Transforming banking transactions: The impact of connectIPS in Nepal

Introduction

Underpinning the Digital Nepal Framework 2019, eight sectors—digital foundation, agriculture, health, education, energy, tourism, finance, and urban infrastructure—have been strategically identified through extensive stakeholder engagement. The Framework program aims to assist Nepal in maximizing its development opportunities by using cutting-edge technologies and speeding up its social and economic progress. Among the eight sectors named Finance, the Government of Nepal mentioned initiatives such as the promotion of digital payments in Nepal and the digital payments campaign. In 2002, Kumari Bank ¹ led the way in Nepal by introducing digital payment services through the launch of online banking facilities for its clients. The Government of Nepal is trying to implement an internet-based payment system in Nepal to help Nepali citizens move from a traditional banking system to a modern digital payment system by promoting the convenience of the payment system. The growth of e-commerce in Nepal is inhibited due to the lack of a supporting ecosystem such as limited digital payment options. However, this is changing with the emergence of fintech start-ups such as eSewa ² and Khalti ³ which are expected to disrupt the payments landscape (Government of Nepal, Ministry of Communication and Information Technology and Frost and Sullivan, 2018).

With the implementation of digital payment methods in Nepal, the gap between the last country user and the nearest bank will no longer be an obstacle to the integration of formal financial services. Digital payments have evolved rapidly, with the COVID-19 pandemic igniting their mass adoption in Nepal. New payment instruments have evolved in the payment system, changing how people transact in banks. Such instruments are connected to instant payment system (IPS), quick response (QR) codes, cardless withdrawal, smart point-of-sale (PoS), contactless cards based on near-field communication (NFC) technology, virtual cards, etc. Further, e-commerce and PoS transactions have also increased after the pandemic. At the beginning of 2023, Nepal had 15.85 million internet users, accounting for a 51.6% internet penetration rate. There were 12.60 million active social media users, which constituted around 41% of the total Nepalese population. Additionally, there were 42.78 million active cellular mobile connections, exceeding the total population by 139.2% (KEMP, 2023). The digital payment revolution in Nepal has been propelled by several key factors. Government policies and historical initiatives have played a crucial role in promoting digital payments, aligning with the NRB’s mandate to develop a secure and efficient payment system.

Case: connectIPS

The connectIPS electronic payment system is developed and operated by regulatory bodies of Nepal, that is, Nepal Clearing House Limited (NCHL) which is approved and regulated by Nepal. Rastra Bank (NRB) as payment system operator (PSO), on October 12, 2018. The payment system was initially launched as a pilot testing project to facilitate the online government revenue and remittance services. Later, the service was made operational by the member of BFIs to the customers. The customers have to link their bank accounts(s) to the payment system after registering at https://connectips.com or through mobile application, payment process/gateway. connectIPS e-payment system is a standardized single payments platform to facilitate online payments and similar transactions. Such online payments could be online fund transfer, payment processor (gateway) for creditor/merchant payments or biller payments. Customer may link multiple bank accounts (same or different banks) and then use connectIPS e-payment system as an alternate channel for initiating online payments (Nepal Clearing House, 2017/18). The payment transactions are processed directly from/to the bank accounts and the transactions are normally immediate at the sender and receiver. The system is available round the clock through alternate channels of the web (https://www.connectips.com/), mobile App and payment process/gateway. This can also be accessed from the mobile/internet banking of major banks and financial institutions and App/Web of various mobile wallets (connectIPS, 2024). It may need one-time verification from their bank(s), or they can also use self-verification (incase bank permits) after which they can use the system. System of services including online money transfers, government revenue payments, and payments to creditors. In terms of volume of transactions, connectIPS covers about 40% of all large-value transactions (Bank, 2023). The system has been expanded to include additional services, such as paying credit card bills, topping up mobile wallets, and making payments to share brokers, accessible through both the online (web) version and mobile application. The per transaction limit is set for online payment for NPR 100,000 and up to NPR 5000 through mobile application. In the initial period, 44 banks and financial institutions have subscribed to the connectIPS e-payment system (https://www.newbusinessage.com/, 2018). The Nepali banking system faces challenges like low turnover, high lending rates, and inefficiencies, hindering financial inclusion and exacerbating urban-rural disparities. Currently, there are now 20 commercial banks (Class: A), 16 development banks (Class: B), and 16 financial companies (Class: C) directly associated as members of the connectIPS system. From the Annual report of FY 2022–23 published by Nepal Clearing House around 1,100,000 customers of the BFIs including 1.8 million bank accounts were linked within connectIPS system till the end of FY 2022–23. As of the latest report published by Nepal Rastra Bank (NRB), there are a total of 10 payment system operators (PSOs) and 26 payment service providers (PSPs) in Nepal. connectIPS is ranked in first position with a paid-up capital of NPR 100.64 million. connectIPS is an immediate or expedited payment system offering various channels (web, mobile, and gateway) for conducting payment transactions via one of the linked bank accounts, eliminating the need to load or unload funds like with mobile wallets. Several mobile wallets are also integrated with connectIPS to facilitate fund loading and unloading. connectIPS serves as a versatile payment processor, functioning as a gateway for fund transfers as well as biller and service payments.

