Digitalisation of financial sector - strategy for future Review by Caliber.Az

The measures taken in recent years to expand the infrastructure of cashless payments stimulate Azerbaijan’s banking sector to develop e-banking services and, in general, to increase the digitalisation of the operating environment.

Mass application of fintech solutions, given the introduction of OpenBanking platform in the country in the near future, is a current trend that sees no alternative. The achievements and new directions in Azerbaijan’s financial ecosystem were discussed in Baku at the recent two-day finance and technology exhibition - Fintech Summit 2023.

The large-scale reforms implemented as part of the "State Program to Expand Digital Payments in Azerbaijan for 2018-2020" played a driving role, accelerating the introduction of IT infrastructure and new software solutions in the banking sector, processing structures and other domestic payment service providers. Overall, the country has seen more than a tenfold increase in e-commerce over the past five years, with these positive trends particularly intensifying during the pandemic and severe quarantine period of 2020-2021, multiplying the number of cashless payments, including transactions through POS terminals, by several times.

Overall, non-cash card transactions have increased more than tenfold since the start of the reforms in 2018 and the following years, reaching AZN56.4 billion ($33.1 billion) in 2022, a 2.1-fold increase. Most of the non-cash transactions with payment cards came from e-commerce, increasing by 261 million transactions with an increase of 2.4 times.

The positive trends of recent years have only intensified in 2023.

"As of May 1, 2023, the number of payment cards in circulation reached 14.5 million units, which is 18 per cent more than during the same period last year. At the same time, the volume of cashless payments through these cards during the reported period amounted to AZN12.2 billion [$7.1 billion], twice as much as in the first third of last year," Central Bank of Azerbaijan (CBA) General Director Farid Osmanov said at the Fintech Summit.

The dynamics of cashless payments positively impact the increase of the share of card transactions, which reached 52 per cent of the total cashless turnover. Besides, over 70 per cent of all bank plastic falls on contactless cards (10.5 million units), and the number of transactions with contactless cards during the third of this year grew by 2.3 times.

The rapid expansion of cashless payments and the increase in card turnover stimulate banks to develop digital technologies and provide new IT services to their customers. Thus, currently, more than 85 per cent of the country's banks provide services through mobile applications, and a little less than four-fifths of digital transactions of bank customers are carried out through electronic banking. Besides, operations through mobile banking have tripled.

According to estimates of another Fintech Summit participant, Executive Director of the Centre for Analysis of Economic Reforms and Communications Vusal Gasimli, by 2026 these trends will become even stronger: the national payment system is expected to increase digital payments by 25 per cent and the share of cashless transactions in total turnover will reach 55 per cent.

According to the financial expert, in order to develop fintech, Azerbaijan continues the introduction of global technological trends - artificial intelligence, machine learning, open banking and other mechanisms, as improvement of financial technology and management is one of the important factors for further transformation of banking and payment systems.

Staying behind in this direction would be extremely detrimental for Azerbaijan, whose financial and banking system has long been incorporated into the global payment system. The scale of the world's non-cash payment system is staggering with its enormous capitalisation: it is predicted that by the end of 2023, the value of digital payment transactions on a global scale will be about AZN6.7 trillion ($3.9 trillion).

Consequently, in order to prevent a digital divide in the global financial market, the country has been consistently reforming the legal framework and introducing new mechanisms of cashless payments over the past few years.

"In Azerbaijan, work is underway to optimise the legal framework that promotes the development of the financial sector. The Law on Payment Systems & Services has already been adopted, which will accelerate the development of this sector and ensure its effective regulation," Association of Banks of Azerbaijan (ABA) President Zakir Nuriyev said at the summit.

He pointed out that the country is working on the development of digital manat, and given the growing role of digital currencies and cryptocurrencies, the local financial market needs the latest technologies, including the ones based on blockchain technology, as well as the implementation of measures to improve the transparency of fintech companies, credit systems and other payments.

The ABA head also reminded that the CBA has already submitted a bill "On Payment Services and Payment Systems" to the government, which is set to play an important role in expanding the implementation of digital financial technologies across the country. This document should ensure greater openness of the market for the participation of international vendors and financial and technical organisations (FinTech).

Also, specialists of the Central Bank and British TheCityUK are developing an OpenBanking road map till 2026 which provides for the realisation of a number of projects to standardise the infrastructure of credit structures and implementation of API solutions for the banking sector. This will enable the centralised development of mobile applications for the country's banks, taking into account the preferences of users. The OpenBanking mechanisms will also help attract new financial players, startup projects and services to the domestic market, all of which will contribute to the more dynamic development of the financial services market in the near future.

Innovations in the protection of the financial sector’s digital space are no less important. The relevance of this issue is clearly illustrated by the data of international expert structures, according to which in 2022 the e-commerce world will lose more than AZN41 billion ($24.1 billion) due to cybercrime.

In order to prevent this in May of 2023, on the initiative of the CBA a new "Strategy of cyber security in financial markets" was adopted for 2023-2026, designed to form a sustainable environment of cyber security. Amendments to the bill "On the protection of personal information" are also prepared, in particular, modern standards of protection of personal data will be applied.

According to Deputy Head of Electronic Security Service at Azerbaijan’s Digital Development and Transport Ministry, summit participant Samir Rasulov, such measures are extremely important today, given the rapid growth of digital technologies in the financial sector, which respectively increases the risks of cyber-attacks.

Thus, the possibilities of digitalisation of the financial market of Azerbaijan are consistently expanding for the participation of the world's payment systems. In particular, the international payment systems MasterCard and Visa have been actively supporting the formation of such infrastructure, including the expansion of contactless tokenised payment technologies in the country in recent years.

"We are working on the expansion of the B2B Connect project in Azerbaijan, have established work with all participants of the financial sector, both public and private sectors, are actively introducing payment technologies in the transport sector, as well as cooperating in the field of cybersecurity," Kristina Dorosh, vice president and regional manager of Visa in Central Asia and Azerbaijan, said during the summit.

According to her, with the support of Visa, the mechanisms of Apple Pay and later Google Pay were launched in the local market. These international systems of contactless payments with the help of smart devices expanded opportunities for the use of mobile devices with NFC technology in the country.

"In Azerbaijan, the volume of non-cash payments through mechanisms Apple Pay and Google Pay in January-May of this year amounted to AZN 327 million [$192,352,939] and AZN 107 million [$62,941,176] respectively," CBA general director Osmanov said during the summit.

The two-day exhibition of finance and technology Fintech Summit 2023 in Baku, held under the theme "New trends in the banking and financial ecosystem: Innovative solutions, fintech and security" presented the current and future trends in the financial ecosystem of Azerbaijan.

 The forum organised by the Association of Banks of Azerbaijan and the Central Bank of the Republic, in addition to local banks and payment ecosystem structures, was attended by about 200 representatives of international financial institutions, Türkiye, USA, EU, CIS, Middle East countries, etc.