E-commerce payment systems are a critical part of the e-commerce ecosystem. They allow customers to pay for goods and services online. There are a variety of e-commerce payment systems available, each with its own advantages and disadvantages, and the mix used in Nepal is very different from the mix in countries where most people carry credit cards.
Learning Objectives
By the end of this chapter, you will be able to:
- Identify the parties in an online card transaction and the role of a payment gateway.
- Compare cards, digital wallets, mobile and QR payments, bank transfers, and cash on delivery.
- Explain the limitations of online credit card payments.
- Describe B2B and bill payment systems and the main features and risks of cryptocurrencies.
- Describe the payment landscape and regulatory framework in Nepal.
sequenceDiagram
participant C as Customer
participant M as Merchant Site
participant G as Payment Gateway
participant W as Digital Wallet
participant B as Bank / PSP
C->>M: Select product and checkout
M->>G: Send payment request
alt Card payment
G->>B: Authorize card transaction
else Wallet payment
G->>W: Debit wallet balance
W->>B: Settle funds
end
B-->>G: Payment confirmation
G-->>M: Transaction approved
M-->>C: Order confirmed
Figure 1: Online payment flow via gateway, wallet, or card
1. Payment Cards (Credit and Debit)
Credit cards let the customer borrow from the card issuer and pay later; debit cards take money directly from the customer’s bank account. Worldwide, cards are the most common way to pay online.
Parties in an online card transaction
| Party | Role |
|---|---|
| Customer (cardholder) | Enters card details at checkout |
| Merchant | Sells the goods; needs a merchant account to accept cards |
| Payment gateway | Securely passes card details from the website to the processor |
| Acquiring bank | The merchant’s bank, which receives the money for the merchant |
| Card network | Visa, Mastercard, UnionPay, and others; route authorisation requests |
| Issuing bank | The customer’s bank, which approves or declines the payment |
The issuing bank checks the balance or credit limit and the fraud risk, sends approval back through the network, and later settles the money to the acquiring bank, which pays the merchant after deducting a fee.
Limitations of online card payments
- Security: Card details can be stolen through breaches or phishing; merchants must follow strict standards (PCI DSS) to store or process them.
- Merchant risk: In “card not present” transactions the merchant usually bears the cost of fraud through chargebacks.
- Cost: Merchants pay a percentage fee on each transaction.
- Social equity: Many people, especially young people and those without formal income, do not have credit cards.
2. Digital Wallets
Digital wallets store money or payment details in an online account or app. Some hold a stored-value balance that the customer loads from a bank (eSewa, Khalti, IME Pay in Nepal); others store card details and pay with them (Apple Pay, Google Pay, PayPal). Wallets are convenient for frequent small payments, mobile recharges, and bills.
3. Mobile and QR Payments
Mobile payments are made using a smartphone. The main forms are:
- In-app and mobile web payments, where the customer pays inside an app or site using a wallet or mobile banking.
- QR code payments, where the customer scans the merchant’s QR code with a wallet or banking app. This is the dominant form of everyday digital payment in Nepal, from supermarkets to tea shops.
- Contactless (NFC) payments, where a phone or card is tapped on a terminal.
4. Bank Transfers and Real-time Payments
Customers can pay directly from their bank account through internet or mobile banking. Real-time interbank systems move money between banks within seconds, which makes bank transfers practical for e-commerce and for paying suppliers.
5. B2B and Bill Payment Systems
- B2B payments are larger and often on credit terms. They use bank transfers, letters of credit for imports, and increasingly online invoicing and payment portals.
- Electronic billing presentment and payment (EBPP) lets customers see and pay bills online: electricity, water, internet, phone, school fees, and insurance. In Nepal, wallets and banking apps are widely used for this.
6. Cash on Delivery (COD)
With COD, the customer pays the courier in cash when the goods arrive. It builds trust where customers fear online fraud, but it is costly for sellers: couriers must handle and remit cash, money reaches the seller days later, and customers can refuse the parcel at the door.
Worked example: the hidden cost of COD
A Kathmandu online store sells 1,000 orders a month at an average of Rs. 2,500. Assume (illustrative figures):
- COD handling fee charged by the courier: Rs. 50 per order
- 8% of COD orders are refused at the door; each refusal costs Rs. 200 in two-way delivery
- A wallet or QR payment costs the merchant 1.5% of the order value and has almost no refusals
| Cost item | All COD | All prepaid (wallet/QR) |
|---|---|---|
| Handling or payment fees | 1,000 × Rs. 50 = Rs. 50,000 | 1,000 × 2,500 × 1.5% = Rs. 37,500 |
| Refused parcels | 80 × Rs. 200 = Rs. 16,000 | Almost nil |
| Total | Rs. 66,000 | Rs. 37,500 |
On these assumptions, moving customers to prepaid payment saves about Rs. 28,500 a month and gets the money into the business faster. This is why many stores offer a small discount or free delivery for prepaid orders.
