The technological transformation of Nepal’s banking sector has been moving towards gradual development from cards and ATMs to internet banking to mobile banking. Initially, cards and ATMs were the main digital medium, allowing customers to transact offline. After the advent of internet banking, customers started getting access online. However, with the expansion of smart phones, mobile banking has also overtaken internet banking. The use of digital banking has gained momentum in Nepal after the pandemic.

Before the pandemic, the expansion of digital transactions was slow due to customer hesitancy and lack of active promotion by banks. However, due to the lockdown and health safety during the Covid period, customers were attracted to digital medium. During this period, the bank introduced services such as online account opening facility, digital KYC, contactless payment system, and the regulatory body Nepal Rastra Bank also increased the limit of digital transactions.

The pandemic increased consumer access and confidence in digital banking, while it reduced the costs associated with digital transactions. Mobile banking, QR payments, internet banking, and digital wallets have become popular after the pandemic. In the post-pandemic years, both the number of transactions and the value have increased by 210 to 230 percent year-on-year. Small merchants and service providers, as well as business establishments, began to make digital payments a compulsory. This made digital business a part of everyday life in Nepal.

COVID-19 made the banking system largely focused on digital transactions. This increased customer reach and trust and reduced costs. This evolution shows how technology has transformed Nepal from traditional banking to digital banking. This has made financial services easier and more effective.

The customer-oriented change began with credit cards in the early 1990s. This was followed by ATMs in the mid-1990s, internet banking in the early 2000s, and SMS in 2004. With the growth of smartphones, the number of mobile banking users has reached 24.7 million by mid-2024. Digital wallet users have crossed 2.3 million by 2024, down from 5 lakh in 2020. This change shows how fast people’s inclination towards digital payments has increased in the last few years.

Nepal Rastra Bank (NRB) has made it mandatory for all commercial banks to have a digital platform (including QR payment). The number of merchants providing QR payment facility to customers increased from 40,000 in 2020 to 300,000 in 2024. Banks have expanded services such as digital account opening, online KYC and contactless payments. It also included special programs for women and farmers in rural areas.

Nepal Rastra Bank (NRB) has recently implemented a robust framework to ensure cybersecurity. Internally, banks have adopted automation, artificial intelligence (AI) and digital payment infrastructure, which have greatly improved transaction speed, cost and efficiency. Systems like Real Time Gross Settlement RTGS, Inter-Bank Fund Transfer (IBFT), Connect IPS have made the transactions between banks fast and hassle-free. This has led to the rapid promotion of a cashless economy.

Some banks have also started offering personalized offers on other ancillary services using AI. The campaign of offering discounts through digital payment by collaborating with hospitals, hotels/restaurants, marts, business owners and insurance companies has also made a stride in building an integrated digital system that can emphasize long-term bonds for customers.

The network, servers and security infrastructure used by Nepal’s banks are in accordance with international standards.TAG_OPEN_em_65 Globally, financial services based on blockchain, quantum computing, open banking, and AI are rapidly evolving {

The pandemic accelerated the use of digital services, which prompted the banking sector to speed up internal processes and extend digital services to customers. Digital transformation in banks has not only increased operational efficiencies but has also improved financial inclusion and customer experience in rural and urban areas.

Financial Sector Security Challenges

With the rapid growth of digital transactions in Nepal, the cases of cybercrime and financial fraud through online mediums are also on the rise. According to Nepal Police’s Central Investigation Bureau (CIB) and Cyber Bureau, 2,301 complaints were registered in 2019÷2020 related to cyber fraud and financial crimes. In a five-year span of 2023÷24, that number has increased to 19,730. This figure shows that there has been a 757 percent increase in such crimes. By the end of 2024-25, this number is expected to cross 25,000. This threatens to make Nepal one of the fastest growing countries in cybercrime. More than 20 percent of the total cybercrime cases are related to online fraud. This number is doubling every year. Of the 20,000 cases registered with the police in the last fiscal year, about 4,100 were related to online fraud.

It has also been found that crimes such as banking fraud and money laundering are being carried out using digital wallets or unknown people as a weapon for financial crimes. According to the CIB’s investigation, some criminal gangs have laundered money worth Rs 17.86 billion through digital payments.

The Cyber Prevention Policy issued by Nepal Rastra Bank for banks, Payment Service Providers (PSPs) and Payment Service Operators (PSOs) encourages restricting VPN usage, deactivating the bank’s app on the root or jailbroken mobile. Despite these standards and other measures to control internal risks, the financial risks associated with digital transactions are increasing. Some banks are spreading financial literacy through animated cartoons aimed at young people and social media.

Digital literacy cannot be increased by the unilateral efforts of banks alone. To ensure effective digital security, there is a need for integrated participation of all stakeholders. It requires the active role of government agencies, police, regulators, law enforcement agencies, media and the general public. Strengthening regulatory policies and frameworks, putting in place an efficient and effective system for detecting fraudulent information, promoting safe technology practices, and community-based digital literacy will help create a more secure, trustworthy, and sustainable digital transaction environment in Nepal.

