E-wallets and Operation of Payment Service Providers

With ever-growing use of digital modes of payment in Nepal, e-wallets have established itself as a reliable medium. An electronic wallet (e-wallet) is a type of Payment Service Provider (PSP) that holds electronic money (e-money) and operates on internet based digital platforms accessible through a mobile or tablet. The promotion of digital payments by the Payment Systems Department of Nepal Rastra Bank (NRB) along with the mass usage of online electronic payments during the Covid 19 pandemic generated a windfall for payment institutions. The establishment of Payment Systems Department (formally known as Payment and Settlement Department) in July 2015 was an important step in the process of modernising the payment system in Nepal. After NRB was entrusted to regulate and supervise payment institutions, PSP companies acting as mediators between banks and their customers through the non-use of bank notes for payment of services or goods, have provided more convenient payment services to the public.

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Starting a PSP (including E-wallet) Business

Anyone who wishes to run an e-wallet business must hold the relevant payment system licence granted by the Payment Systems Department. Before getting such licence, the interested party must follow two major steps of firstly getting a Letter of Intent from NRB followed by registering a company. If the PSP wishes to operate card transactions, then it must have at least Rs 50 million capital, however if PSPs intend to operate transactions through telecom technology or web, then that company should have minimum Rs 10 million capital. Each PSP company must have a Board of Directors with three to seven directors, and if such company is public limited then there should be at least one ‘Expert Director’. Every PSP is required to execute a Settlement Agreement with a commercial bank of Nepal before commencing service. As per such agreement, the settlement account of that PSP is used to make payment liabilities, reconcile and settle the transactions of PSP customers. Every PSP should be mindful about maintaining adequate liquidity in its settlement account. Transaction amount must not exceed the balance amount held in the settlement account while facilitating payments of customers. A PSP may not carry out any single operation related activity on its own. It can appoint an agent to carry out some of the marketing, payment instrument issuance and other services by appointing an agent. Details of such agent should be made public and NRB must be informed about it. Ultimately, the PSP is responsible for the works carried out by an agent on behalf of that PSP. Likewise, PSP can also outsource some of the payment related activities, customer support and grievance services to an outsider and the agreement for it should be recorded with NRB. Such outsourced institution has the duty to comply with payment related laws of NRB, however just as in the case of an agent, the PSP is responsible for the payment, reconciliation and settlement of all transactions conducted through outsourcing.

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What can e-wallet be used for

The e-money stored in e-wallets can only be in Nepali currency and such money can be used to pay off customer’s liabilities like mobile recharge and payment of utilities, internet, cable television and telephone fees. An e-wallet can offer interest on the balance amount provided that the e-wallet institution procures prior approval from NRB. Similarly, schemes like cash back, bonus or other discounts can be provided to e-wallet holders after notifying Nepal Rastra Bank.

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What an e-wallet cannot be used for

Currently, e-wallets cannot be used to pay for goods and services outside Nepal. E-wallets are also restricted from offering loans (credit) to its customers. However, on a brighter note, the Digital Lending Related Guideline of 2022 (2078 BS) issued by NRB has paved a way for possibly permitting PSPs to a play a vital role as an agent of banks and financial institutions (BFIs) during digital lending.

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Safety and security of PSP activities

Perhaps unknown to the general public, payment institutions have to abide by several customer safety and service security requirements imposed by NRB that has resulted in regular customer protection. In brief, some of the important security compliances that PSPs should observe are formulating and implementing policies for disaster recovery and disaster management, set up disaster recovery site, conduct annual system audit, use 3D (three domain) Security for authentication of CNP (Card-Not-Present) transaction, fulfil ISO 2700 standards, and insure the amount held in the e-wallet. Additionally, e-wallet institutions are also required to make daily notifications and periodic reporting to the Payment Systems Department of NRB regarding its transaction, audit and compliance of security standards. The aforementioned department can also make on-site inspection of payment institutions to review the status of compliances. The measures adopted by NRB has been effective in protecting the safety and security of payments and customer privacy. The Nepali public is swiftly switching to the use of digital modes of payment as it is fast, convenient, more secure and does not require a person to bear the risk of carrying cash all the time. The adoption of digital payments in daily life has been seen as ride-hailing apps, restaurants, cafes, and shops like kirana pasals use digital payment systems like Khalti, eSewa and IME Pay increasingly. This is one of the biggest reasons why the payment industry is being populated by e-wallets nowadays. The steady rise of e-wallets can be expected in the future as NRB has been continuing efforts in developing policies that promote modernisation of digital payments in Nepal.

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Nirvana Rawal Nirvana Rawal is an Associate with Pioneer Law Associates and is a corporate lawyer focusing on Foreign Investment, Corporate Compliances and Payment matters.  

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Divya Khadka Divya Khadka is an Associate with Pioneer Law Associates, and is also a corporate lawyer focusing on Foreign Investment, Corporate Compliances and Payment matters.