The recent decline in electronic transactions in Nepal highlights a shift in consumer behavior that can largely be attributed to recent changes in government policy and the associated costs of using digital payment methods. According to data from Nepal Rastra Bank (NRB), electronic payments surged to an all-time high during the first month of the current fiscal year (mid-July to mid-August), with over Rs 12.7 trillion processed through digital channels. This was followed by a sharp decline in the subsequent months, with payments dropping by Rs 4.43 trillion in mid-August to mid-September, and another Rs 1.47 trillion in mid-September to mid-October.
One of the main drivers of this decline is the government’s recent shift in its Value Added Tax (VAT) policy. In particular, the introduction of a fixed charge of Rs 11 on small transactions has made digital payments less appealing to many consumers. In the past, a VAT refund system offered a 10% rebate on transactions between Rs 1,000 and Rs 100,000 conducted via mobile banking, internet banking, wallets, and debit cards. This incentive helped encourage people to use electronic payment methods. However, the government decided to discontinue this VAT refund for platforms such as Esewa and PhonePay in the current fiscal year, replacing it with a fixed charge. As a result, the additional cost of using digital payments has caused many consumers to revert to cash transactions, which they see as simpler and more cost-effective.
Despite the overall decline in transaction volume, some payment methods, such as IPS (Interbank Payment System), Connect IPS, and debit cards, have seen increased use. This suggests that while the broader trend points to a preference for cash, certain digital payment methods remain attractive, likely due to lower fees or broader acceptance. On the other hand, methods like internet banking, wallet loads, branchless banking, and e-commerce payments have experienced a decline, indicating that consumers are gravitating away from platforms where the cost-benefit ratio is less favorable.
The drop in electronic transactions reflects how sensitive consumers are to transaction fees and incentives. With the added burden of VAT and other transaction charges, many people are opting for cash payments, which seem more straightforward and free of additional costs. In the long term, the government may need to reconsider its VAT and fee policies, perhaps by reintroducing VAT refunds or reducing transaction fees, to reignite the growth of digital payments. Public education campaigns to highlight the convenience and security of digital payments could also help shift consumer behavior back toward electronic channels.
While Nepal saw an initial surge in electronic transactions, recent policy changes and rising transaction costs have caused a significant decline in their use. Reassessing VAT and fee structures, along with reintroducing incentives, could play a crucial role in encouraging consumers to adopt and maintain digital payment methods.
