Digital Payment’s Role in Good Governance

October 23, 2024

1. Introduction

As countries face the challenges of the digital age, the need for transparent, accountable, and efficient governance has become more important than ever. In this context, digital payments have emerged as a cornerstone of the modern economy, revolutionizing how transactions are conducted across the globe. By enabling instant, secure, and convenient financial exchanges, digital payment systems have significantly reduced the reliance on cash, facilitated global commerce, and expanded access to financial services. From mobile wallets to online banking, these technologies have not only streamlined everyday transactions but also played a pivotal role in driving economic growth, fostering financial inclusion, and enhancing the efficiency of both private and public sector operations.

Digital payment was first introduced in Nepal by Kumari Bank in 2002, marking the beginning of the country’s journey into digital financial services. Today, more than five digital payment platforms operate in Nepal, alongside e-banking services provided by the majority of banks. This digital shift has been met with rapid adoption, as evidenced by the significant growth in digital transactions reported by Nepal Rastra Bank (NRB). These trends reflect the rapid growth of digital payments in Nepal. From the bustling markets of Kathmandu to the remote villages in the Himalayas, digital payments are empowering people and making government operations, trade, and service delivery more efficient. As Nepal stands on the brink of this digital transformation, the role of digital payments in fostering good governance cannot be overstated.

2. Role of Digital Payment in Good Governance

The UNDP has identified eight core principles of good governance, including participation, inclusion, transparency, accountability, efficiency, responsiveness, consensus orientation, and the rule of law. (8 Governance Principles, Institutional Capacity and Quality, 2011). Among these, five principles: inclusion, transparency, accountability, efficiency, and responsiveness are particularly influenced by the adoption of digital payment systems.

2.1. Inclusion

In many developing countries, including Nepal, a significant portion of the population remains unbanked, often due to geographical barriers, lack of infrastructure, or socioeconomic challenges. Digital payment systems help bridge this gap by offering a more accessible and convenient alternative to traditional banking. This not only brings financial services to the doorstep of those previously excluded from the formal economy but also empowers them to participate more fully in economic activities, improving their quality of life. According to Nepal Rastra Bank, mobile banking users in Nepal experienced a staggering 1117.32% increase from 2016 to 2023, while internet banking users saw a substantial 260.58% growth during the same period.

2.2. Transparency

By digitizing payments, governments, businesses, and individuals can create an auditable record of every transaction, which is easily traceable and verifiable. The study by Tenace et al., which analyzed data from 111 developing countries between 2010 and 2018, showed that increased digital transactions were associated with lower levels of corruption (Setor et al., 2021). For example, when government payments, such as salaries, pensions, or social welfare benefits, are made digitally, there is a clear record of who received the payment, when it was received, and the exact amount. This transparency ensures that funds are used as intended and that any discrepancies can be quickly identified and addressed.

2.3. Accountability

Unlike cash payments, which are difficult to monitor, digital transactions leave a clear audit trail that allows for easy tracking and verification. This ensures that every payment is accounted for, making it harder for unauthorized or under-the-table dealings to occur. Additionally, digital payment systems enable real-time oversight of the flow of funds, allowing governments and organizations to monitor public spending more effectively. McKinsey & Company has conducted research indicating that digital payments can provide a clear audit trail, making it easier to track and verify transactions, which in turn can improve accountability. (Anan et al., 2022).

2.4. Efficiency

Unlike traditional cash-based systems, which involve manual handling, counting, and transportation of money, digital payments are processed instantly and electronically. This immediacy eliminates the delays typically associated with physical transactions, enabling governments to disburse funds quickly and accurately. The UK Government Digital Efficiency Report highlights significant savings and efficiency gains from digitizing government services. The report also emphasizes that digital services can improve efficiency by providing faster and more reliable service delivery, reducing the time required to process transactions, and enhancing overall service quality. (Digital Efficiency Report, 2012).