7. Cryptocurrencies
Cryptocurrencies are digital money that exists only online. Unlike rupees in a bank account, they are not issued by a central bank. Instead, transactions are recorded on a shared digital ledger called a blockchain, which many computers verify so the same coin cannot be spent twice.
Well-known examples include Bitcoin and Ethereum. To pay with crypto, a customer sends coins from a digital wallet (an app or hardware device) to the merchant’s wallet address. Some merchants accept crypto directly; others use a payment processor that converts crypto into regular currency at checkout.
Advantages for e-commerce (where legal):
- Lower cross-border fees than traditional bank wires in some cases
- No need for a traditional bank account on the customer side
- Fast settlement on some networks (minutes rather than days)
Disadvantages:
- Price volatility — the value of Bitcoin and similar coins can change sharply in a single day, so a payment received today may be worth less tomorrow unless converted quickly
- Irreversible transactions — mistaken or fraudulent transfers are hard to reverse compared with credit card chargebacks
- Regulatory uncertainty — many countries restrict or ban crypto for payments; rules differ by jurisdiction
- Limited merchant adoption compared with cards and digital wallets
Crypto is best understood as an alternative payment rail, not a replacement for cards, wallets, or mobile banking in most markets.
Comparing Payment Methods
| Method | Speed for merchant | Cost to merchant | Customer trust in Nepal | Main risk |
|---|---|---|---|---|
| Cash on delivery | Slow (days) | High (handling, refusals) | High | Refusals, cash handling |
| Wallet / QR | Fast | Low fee | High and growing | Phishing for PIN/OTP |
| Mobile/internet banking | Fast | Low | High | Account takeover |
| Domestic cards | Fast | Percentage fee | Medium | Card fraud, chargebacks |
| International cards | Fast | Higher fee | Low use for local shops | Fraud, foreign spending limits |
E-commerce Payments in Nepal
The e-commerce payment landscape in Nepal is evolving rapidly. Cash on delivery (COD) is still common for online shopping, but digital payments, especially QR and wallet payments, have grown very quickly.
- Cash on Delivery (COD): COD remains popular for first-time buyers and for orders from social media sellers, because customers want to see the product before paying.
- Digital Wallets: eSewa, Khalti, and IME Pay are widely used for online purchases, utility bills, mobile recharges, and transfers.
- Mobile Banking and QR: Most banks offer mobile banking apps, and QR payments through networks such as Fonepay and NepalPay are accepted by a very wide range of merchants.
- Interbank transfers: connectIPS, operated by Nepal Clearing House Limited (NCHL), lets customers pay directly from their bank accounts, including for government fees.
- Credit and Debit Cards: Card use for online payments is lower than in many countries; credit cards are not widely held, and cards issued in Nepal have limits on foreign currency spending.
- Cryptocurrencies: Nepal Rastra Bank has declared cryptocurrency transactions illegal in Nepal.
Regulation: Nepal Rastra Bank (NRB) regulates payment systems under the Payment and Settlement Act, 2075 (2019). Wallets and other payment service providers must be licensed by NRB and follow its rules on customer verification (KYC), transaction limits, and security.
Challenges and opportunities: Barriers include low trust among first-time online buyers, digital literacy, phishing aimed at wallet users, and difficulty paying for foreign services. Opportunities include a young, mobile-first population, interoperable QR payments, and government services moving online.
Summary
Online payments involve several parties: the customer, the merchant, a payment gateway, the acquiring and issuing banks, and the card network or wallet provider. Cards dominate globally but have security, cost, and access limitations. Digital wallets, QR and mobile payments, and real-time bank transfers are convenient and cheap, and they dominate everyday digital payment in Nepal. Cash on delivery builds trust but carries hidden costs for sellers. B2B and bill payments are moving online, while cryptocurrencies remain volatile and, in Nepal, illegal. Nepal Rastra Bank regulates payment providers under the Payment and Settlement Act.
Key Takeaways
- A card payment involves the customer, merchant, gateway, acquiring bank, card network, and issuing bank.
- Online card payments carry fraud, chargeback, cost, and access problems.
- In Nepal, wallets, QR, mobile banking, and connectIPS are the main digital payment methods.
- COD builds trust but costs sellers more than prepaid payment.
- NRB licenses payment providers; cryptocurrency transactions are illegal in Nepal.
Discussion Questions
- Why do many Nepali customers still prefer cash on delivery, and what could change their minds?
- Should an online store charge extra for COD or give a discount for prepaid orders? Justify your answer.
- Why are QR payments more popular than card payments for everyday purchases in Nepal?
Exam-Style Questions
Short answer
- What is a payment gateway?
- Distinguish between the acquiring bank and the issuing bank.
- What is a digital wallet? Name two used in Nepal.
- What is EBPP?
- State any three limitations of online credit card payments.
Long answer
- Explain how an online credit card transaction works, naming all the parties involved.
- Compare the major e-commerce payment methods used in Nepal, including their advantages and risks.
- Describe the digital payment landscape and regulatory framework in Nepal, and discuss the challenges to its growth.
