A solid understanding by the fintechs of the root causes behind lesser adoption of digital financial services will lead to new innovative products that are built ground up and fit in the Nepali context. This ‘first principles’ approach can then be augmented with ‘design thinking’ practices to provide digital financial solutions that best fit the need of all the stakeholders
When the Governor of Nepal Rastra Bank inaugurated a Quick Response (QR) code for merchants in Naxal Vegetable Market, it created a wave of change around the nation among agro-merchants, consumers and aspiring fintech enthusiasts. Similarly, Kishan app, an initiative of Agriculture Development Bank, has enabled farmers, agro-merchants and banks to digitally disburse agro-loans, seamlessly make payments, monitor the loan expenditure and provide a digital lifestyle for farmers at their fingertips. This also has facilitated the bank to achieve the compliance requirement of minimum percentage of credits to be allocated to agriculture as per the Monetary Policy 2020/21.
With over 35 million GSM mobile service subscriptions in Nepal, mobile devices are being used for a multitude of services, from communication to digital financial services. Payments via smart devices are quick, seamless, secure and extensible for multiple products and services. If people around the country adopt digital finance platforms, the goal of financial inclusion can be easily achieved. A ‘digital rush’ is observed among stakeholders such as the banks, financial technology solutions providers (tintechs), payment gateways, service aggregators, wallets, merchants and consumers in adopting digital financial platforms.
However, the consumers of digital financial services number 2.5-3 million only.
A significant portion of digital finance service subscribers are inactive, and only very few are contributing to the digital payments ecosystem, only about 6.5% of total payments in the country. Digital finance service providers are investing on a large scale, offering more digital services and a reduction in transaction fees. At the same time, consumers and merchants are demanding more and more services, real-time settlements, low or no transaction fee. For digital finance service providers, this has created an ‘investment black hole’ demanding lots of resources. Digital finance services need to be economically viable, but the return from such investments is not yet justifiable.
Although, the stakeholders of digital payment ecosystems seem to be on the same page in offering innovative products in the Nepali market, there, however, seems to be huge ‘information asymmetry’ in understanding the market needs by fintechs. Fintechs, driven by tech-savvy professionals, aim for superior consumer experiences in their digital offerings. However, many business processes have key pain points that are yet to be exploited for digitization by fintechs.
For example, after agroloan disbursement by banks, misuse of the credits in non-agro purchases is highly probable. Hence, Agriculture Development Bank initiated the Kishan project, where the mobile app allows payment of agro-loan amount to registered agro-merchants only.
A solid understanding by the fintechs of the root causes behind lesser adoption of digital financial services will lead to new innovative products that are built ground up and fit in the Nepali context. This ‘first principles’ approach can then be augmented with ‘design thinking’ practices to provide digital financial solutions that best fit the need of all the stakeholders.
M-Pesa project in Kenya is another example of such an innovation that reduced crimes of looting and harming human life by introducing secure mobile-money service.
Fintechs can broaden their understanding of market needs and establish their first principles by using contemporary technologies, such as artificial intelligence and machine learning that mine useful insights from market data.
Latest advancements in these technologies can also handle sparse and missing data. Decisions made by analysing statistical data are more appropriate than decisions made by gut-feeling.
Fintechs also need to establish business use cases where their solutions make sense of efficiency, effectiveness and compliance.
As consumers and merchants are too tightly integrated with fintech solutions, fintechs have abundant information about their users. Fintechs can play a significant role in bridging the gap in information asymmetry by managing identities, discovering new information and brokering information.
Similarly, the gap in service delivery, such as financial services offered by commercial banks to be consumable by customers of financial institutions and cooperatives can also be bridged by fintechs.
The vastness of value web that fintech solutions create can sometimes overwhelm the stakeholders.
Fintech solutions aim to achieve efficiency and effectiveness in business processes, but fintechs need to be mindful of compliance requirements. As many innovations are yet to be regulated in Nepal, a riskbased approach in understanding uncertainties and mitigation strategies is also important for innovative projects. Nepal ranks 94th in the World Bank’s ranking for ease of doing business.
Lack of appropriate regulatory framework, policies, laws, operating guidelines, investment, human resources, integration with legacy systems, merchant and consumer awareness are making innovation a big challenge in Nepal.
While the cost of doing business in Nepal is said to be high, investment in fintech must cater towards identifying the first principles and executing innovative projects using design thinking practice. Change for the sake of change is not desirable, neither can it be confirmed that modern practices are always better than the established ones.
From ordering pizzas for home delivery to digital agro-lifestyle, such innovations enable efficiency, effectiveness and compliance for the greater good of the nation. Every innovative idea needs to be traced towards the needs of stakeholders, and financial inclusion at large.
Parajuli is chief innovation officer, Nepal Payment Solution
A version of this article appears in print on December 28, 2020 of The Himalayan Times.
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