2.5. Responsiveness

In times of crisis or when rapid action is required, digital payment systems enable governments to disburse funds swiftly and directly to those in need. Moreover, digital payments facilitate a more responsive and citizen-centered approach to public service delivery. When payments for public services such as utility bills, taxes, social security, or fines are made digitally, the entire process becomes faster and more convenient for both the government and the public.

3. Challenges

Implementing digital payments as a tool for good governance comes with several challenges. While digital payments offer numerous benefits, these challenges can hinder their effectiveness and need to be addressed to fully realize their potential. Here are some of the key challenges:

  • In many developing countries, including Nepal, large portions of the population still lack access to reliable internet connections, especially in rural and remote areas. This digital divide can exclude significant segments of the population from benefiting from digital payment systems.
  • Even where internet access is available, low levels of digital literacy can prevent people from effectively using digital payment platforms. Many individuals, particularly in older age groups or low-income communities, may find it challenging to adopt and trust these new technologies
  • As digital payments involve sensitive financial and personal data, they are vulnerable to cyberattacks and data breaches. The rise of digital payments has also led to an increase in fraud, such as phishing attacks, fake payment apps, and identity theft.
  • For small businesses and vendors, the costs associated with setting up digital payment systems, such as acquiring POS terminals or paying transaction fees, can be barriers slowing down the adoption process.

4. Conclusion

In conclusion, digital payments hold significant potential to advance good governance by enhancing transparency, accountability, efficiency, and inclusivity within governmental operations. For a country like Nepal, embracing digital payments could be a transformative step toward overcoming long-standing challenges in governance, particularly in reaching underserved populations and reducing corruption. However, the successful implementation of digital payments in governance is not without its challenges. Issues such as the digital divide, limited infrastructure, cybersecurity risks, and the need for a supportive regulatory framework must be addressed to fully realize the benefits of digital payments. Ultimately, for digital payments to play a meaningful role in good governance, a concerted effort is required from policymakers, financial institutions, and technology providers to address these challenges and create an environment where digital transactions are accessible, trusted, and seamlessly integrated into the fabric of public administration.

5. Recommendation to Government and Institutions

  • Invest in expanding digital infrastructure, especially in rural and underserved areas, to ensure that all citizens have access to reliable internet and digital payment services. This includes improving mobile network coverage, increasing the availability of Point-of-Sale (POS) terminals, and supporting the development of digital payment platforms.
  • Launch nationwide digital literacy campaigns to educate citizens on how to use digital payment systems safely and effectively. Focusing on reaching marginalized and older populations who may be less familiar with digital technology.
  • Strengthen cybersecurity measures to protect digital payment systems from fraud, data breaches, and other cyber threats. Implementing robust data protection regulations to safeguard users’ personal and financial information, ensuring that digital payments are secure and trustworthy.
  • Establish a clear and comprehensive regulatory framework for digital payments that promotes innovation while ensuring consumer protection. This framework should include guidelines for interoperability between different payment platforms, standardization of payment processes, and clear rules for handling disputes and grievances.
  • Encourage interoperability between various digital payment platforms and financial institutions to create a seamless payment ecosystem. This will reduce fragmentation, lower transaction costs, and make it easier for citizens to use digital payments across different services and platforms
  • Accelerate the integration of digital payments into government services, such as tax payments, social welfare distribution, and public utility payments. This will increase transparency, reduce leakages, and make it easier for citizens to interact with the government.

The views and opinions expressed in the piece above are solely those of the original author(s) and contributor(s). They do not necessarily represent the views of Governance Monitoring Centre Nepal and/or Centre for Social Change.

References

Author Introduction

Nurjang KC is a Professor of Economics Education at Butwal Multiple Campus, Butwal, where he also serves as an Associate Professor. With over two decades of experience in the field of economics, he has been actively involved in various research endeavors. Most recently, he was awarded the Faculty Research Grant in 2024 by the University Grants Commission for his research titled "Corruption as a Challenge to Good Governance and Sustainable Development." In addition to his academic work, he is currently serving as a distinguished expert member of the Municipal Education Committee of Butwal Sub-Metropolitan City.