The payment processor acts as an online gateway for transactions conducted on various service providers’ web portals, including those of merchants, government agencies (such as Financial Comptroller General Office, Tax, Loksewa ⁴ [Public Service Commission], Passport), Trading Management System, e-commerce platforms, travel and tour agencies, airlines, insurance companies, etc. (connectIPS, 2024). It facilitates fund transfers between own accounts, other bank accounts, connectIPS users (identified by a mobile number), or listed favorite accounts. Biller payments enable users to make third-party payments to service providers (creditors/merchants) directly through connectIPS channels, whether through the web or mobile app.

The use of connectIPS has surged especially after the COVID-19 pandemic (with the growth rates remaining as high as 1432.3% and 566% in 2019/20 and 2020/21, respectively). In 2021/22, the total number of connectIPS transactions has increased significantly (108.6%) and reached 39.6 million. Similarly, the rate of rejected transactions has decreased with just 25.9% of the total presented transactions being rejected in 2021/22. connectIPS system is an in-house developed system by NCHL as an overlaying service on top of the NCHL-IPS system. The integration module of the connectIPS system provides a mechanism for the banks to integrate their CBS with the NCHL-IPS system for their outward and inward transactions from/to the bank. There are additional APIs available to connect the bank’s existing channels (like Internet banking, mobile banking, or corporate channels) through which the transactions could be initiated by the end customers.

National payment switch

connectIPS e-payment system was implemented and in operation as a faster payment system as per NRB approval in 2018. In 2020, as part of the National Payment Switch (NPS) initiative in Nepal, there is a need to enhance the existing connectIPS e-payment system. This involves separating the retail switch and its alternative channels used by customers, creditors, and merchants of member institutions. Additionally, it aims to refine the system operated by NCHL (National Clearing House Ltd.), enabling it to initiate and process electronic payment transactions directly from or to bank accounts or stored value instruments (Nepal Rastra Bank, Nepal Clearning House, 2021). The NPS, currently being developed by NCHL by the Payment and Settlement Act, 2019, and the Payment and Settlement Bylaw, 2020, is a crucial infrastructure aimed at establishing interoperable payment systems for settling all domestic transactions within Nepal. A component of NPS, the retail payment switch (RPS), became operational in November 2021. NPS is the core infrastructure for routing and settlement of retail transactions to ensure interoperability of card and non-card-based payments within Nepal (Nepal Clearning House, 2024).

This system facilitates the settlement of retail payment transactions originating from IPS, connectIPS, and ECC systems through the Central Bank’s RTGS system. The NRB strategically aims to ensure that all electronic transactions in the country are settled through RPS and NPS. It comprises the Retail Payment Switch (RPS), handling non-card-based transactions and instruments, and the National Card Switch (NCS), managing card-based transactions and domestic card schemes. RPS operates as a real-time retail payment switch, supporting various instruments such as VPA-based payments, request pull transactions, interoperable QR codes, biller gateways, wallet interoperability, and PSO settlements. It also provides integration mechanism for the members to process their outward and inward transactions (Nepal Rastra Bank, Nepal Clearning House, 2021). The underlying channels or instruments allow the customers and merchants of the members for handling online payments.

A payment transaction shall be initiated by a payer customer and routed through the Originating Depository Financial Institution (ODFI) and transferred electronically for exchange and clearing, via secured communication channel to the Receiving Depository Financial Institution (RDFI) for necessary crediting at the receiver’s or Creditor’s/Merchant’s bank account. However, in case of pull (direct debit) transactions, it will be initiated by the payee customer electronically either for each transaction or based on pre-approved authorization of payee customer. The debit leg of the transaction is processed on immediate basis at the debtor bank on confirmation of availability of fund and account status, either by the system or by the member itself. The credit leg of the transaction is also processed on immediate basis with option of immediate credit or on deferred basis with settlement guaranteed. The final settlement between the BFIs shall be done on deferred net basis through RTGS system (Nepal Rastra Bank, Nepal Clearning House, 2021).

