in e-banking, the bigger the transactions, the bigger the risks and security problems and lapses can have severe financial consequences. But no problem is without a solution. Nepal can adopt various cyber security policies. The recent hackings involving criminals from different countries is a wake-up call as well as an opportunity. We need to identify our vulnerabilities and repair them. Shutting ATMs down is not the solution.
Nevertheless, Nepal is transitioning into a cashless society. People no longer go out to pay their utility bills and instead use e-payment services. The use of scratch cards for mobile recharges has gone down. Nearly 18 percent of the total banking transactions has already moved from cash and cheques to online. In the budget speech for the fiscal year 2019/20, the finance minister also talked about a 10 percent VAT rebate on transactions done with cards. This is a beautiful policy to encourage digital payments. But a more concrete mechanism needs to be put in place for a speedier and smoother transition.
To facilitate this transition, we at Unlimited Technology recently launched E-Dheba. For this, we merged with iPay, an old player in the field of digital payments in Nepal. iPay already had 127,000 customers and a certain level of infrastructure. So we didn’t need to focus ourselves in starting from scratch. We currently have 150,000 customers on E-Dheba and now, plan to aggressively expand our market presence and focus on advertising as well. Our goal is to reach 2.5 million customers in the next two years. We also plan to add around 50 various financial services on our app.
We at E-Dheba looked at the market trend and went above and beyond it. We are much more than the average utility payment app. We offer so many additional services like payment of bus fares. Currently, commuters can use the E-Dheba card to pay their fares in 29 buses of two different companies. By February, this number will have increased to 300 buses. We are using the Near Field Communication (NFC) technology in our cards which can also be used on smartphones or smartwatches. We are also working with Visa and Union Pay to have our cards work at ATMs and retail outlets as well. And all of this, without any link to a bank account!
In the next two months, we will also have come up with a service to pay government taxes electronically. We are also developing a Central KYC Repository where the customers will receive a token. Then that token will serve as all the physical documents that an individual would normally have to carry for KYCs at banks; thus making the process much less tedious for everyone involved.
We are also looking beyond banks and are with cooperatives as well. According to the Nepal Rastra Bank, they hold a huge amount of money and are often the first line of credit for many people. So, we plan to integrate them into our platform.
E-Dheba is just one of the many fintech platforms that are coming up. Many young graduates are entering the field with new and exciting ideas of their own. But there are policy constraints keeping this field from exciting. There are strict criteria that platforms have to meet with regards to money laundering and cross-border transactions. Also, there are various processes where the customer is required to be physically present at the bank or financial institutions. These are some policy-level hurdles that discourage this sector from taking off and these hurdles are, unfortunately, getting tighter.
Having said this, the government’s Digital Nepal Initiative is a very positive step. However, the challenge is to get all the stakeholders on the same page and to monitor the progress made on achieving the targets. If the government truly wants to promote Digital Nepal then it should focus on developing the IT infrastructure. We also need a more open and progressive attitude. We need to welcome platforms like Amazon and Facebook because they have the expertise and the technology to handle e-payments on a global scale. So, the government should be taking more of an initiative.
DIGITISATION OF DOCUMENTS TO USHER NEPAL IN A NEW ERA OF DIGITAL DEVELOPMENT
The IT sector in Nepal made noticeable growth in the mid to late 1990s with the likes of Mercantile Communications setting up business. Today there are more than 400 companies active just in the field of software development in the country. While many are registered and working in noticeable ways, some firms are hidden from the public eye. The software industry has flourished and big investments are coming into this sector.
The government policies as such are not much of a hindrance for software development companies. But if the government makes them easier, this sector can grow even larger. The company registration process, getting approval from Nepal Rastra Bank and Department of IT, and getting approval for foreign investment, are all far too lengthy,
In last year’s Nepal Investment Summit, there were some Foreign Direct Investment (FDI) pledges made in the Nepali IT sector. But the commitments are yet to be realised. I think incentives like ‘tax holiday’ will encourage foreign investors to invest here. Besides, Nepali IT entrepreneurs should also be active in terms of lobbying and pressing the issue in order to bring in the investment committed by foreign investors. Nevertheless, it is encouraging that a domestic company like WorldLink has secured investment of Rs 1.35 billion from CDC Group of the United Kingdom.
In the IT sector, any innovation that will become a great business idea comes first and then policies are formulated to regulate the business. So policies can never bind this sector. There are many innovations that cannot wait for a specific policy to come.
The size of the global Business Process Outsourcing (BPO) market reached USD 1.034 trillion in 2019. If we could have been able to bring a small portion of BPO transactions in the country, then there would have been a huge employment generation. The Nepali private sector cannot do it alone. We need to work collaboratively, such as forming IT firms in public-private-partnership (PPP) modality to harness the available opportunities in BPO business. We need to have an official body like IT Board with authority in areas like investment facilitation, marketing and promotion of Nepali IT sector across the world, among others.
Similarly, a large number of people are also active as BPO freelancers who are working from their home and making money. It is estimated that there are around 5,000 freelancers who are out of the tax net. Their income is not counted as formal earnings as they mostly receive money as remittances. The government can offer them some incentives to bring their activities into the formal economy. This can be implemented for people who are involved in creating content for social media sites such as Facebook and video sharing site YouTube. Doing this is not only important for maintaining a proper record of such activities but also to formalise their earnings.