Banks in Nepal have also started using modern technology. Some banks have even started using AI to detect and prevent fraud and financial crime. Although this technology is expensive, its use is becoming indispensable due to increasing complexity and risk.

Raising digital awareness and taking precautionary measures at all levels is a long-term safety measure for Nepal to avoid new risks that are increasing with the transformation of digital technology.

In a social and political environment that has long been challenging, the Genji movement caused a major disruption to digital financial transactions. At the same time, incessant rain after festivals like Dashain, Tihar and Chhath made the situation more complicated. The attack and arson on major data centers disrupted payment systems and digital services for a few days. Despite these grave challenges, Nepal’s financial institutions and foundational digital service providers demonstrated remarkable understanding, resilience, and agility to quickly restore and sustain their services, thanks to technological investments made in the previous year.

Blockchain, quantum computing, open banking, and AI-enabled financial services are rapidly evolving globally.TAG_OPEN_strong_61 Nepal is also rapidly following these technologies {

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The latest crisis highlighted the over-reliance on physical data centers, as a weak point, and the fact that cloud-based databases can be the formula for solutions. The cloud offers flexibility, emergency restorability, and extensibility, but it also requires adherence to global regulations related to data protection.

The damage done during the GenG movement reaffirmed the importance of investing in technology. It is still challenging to maintain this trust and confidence in the system, especially in times of crisis, as banks have not seen immediate returns even though they have invested heavily in it.

For future disruptions, Nepal needs to develop contingency plans, cloud-based backups, and data centers in multiple locations. There is a need to strengthen coordination between banks, regulators, government and security forces. At the same time, digital literacy and accurate information dissemination at the public level can reduce social instability dependent on misinformation. In addition, the use of AI can help in fraud detection and risk management.

It is also necessary to prepare a comprehensive contingency plan that covers situations of natural disasters, cyber attacks and social unrest. It will make Nepal’s digital transaction system more secure and sustainable.

Nepal’s banking and payments sector has shown a lot of enthusiasm towards new technologies especially digital payments. The QR code-based payment system has been recognized nationally, facilitating millions of transactions daily, promoting financial inclusion. After global payment services like Visa made chip-based cards mandatory, Nepal’s banks have also met the criteria for their implementation on time. The mobile banking apps and wallets developed in the country are state-of-the-art, user-friendly and secure. It is attracting consumers.

The networks, servers and security structures used by Nepal’s banks are in line with international standards. Blockchain, quantum computing, open banking, and AI-based financial services are rapidly evolving globally. Nepal is also following these technologies at a rapid pace. Nepali fintech companies are increasingly competing globally, recognizing the capabilities and entrepreneurship of individuals or experts skilled in information and communication technology (ICT). Nepali start-up AI company FuseSense has recently been listed on the New York Stock Exchange (Nasdaq), which is a strong example of Nepal’s technological prowess.

As Nepal’s banking technology evolves as per the local needs, it showcases a unique combination of local innovation and world-class quality. Since the investment in technology is expensive, only government support, regulatory incentives, and industry collaboration to ensure high returns will help deliver sustainable development, innovation and position Nepal as a rising player in global fintech. It also ensures data security and sovereignty of the country.

International Practice in Banking Technology and Nepal

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Nepal’s banking technology is rapidly developed but expensive. The results may be slower or slower. This has created a challenge for many fintech companies and financial institutions. Investing in new technology requires a lot of capital. There is an equal need for investment in maintenance, research and human resources. Therefore, the notion that technocracy reduces the operating cost of the bank is also wrong.

As Nepal has not yet moved towards a full-fledged cashless economy, there is a need to invest heavily in physical branches, employees and physical infrastructure.

To win the hearts of customers, banks need both human assistance and AI-based services since they need to provide service round the clock and seven days a week. While this increases costs, it is essential for customer trust. Billions of rupees are being invested in banking technology worldwide.

Nepal has been developing modern systems like QR payment, chip card, mobile wallet with its own skilled manpower. However, the challenge of continuous investment in cybersecurity, IT workforce protection and expansion of innovation remains.

Nepal’s banks invest in technology to maintain a balance between cost and innovation, not an optional choice, but an obligatory obligation. The sustainable growth of the country’s emerging digital financial economy is possible only if they are able to further broaden competitive service delivery and win customers’ trust to provide modern, secure and reliable financial services. For this, banks need to maintain a balance in their investment in innovation by continuously improving both human and digital services. It can also elevate financial and other non-financial transactions, including debt investment, cash payments, to a modern, secure and reliable level.

The writer Santosh Koirala is the president of the Bankers’ Association.TAG_OPEN_strong_59 (From the Economic Policy of the Society of Economic Journalists (SEJON))