Automated clearing house

The Automated House in Nepal is Operated by the Nepal Clearing House Ltd. (NCHL), the Automated Clearing House (ACH) system stands at the forefront of modernizing Nepal’s financial infrastructure. NCHL oversees a range of payment systems and clearing services, with ACH being a cornerstone in enabling seamless electronic transactions across the country’s banking sector. Its role in enhancing efficiency and reliability within the payment ecosystem is paramount, underscoring its contribution to the ongoing evolution of Nepal’s financial landscape towards greater accessibility and technological advancement.

The ACH system in Nepal has significantly contributed to streamlining financial transactions, making them more efficient and convenient for individuals and businesses alike (isolutions.com.np, 2024). The Automated Clearing House system in Nepal is a secure electronic network that facilitates various financial transactions among banks and financial institutions by enabling efficient and seamless fund transfers between different banks, reducing the need for physical checks, cash transactions, and manual intervention. This system makes banking services more accessible by supporting the financial inclusion, reducing transaction and operational fees which are processed electronically to reduce the time required for transactions to clear, benefiting businesses with timely payments thus streamlining the transfer of funds within the Nepali financial landscape.

With its ability to handle batch processing, the ACH system efficiently manages transactions related to payroll, bill payments, and recurring payments. Automating these processes significantly reduces reliance on paper-based transactions and manual intervention.

Understanding how connectIPS works for customers

connectIPS simplifies financial transactions for Nepalese customers by allowing them to register with their email address and mobile number through their banks, creating an account that consolidates multiple bank accounts for unified management. connectIPS offers various services to facilitate digital transactions. These services cover a wide range of transactions, including government payments (taxes, passport applications, etc.), travel and tour bookings, school/college fees, stockbroker fees, insurance premiums, and more. These services are typically enrolled by member banks and financial institutions (BFIs).

To ensure transaction security system provides features like captcha verification, security questions, two-factor authentication supported by a mobile app that offers convenience and accessibility. It provides one-time password (OTP) to process the default transaction which is less than 5000 and requires two-step verification for the transaction more than that amount. It requires six digits pin to process transaction along with the two-factor authentication for transaction. The user also needs to verify the first logged in device with the two-factor authentication (as shown in Figure 1).OPEN IN VIEWER

Bank account linking process

To link and activate a bank account on connectIPS, users need to setup the nick name for the bank account that needs to be linked. Then the user is requested to manually enter their bank name, branch name, account number, and account name correctly provided by the respective bank. After the information are added the account need to be verified by the bank. For verification, users have the option to either download a form for manual submission at their respective bank branch or opt for self-verification if supported by their bank (as shown in Figure 2). Users have to do the transaction of less than a rupee for the self-verification process. The amount will be credited to the client account once the verification is completed. If the self-verification is not supported by the bank, they have to download the receipt, submit the print copy to respective branch/bank for verification. This process enables users to add and manage multiple similar accounts from various member banks and financial institutions through connectIPS. User can also select one default account that has the frequent transaction.OPEN IN VIEWER

Creditors listing

In connectIPS, a Creditor Listing allows users to maintain a database of creditors to whom they owe money. Beneficiary bank account details get registered within the connectIPS system as creditors, allowing them to receive payments directly into their designated bank accounts via the connectIPS web portal and mobile app. Service providers/merchant can also integrate their web portal with the payment processor (gateway) of the connectIPS, corresponding to which NCHL will provide the necessary APIs of the payment processor such that the payment collection can be initiated from the web portal itself against the service rendered. Service providers/Merchants/Creditors can consult their bank for creditor listing in connectIPS system (connectIPS, 2024). A variety of entities, including commercial creditors/merchants, merchant banks, insurance firms, credit card bill payments, e-commerce platforms, educational institutions, and utility providers, utilize the connectIPS system. Moreover, the system plays a vital role in revenue collection for various government offices such as the Financial Controller General Office (FCGO), the Inland Revenue Department (IRD), the Public Service Commission (PSC), the Office of Company Registrar (OCR), the Nepal Stock Exchange Ltd., the Social Security Fund (SSF), and the Citizen Investment Trust (CIT) (connectIPS, 2024). Service providers, merchants, and creditors interested in registering with the connectIPS system can seek guidance from their respective banks for creditor listing. It ensures accurate and timely transactions while enhancing overall financial management within the platform.

