NRB releases report suggesting adoption of USSD-based payment system for financial inclusion

KATHMANDU: Nepal Rastra Bank (NRB) has today released a comprehensive study report titled ‘A Study Report on the USSD-based Payment System and its Regulations: Suggestions for Nepal.’ The report explores the potential of the Unstructured Supplementary Service Data (USSD)-based payment system and offers crucial recommendations for Payment System Operators (PSOs), Payment Service Providers (PSPs), and regulatory bodies such as the Nepal Telecommunications Authority (NTA) to adopt this technology for advancing financial inclusion in the country.

USSD technology enables mobile users to carry out financial transactions through basic mobile phones without requiring internet connectivity, making it a vital tool for financial inclusion, especially in rural and underserved areas. However, the report emphasizes that implementing USSD payments should be a flexible option, rather than a mandated feature, for banks and financial institutions in Nepal, considering the evolving nature of the market.

Flexible Approach to USSD Adoption Recommended

The NRB report highlights the importance of adopting a proportionate regulatory framework for the USSD-based payment system, in line with the Consultative Group to Assist the Poor (CGAP)’s guiding principles. It recommends that regulatory measures should be the least restrictive, aimed at promoting financial inclusion, encouraging competition, and providing consumer benefits while being proportionate to the risk level. The report suggests that while USSD-based payments offer significant benefits, mandating their adoption by all banks and PSOs/PSPs may not be suitable for Nepal’s developing financial ecosystem.

The NRB study underscores that those institutions that find value in offering USSD services should be allowed to implement the system at their discretion, while others, especially those that would incur substantial capital expenditure (CAPEX) and operational costs, should not be forced to offer USSD payments. This flexibility is seen as crucial to maintaining commercial model neutrality and fostering a healthy, competitive environment in Nepal’s financial sector.

Role of the Nepal Telecommunications Authority

The report assigns a critical role to the Nepal Telecommunications Authority (NTA) in facilitating the implementation of USSD-based payments. It recommends that NTA mandate all Mobile Network Operators (MNOs) to provide USSD services for mobile financial transactions. Additionally, the NTA should explore the feasibility of implementing a common USSD code for all mobile financial services to ensure uniformity in customer experience.

To ensure equitable access, NTA is advised to issue regulations preventing discriminatory pricing for USSD gateway access among PSOs, PSPs, and Banks and Financial Institutions (BFIs). The authority should also work towards ensuring interoperability of USSD gateways across all MNOs, promoting seamless payment experiences for users.

Key Recommendations for Nepal Rastra Bank 

NRB’s role as a financial regulator is central to the success of USSD-based payments. The report strongly advises against mandating the adoption of USSD as a standard feature across all financial institutions, allowing those entities that see value in the channel to implement it at their own pace.

The report also emphasizes the need for interoperability between the USSD systems of licensed institutions and the USSD gateways of all MNOs. It further calls for NRB to establish transaction limits for USSD-based payments, reflecting the risks and limitations of the channel.

In addition, NRB is urged to direct payment service providers (PSPs) to conduct Enhanced Due Diligence (EDD) of agents involved in expanding USSD-based systems and to establish directives ensuring the confidentiality and security of data shared through the USSD channel. The report stresses the importance of consumer protection by setting up dispute resolution mechanisms and turnaround time (TAT) guidelines, jointly defined by NTA and NRB, to protect users of the USSD system.

Joint Responsibilities of NRB and NTA

Recognizing the intertwined roles of financial and telecommunication regulators, the report recommends a Coordinated Consultative Committee between NRB, NTA, and other stakeholders, including BFIs and PSPs, to address issues related to access, pricing, and quality of the USSD payment system. This collaborative approach is seen as essential for creating a robust payment system in Nepal.

The report also highlights the need for a Joint Dispute Resolution Mechanism to handle disputes arising from USSD payments, specifying clear roles and responsibilities for both NRB and NTA, as well as a fixed TAT for resolving disputes. To ensure user satisfaction, NTA is advised to introduce minimum quality standards for USSD services, particularly to control session drop rates, which can frustrate users and hinder widespread adoption.

Additionally, both NRB and NTA are tasked with setting cybersecurity standards for USSD-based systems to mitigate potential risks, along with jointly deciding the end-user charges for USSD transactions to make the channel more accessible and cost-effective.

Looking Ahead: USSD as a Tool for Financial Inclusion

The study concludes that USSD-based payments hold great promise for expanding financial inclusion in Nepal, particularly for people in rural areas and those without access to smartphones or internet services. However, the implementation of the system must be approached with flexibility, allowing market forces to shape its adoption while ensuring a supportive regulatory framework that prioritizes consumer protection and interoperability.

With joint efforts from NRB, NTA, and the financial sector, USSD payments could become a transformative tool in Nepal’s digital economy, helping bridge the gap in financial access and driving the country towards greater digital financial inclusion.