Nepal’s Digital Adoption – Removing the Barriers to Going Digital

The lack of affordable broadband internet access, according to the World Bank, has hindered the ability of individuals and businesses to fully utilize digital technologies, creating significant gaps in their adoption

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More ordinary Nepalis are embracing digital ways of doing things from online shopping to digital payments and banking. However, government agencies and private businesses are lagging in terms of adopting new technologies leaving consumers to wait to reap the benefits of a fully-fledged digital economy.

According to a World Bank report titled ‘South Asia’s Digital Opportunity: Accelerating Growth, Transforming Lives’, despite some progress, government bodies and the business sector in Nepal are falling behind in the digital revolution.

“Compared to other South Asian countries, broadband internet usage in Nepal is yet to gather significant momentum,” reads the report. The Washington DC-based multilateral agency has highlighted higher data prices, unreliable coverage, and higher mobile handset prices as factors hindering the use of broadband services. “An entry-level mobile broadband package is about 2.75 percent of the gross national income (GNI) per capita in Nepal, which is higher than the 2 percent threshold for affordability,” states the report, adding, “The cost for a fixed-broadband basket with monthly data usage of (a minimum of) 5 GB stands at 2.30 percent of GNI per capita, which is also beyond the affordability threshold of 2 percent.”

Despite the proliferation of digital businesses, especially new technology startups focusing on areas like education, fintech, and e-commerce, mainly over the past decade, Nepal scores lower than India, Pakistan, Sri Lanka, and marginally higher than Bangladesh, in the Digital Entrepreneurship Index. The World Bank expects the growth of digital startups in Nepal to accelerate in the next five years. According to the report, Nepal’s e-commerce sector is valued at close to USD 30 million and is experiencing a growth of more than 40 percent per year. “Even so, e-commerce is still nascent, with limited retail infrastructure to support digitization and few digital payment options,” reads the report.

The lack of affordable broadband internet access, according to the World Bank, has hindered the ability of individuals and businesses to fully utilize digital technologies, creating significant gaps in their adoption. The report also points out that broadband internet usage in Nepal is yet to gather significant momentum compared to other South Asian countries.

Experts say these hindrances can be overcome if the government is serious about adopting digital technologies.

“While it is easy to talk about the importance of digital transformation for government, we have yet to see any concrete efforts towards this goal. How many government agencies accept digital payments or allow for the submission of digital bills? It is clear that the government lacks the vision and initiative to truly embrace the digital age,” said Amit Agrawal, founder of Khalti, a leading digital payment service provider in Nepal.

As an example, Agrawal cites two government agencies that are always packed with long queues of service seekers. “The Nepal Electricity Authority has started accepting digital payments. However, you can’t pay bills before 10 in the morning, and after 12 at night. How does a service like this aid in digital transformation? Likewise, the Department of Transport Management accepts digital transactions to clear vehicle taxes. However, you have to go to the office to get the official seal in your vehicle registration book. The hassles people are facing in this regard is another story. But if you have to physically visit the office even after going digital, no service seeker would again want to clear their bills digitally,” said Agrawal.

The covid-19 pandemic is seen as an unforeseen event that accelerated digital transformation across the world. However, only a few Nepali firms and government agencies began using or increased the use of digital platforms during the pandemic. The World Bank report states that 19 percent of businesses and government agencies adopted digital technologies, while this rate stands at 28 percent in Sri Lanka, 45 percent in Pakistan, 46 percent in Vietnam, and 38 percent in Cambodia.

The report suggests that Nepal could improve the number if it takes steps to improve the trust ecosystem as the country currently ranks 94th among 181 countries in the 2020 Global Cybersecurity Index. It suggests strengthening personal data and consumer protection.

The government claims that Nepal has enjoyed incredible success in digital adoption compared to its neighbors. The government has compared the penetration of mobile with digital adoption, but experts have different opinions.

“We often hear that internet and smartphone penetration has exceeded 100 percent. It is true. But the number is above 100 percent as one person has two phones and two SIM cards,” said Sanjib Subba, CEO of Nepal Electronic Payment System (NEPS). “To improve digital adoption, the cost of bandwidth internet must be lowered. Not only the internet price, but the quality of the internet also is not as per the expectation. The internet speed in Nepal is also not monitored.” According to him, the focus of the government should be on building proper infrastructures so that the pace of digital adoption accelerates.

Subba is of the view that leaving all the hurdles behind, the will of the government matters the most when it comes to developing a comprehensive digital ecosystem. “The government has biometrics data of at least one-third of the country’s population. This means state agencies have succeeded in collecting data but it has not been centralized. It can be centralized to develop electronic KYC (know-your-customer). But this process has also been delayed,” said Subba.

Agrawal of Khalki says that when it comes to digital adoption, there are a few first steps for it. According to him, the first is improving internet quality. “Second is centralizing KYC, and third is making payment system hassle-free,” he said, adding, “How many identity cards do we need? From citizenship to voter cards to licenses, we have many identity cards. The government should make everything simple.”

For a long, handset market prices have remained expensive with Nepal ranking 115th out of 134 countries in terms of device affordability. The high price of devices, especially smartphones, high customs tariffs, and lack of digital literacy has contributed to these digital access gaps. “As handsets are costlier, the government can work to bring the device manufacturers into Nepal. The local market prices of mobile devices can go down if the handsets are assembled locally,” says Subba.
The lack of a national payment switch in Nepal has forced banks and financial institutions (BFIs) to pay a hefty price for digital transactions through international payment gateways. Nepal is still in the process of developing a National Payment Switch, which would make payment systems interoperable. Experts say Nepal needs to develop a national payment switch as early as possible.

Currently, the Nepal Clearing House Limited (NCHL) is working on establishing and operating the national payment switch. The NCHL has divided the payment switch project into two phases. The first phase will enhance the Retail Payment Switch for enabling non-card-based transaction interoperability through the enhancement of the existing National Payment Interface (NPI) and connectIPS Retail payment switch for routing and settlement of transactions along with establishing a QR scheme. In the second phase, NCHL plans to implement interoperability of card-based transactions through the rollout of the Interoperable Card Switch and Domestic Card Scheme for Nepal.

The lack of a large digitally skilled workforce, difficulty in establishing operations, and issues relating to remittances and international payments have created barriers to the entry of large multinational digital firms in Nepal.

Despite showing some flaws, the report appreciates Nepal’s efforts in basic connectivity. “About 75 percent of Nepal’s population uses the internet. There are about 18 million mobile internet and broadband subscriptions (equivalent to about two-thirds of the population) and around 7 million fixed broadband subscriptions,” says the World Bank.

Despite this recent progress, internet service is primarily concentrated in urban areas. “This is due to the potential of better returns in urban areas and also due to persistent barriers to market entry,” reads the report.

The report has suggested that Nepal can improve its digital connectivity by focusing on four key points. First, by increasing competitive pressure on the market, through the enforcement of regulations and licensing conditions on all networks including rollout obligations, and infrastructure sharing (among networks and across sectors).

Second, by updating the telecommunications legislative framework to align with international good practice and to respond to emerging technology and business trends. Third, by implementing measures to support digital inclusion, such as programs that de-risk private investments in less commercially-viable and high-cost areas (e.g., mountainous areas), rationalizing taxes and fees to reduce the burdens on lower-income consumers, and improving access to devices for rural and low-income households and individuals. And fourth by accelerating the deployment of infrastructure and supporting ongoing rural telecommunications development programs.

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