connectIPS for billers

Most biller payments are free for customers, but there’s a transaction fee of NPR 2 to 8 for fund transfers and some biller payments, depending on the transaction amount. The NCHL team developed the system with strong security features meeting international standards for e-payment systems. Payment data is securely captured, processed, and transmitted with end-to-end encryption (as shown in Figure 3). No customer data, except payment status, is shared with merchants. Authorization requests are verified using a connectIPS username and other credentials. Users are advised to keep their login credentials secure and not share them. BFIs customers with self-verification enabled can self-verify and activate linked bank accounts in connectIPS, avoiding the need to visit bank branches. The per transaction limit for self-verified accounts is up to NPR 100,000, subject to bank policies. NCHL provides connectIPS through BFIs’ mobile banking apps, NCHL’s web portal, and mobile app. The system employs security measures like complex passwords, CAPTCHA challenges, personalized image and phrase verification, and dual authentication for transactions, safeguarding against unauthorized access and fraud. The transaction limit for connectIPS e-payment is up to NPR 1,000,000 through the web platform and NPR 100,000 via the mobile application.OPEN IN VIEWER

Affordable pricing: transaction fees and limits

The fee schedule from Nepal Clearing House Ltd. (NCHL) effective from January 15th, 2023 outlines fees for various interbank transactions processed through the connectIPS (RPS) system. The fees are categorized into two sections: General Transaction Fee and GoN Payment Transaction Fee. The General transaction fee applies to all transactions except for payments made to the GoN. The GoN payment transaction fee applies specifically to GoN payments including tax payments. The fee amount is based on the transaction amount (NPR 2 to 8). The liability of the above fee remains on Debtor. Transaction Amount Slab based Fee Structure for general customers of BFIs and PSPs is revised as follows (Nepal Clearing House, 2017/18):

In the Web channel, transactions of up to NPR 2 million per transaction and per day are allowed, with a maximum of 100 transactions daily. On the other hand, the Mobile channel restricts transactions to NPR 2,00,000 per transaction and per day, also with a maximum of 100 transactions daily. These criteria establish the transactional capabilities and limits for each channel, ensuring efficient and regulated financial operations. As per the Finance Ordinance 2024, Clearing House Services, which were previously under the VAT Exemption List, have been delisted. Hence, an additional 13% VAT payable to the GoN shall be applicable to the above-mentioned fee (NCHL, 2024).

Challenges

connectIPS faces several challenges as it seeks to transform digital payments in Nepal. Low digital literacy, particularly in rural areas, presents a barrier to widespread adoption, necessitating educational initiatives to familiarize users with the platform. Limited internet connectivity in some regions further complicates access to connectIPS, hindering its potential reach. Moreover, concerns regarding cybersecurity and data privacy may deter users from fully embracing digital transactions, emphasizing the importance of robust security measures and building trust among users. Additionally, Nepal’s infrastructure may require upgrades to support the increasing demand for digital payments facilitated by connect IPS, while competition from entrenched cash transactions poses a significant hurdle in changing consumer behavior. Adapting to evolving regulatory environments and compliance standards adds another layer of complexity for connectIPS, requiring flexibility and responsiveness to regulatory changes to ensure continued operations and compliance. Despite these challenges, concerted efforts from stakeholders can help overcome barriers and unlock connectIPS’s potential to revolutionize digital payments in Nepal. Cybersecurity threats highlight the need for robust measures in digital payments. Limited digital skills in remote areas challenge Nepal’s payment firms.

Political instability leads to regulatory uncertainty. Interoperability issues hinder payment convenience. Infrastructure limits digital service reach. Unclear regulations affect payment efficiency. Cultural preferences for cash hinder digital adoption. Low revenue streams threaten payment company sustainability. The regulatory limits on online transactions and inadequate telecommunication infrastructure in Nepal pose initial barriers to the flourishing of e-payment systems. However, for these systems to contribute meaningfully to the national economy, the government and NRB must prioritize developing favorable policies and frameworks. Yet, the inherent nature of digital transactions makes them susceptible to monitoring by governments, payment companies, and hackers alike. Therefore, safeguarding against cybersecurity threats and ensuring data privacy becomes paramount for the security and integrity of digital payment systems. Stringent security measures are essential to prevent fraud and protect user information, thereby establishing a foundation of trust necessary for widespread adoption and sustainable growth in digital payments. The hacking of connectIPS highlighted vulnerabilities in online banking systems, raising concerns over cybersecurity measures and user account protection.