FACTS AND FIGURES

Digitalization penetrates all spheres of the economy every day. This global transformation requires fundamentally new approach to business making it possible for entrepreneurs to keep up with the times, become more stable in the changing macroeconomic climate, not to be lost and even stand out among competitors. This is an inevitable process, which requires the ability to adapt to new market conditions, to build a balanced policy of risk assessment and management, investment placement in the development of information technologies and strengthening information security.

Transformation and banks

In terms of banking services, transformation is a radical change in the relationship between participants of the banking market, banks and customers. Principally, this means the increasing speed of services and timesavings of customers thanks to alternative service channels. In this context, the efficiency and widespread availability of services offered by participants of the banking market take the relationship between banks and customers to a completely new level. In other words, banking services are no longer tied to physical availability of clients.

What about the level of digitalization of the banking market in Azerbaijan? The process started, but it is too early to expect considerable success. According to Ibrahim Alishov, Acting Chairman of the Board on the Financial Markets Supervision Chamber of Azerbaijan, 27 out of 30 banks in Azerbaijan provide Internet banking and 25 - mobile banking services. In the first quarter of 2019, the share of electronic transactions in the total portfolio was 31%, whereas in the same period last year, this figure was 22%.

Also, the improvement of card systems and growth of electronic commerce continue. At present, there are 6.8 million cards in circulation in Azerbaijan, and in the first quarter of 2019, 772,000 contactless cards were issued, which is 2.1 times more than in January-March 2018. The volume of e-commerce in the first quarter of 2019 reached ₼573 million against ₼266 million for the same period last year.

But with all this, Azerbaijan is still far behind in terms of digitalization of the banking sector from the same CIS countries. According to Moody's report, plastic cards turnover in Azerbaijan makes up almost 6% of the population’s income, and according to this indicator, Azerbaijan is ahead of Tajikistan only in the CIS. The number of online banking accounts reaches only 7% of their total number, which is the worst figure among the CIS countries. According to the agency, Azerbaijan also lags slightly behind other countries in the region in terms of mobile communications penetration. If the average among the CIS countries is 136 SIM-cards per 100 people, in Azerbaijan it is 103. According to this indicator, Azerbaijan among the CIS countries is ahead of Moldova, Tajikistan and Uzbekistan.

But there is a good point. According to the report, Azerbaijan is far ahead of the CIS countries in terms of online coverage - 79% of the population are users of the Internet, while the average figure for the CIS is 68%. In this case, Azerbaijan ranks first among the CIS countries.

So, the reason for problems is completely different. Apparently, this is a low level of financial literacy of the population, which generates a weak interest of financial institutions in the development of innovative technologies.

Plans and prospects

Meanwhile, all innovations on digitalization in Azerbaijan are supported by the state. Thus, in September 2018, President Ilham Aliyev approved the 2018-2020 State Program for the Expansion of Digital Payments in Azerbaijan. Thanks to this program, the Central Bank of Azerbaijan expects a decline in the share of cash transactions in the economy from 74% (2017) to 40% (2020). At the same time, the annual growth of non-cash payments in 2018-2020 is projected at ₼17 billion ($10 billion at the current exchange rate).

Main objectives of the program are to expand the system of non-cash payments, to strengthen the financial base of banks in Azerbaijan. In this regard, the priorities of the program are: improving the institutional and legal framework of non-cash payments, expanding the quality of services in this area, developing infrastructure for non-cash payments.

Most importantly, the ongoing works in this context and the achieved results were possible due to joint efforts of many structures. For example, as part of the Fintex Summit, Azerbaijani Ministry of Transport, Communications and High Technologies, Financial Market Supervision Chamber, Central Bank, Centre for Analysis of Economic Reforms and Communications and Association of Banks of Azerbaijan signed a memorandum for cooperation. According to the executive director of the Centre for Analysis of Economic Reforms and Communications Vusal Gasimly, the main objective of the memorandum is to unite efforts to introduce financial technologies in the country. He stressed that the introduction of financial technologies is a matter that depends not only on state decrees and regulatory measures. "It is important to prepare the banking system, share information and experience, and also improve the financial literacy of the population. This is only possible through public-private partnership, which is implied by this memorandum."

Blockchain and Financial Sphere

If we focus on more specific actions, the Central Bank plans to introduce a blockchain technology and to launch an instant payment system in Azerbaijan by the end of this year.

According to the chief information administrator of the Central Bank, Farid Osmanov, the project to create the first ecosystem based on the blockchain technology in Azerbaijan is a pilot project. Currently, the bank is negotiating on the implementation of the prototype created at the beginning of the year. Mr. Osmanov noted that CBA also plans to transfer all electronic banking transactions to the blockchain technology.

“Primarily, this will make it possible to improve the security of personal data transferred to credit organisations significantly. Also, this technology will help to carry out most operations remotely. As a priority, we plan to ensure opening of accounts remotely. This goal will be implemented in several stages. First, we plan to ensure remote opening of accounts by individuals for up to ₼500, then for up to ₼6,000, and later for opening all accounts,” Osmanov said.

As for the system of instant payments, CBA is planning to launch settlements between individuals, and next year - between legal entities, cross-settlements between individuals and legal entities, and other elements of the banking system. In general, the system will allow legal entities and individuals to conduct operations 24/7/365, and each operation will take no more than 10 seconds.

Another important project of the CBA in this direction was the centralized search system for financial services and products. So far, the system covers 3,000 products and services of more than 20 banks in Azerbaijan. But in the future non-bank credit organisations, payment agents and other structures providing financial services will join it. In general, thanks to the system, users can get information about loans, deposits, branch network of banks, cards, remittances and other products and services, compare information both on different products of one bank, and on the same products in different banks.

In the future, CBA also plans to implement the system of online ordering services for bank products.

Payment systems and new technologies

The digitalization process in Azerbaijan is actively supported by international payment systems Visa and MasterCard. Both companies are actively cooperating with CBA in expanding the use of innovative payment methods in education and transport, as well as increasing the financial literacy of the population.

In addition, Visa is actively introducing new technologies in Azerbaijan. In particular, this year the company intends to introduce tokenization technology in Azerbaijan, when all card and transaction data is encrypted, which makes it much easier to ensure the security of transactions. In the future, tokenization will also allow the cards to be tied to users' mobile phones, which will make physical availability of the card unnecessary.

According to the head of the Visa payment products department in the CIS countries and Southeast Europe, Christina Dorosh, they are working on another innovation that will make it possible to accept payments via cards using mobile phones. "We know that it is not always economically profitable for banks to purchase POS terminals and install them. Our technology will make it possible to turn a phone into a POS terminal, which will greatly simplify the process of accepting cards for payment."

In other words, the work is underway and we can only expect its first results. By the way, digitalization is also important for banks, which also need to develop, because otherwise they will be the losers.