Nepal Rastra Bank Uncovers Major KYC Lapses in Digital Payment Sector, Heightens Scrutiny to Combat Financial Crime

Nepal's digital payment landscape is experiencing unprecedented growth and expansion, yet a recent report by the Nepal Rastra Bank (NRB) has cast a shadow over its security framework. The central bank's 'Payment System Oversight Report 2024/25' has revealed a startling lack of reliable customer data among Payment Service Providers (PSPs) and Payment System Operators (PSOs), raising significant concerns about the integrity of the nation's digital financial ecosystem.

The report highlights a critical vulnerability: during on-site inspections, a substantial number of institutions were found to be offering services without fully verifying their customers' Know Your Customer (KYC) details. This fundamental lapse in customer identification poses a severe threat, significantly elevating the risks of money laundering, financial fraud, and sophisticated cybercrimes. The central bank has voiced grave concerns, emphasizing that the absence of robust KYC procedures undermines the very foundation of financial security and trust.

For the fiscal year 2081/82, NRB conducted comprehensive on-site inspections of 16 licensed payment institutions, alongside a special inspection of one entity. The scope of this scrutiny covered major players in the payment system. Among the Payment System Operators (PSOs) inspected were Gateway Payment Service, PhonePe, and SmartChoice Technologies. On the Payment Service Provider (PSP) front, institutions like Khalti, eSewa, Bip, Nepal Digital Payment, iCash, FocusOne Payment, LenDen Sewa, Fintech International, DG Pay, Nepal PayTime, City Wallet, Chhito Paisa, and Smart Card were thoroughly reviewed. Notably, IME Digital Solution underwent a special inspection, indicating specific areas of concern.

Beyond the critical issue of unverified customer data, the inspections unearthed broader systemic weaknesses within these institutions. The NRB's assessment revealed a pervasive lack of sound governance, weak internal controls, lax operational procedures, and severe negligence in adhering to regulatory compliance. Specifically, many institutions failed to meet the prescribed standards for managing systemic risk, operational risk, settlement risk, and liquidity risk. This institutional fragility, occurring at a time when public confidence in digital transactions is steadily growing, threatens to destabilize the entire digital financial capital market, according to financial experts.

The central bank's oversight extends beyond digital wallets. It also monitored six commercial banks operating the Real-Time Gross Settlement (RTGS) system, which handles large-value transactions. Himalayan Bank, Shangrila Development Bank, NIC Asia Bank, Nepal SBI Bank, Gorkhaz Finance, and Shine Resunga Development Bank were among those whose RTGS systems were tested, with a primary focus on the security and reliability of their digital infrastructure. This broader monitoring underscores NRB's commitment to ensuring the robustness of the entire payment ecosystem.

The legal framework in Nepal mandates that every customer opening an account with digital wallet and payment services must have their details reliably verified through KYC. However, the intense competition for market share appears to have led some institutions to deprioritize stringent KYC verification, thereby casting doubt on the integrity of the financial system. Through this comprehensive report, the Nepal Rastra Bank has issued a stern message to all payment service providers: rectify KYC systems, strengthen risk management frameworks, and uphold uncompromising regulatory compliance.

Unverified customer data not only creates an environment conducive for illicit activities but also jeopardizes the capital and privacy of legitimate users. Consequently, the NRB has signaled its intent to implement even more rigorous monitoring and enforcement measures against such institutions in the foreseeable future. This decisive action is crucial to safeguard the financial system, protect investors, and ensure the sustainable and secure growth of Nepal's burgeoning digital economy.