It is difficult to have IT hardware industry in Nepal because we don’t have a manufacturing base to produce such types of products. But there are big potentials for us in the service sector of IT as we have the technological know-how and there are constant opportunities to upgrade ourselves. Currently, there are many Nepalis working in Silicon Valley companies and IT firms in different countries. If we can bring them back and retain the existing workforce in the country, there won’t be a deficit of human capital in the Nepali IT sector. It is not that brain drain is necessarily a bad thing. India in the 1990s also faced an outflow of IT workers. Later, people came back to their home country with the experience and investment which became a crucial element in the growth of the Indian IT industry. We have been observing, in recent years, that in Nepal, too, people are coming back. Now we need to encourage them and create an environment where they can stay in the country and fulfill their aspirations.
Talking about creating opportunities, I think the digitization of all the documents of the institutions in Nepal, both government and private, can prove to be very important. Not only will it help to preserve data in scientific ways, but it will also be very beneficial economically. It will usher in a new era of digital development in Nepal. I think if the government decides to digitise all the documents, it will create some 500,000 jobs. Even those who are only high school graduates can be employed for basic tasks such as data entry.
The inclusion of more women in tech should be another area of focus for the stakeholders of Nepal’s IT sector. People need to realise that it becomes a challenge for women IT professionals to keep themselves constantly updated maintaining a good level of work-life balance. They have the responsibility of raising kids, doing household work and giving time to their profession. Nepali women in tech are equally intelligent and hardworking as men and they need support for their professional development.
RIDE SHARING IS THE FUTURE OF URBAN TRANSPORT
We at Tootle started differently than others. We were not only a startup but we were also introducing an entirely new business in Nepal – a business of ride-sharing. It is good that new players are now gradually entering the market but people appreciate the fact that we started it all.
Creating a new business, in any sector, is challenging because you are challenging the status quo. You are changing the existing norms, platforms and mobility. There is also a lack of understanding among the public and the stakeholders as to what we really are how we operate and that also creates some problems. But, as the leaders of this nascent industry, we feel that the responsibility to mitigate these problems falls on us. So, we do not only think about growth but about leadership and activism. We take it upon ourselves to take this industry forward and to ensure its development. Challenges do appear but that only encourages us to take bigger leadership roles for the service of the people. And I would like to emphasise that our focus is on serving the people. We want to create and encourage others to create a good public transportation system in our urban spaces.
The introduction of Tootle has changed two things; it has enabled people to share their resources and make additional income and by promoting the sharing of vehicles, it has helped in reducing carbon emissions. If we are able to develop this system well and take it forward, we will be able to reduce the number of vehicles on the streets. This will free up the congestions that our cities usually face and contribute to their sustainability and livability.
But, even with such long-term benefits, the authorities still aren’t convinced about our existence. There are still debates about how we should be allowed to operate and how we should be regulated. There were even attempts to ban us, although the move was later repealed and such calls to ban us seem to have subsided for now. I believe that such debates largely stem from confusion over our operations which are only natural. All big innovations throughout history have faced such resistance. The world over, people are suspicious of new developments.
When we started Tootle in 2016, it was hard to convince our customers. People did not believe that fact that bikers could use technology and drop people from one place to another. But the customers are convinced now and are comfortable with using our services. So, we are now working on convincing the government. We are continuously holding discussions with them and hope that they come up with the right policy to allow ride-sharing.
The governmental resistance is also natural because innovation always precedes regulation. Nepal Rastra Bank was established after Nepal Bank Limited. Self-driving cars are now slowly starting to pop-up and nations around the world are looking to draft regulations for it. Existing regulations do not imagine future possibilities. But that doesn’t mean that regulations should stifle advancements. The government should be proactive in drafting proper regulatory frameworks that allow innovations that benefit the larger society to flourish.
In the context of Nepal, the Motor Vehicles and Transport Management Act, 1993 states that a private vehicle cannot carry passengers and goods. This means that all e-commerce operations should stop because most of the online stores deliver through private vehicles. Clearly, this is problematic and limits our usage of modern technology. Also, without proper laws, it also becomes difficult to ensure data security. It is unclear as to what types of data companies are allowed to collect and how they should store them. Especially with international companies, there is the risk of our personal data going out of the country.
Also, without a legal parameter, we also cannot properly manage accidents. At the moment, the best measure we have is the third-part insurance of bikes. We do try to facilitate if there are any accidents but absence of regulations really tie our hands. So, an updated tech-friendly law should be formulated.
Yet, even with the legal hurdles, we are growing steadily. We have 35,000 registered bikers on our platform and more than 300,000 users. This is reflective of the overall ride-sharing market which is growing. But there is still so much potential for growth. The government should have a comprehensive vision to allow the sharing of seats; be it on bikes, cars, vans or any other vehicle. Ride-sharing is the future of sustainable public transport and the government should embrace it.
Aside from laws, we also face behavioral impediments. People are aware of e-commerce, ride-sharing, fintech etc but do not fully adopt them because of certain cultural biases. Getting our market to expand is also about changing people’s behaviors which will take time.