FINANCE CODE

The financial market is gradually moving from the digitalisation of individual services towards the formation of a fully-fledged fintech ecosystem, bringing together banks, payment organisations, e-money providers, open finance, innovative payment solutions and new digital services.

The Central Bank of Azerbaijan (CBA) is playing an increasingly active role in this process; alongside its traditional regulatory functions, it is now taking on the task of fostering an innovative environment.

These issues formed the central theme of the event 'Azerbaijan's Digital Financial Agenda', where representatives of the regulator, the banking community and the fintech industry discussed the priorities for the market's further development.

Part of everyday life

Fidan Tofidi, Director of the CBA's Department of Financial Technologies and Innovation, has confirmed that they are now an integral part of routine business activities. "While we were discussing the future of digitalisation and digital financial services a few years ago, today we are already living in that future. The future is now. In the current era, the need to visit a branch or service point for basic banking operations such as opening an account, transferring funds or utilising various financial services has become virtually non-existent," she observed.

One of the key tools for developing an innovative environment has been the special 'Sandbox' regulatory regime, which allows new financial products to be tested in a controlled environment under the supervision of the Central Bank. We are pleased to announce that we have already received over 35 applications under this programme. The next step is to establish a permanent mechanism for accepting projects.

At the same time, the Central Bank of Azerbaijan is finalising work on a large-scale project: a system for assessing the digital maturity of the financial sector. For the first time, a comprehensive assessment will be carried out of the level of digitalisation among banks, payment organisations, fintech companies, the insurance market and the capital market. Consequently, further development is planned to be based on objective indicators of digital maturity across the various segments of the financial system.

Fintech companies do not replace banks

One of the most interesting topics of discussion was the changing role of fintech companies in the financial market. While they were initially regarded as young technology start-ups, they have since evolved into established contributors to the financial ecosystem. Contrary to popular belief, fintech companies do not regard banks as competitors.

Eynar Abdullayev, Deputy Chairman of the Board of the Azerbaijan Fintech Association (AzFina), cited a phrase frequently used in professional circles: A fintech company that does not aspire to become a bank or seek to replace banks does not qualify as a fintech company.

However, he stated that the sector's development is, in reality, following a different trajectory. "Fintech companies have not been established with the intention of replacing banks or driving them out of the market. Instead, they are players that provide banking services in a simpler, faster and more specialised form in specific areas," he believes.

This model of cooperation is becoming the foundation for the market's development. Banks continue to play a pivotal role in the financial sector by overseeing deposits and being bound by stringent regulations. In contrast, fintech companies leverage their agile operating model to deliver cutting-edge solutions with greater expediency and respond swiftly to customer queries.

New infrastructure

The development of fintech must be considered in the context of the transformation of the payments market.

According to Afgan Abbasov, Director of the Central Bank's Department for the Development of Payment Systems and Products, the scale of use of the Instant Payment System (IPS) is growing rapidly and is one of the main drivers of these changes.

The system's monthly turnover has more than tripled compared with the same period last year, exceeding ₼1 billion. However, it should be noted that work on developing the system is still in progress. "A number of projects are being implemented in collaboration with sector participants – banks and fintech companies – to expand it. These projects cover transfers between customers, payments via Ani QR (a tool for working with QR codes), the processing of government payments through the Instant Payment System, as well as the settlement of payments via this system," noted Abbasov.

The next stage of the project will involve expanding the use of the Instant Payment System in e-commerce, further developing QR payments, connecting fintech companies to the system, and integrating Azerbaijan's Instant Payment System with similar platforms in other countries.

To this end, two connection models have already been developed – direct and indirect – allowing fintech companies to choose the most suitable operating format.

According to Abbasov, the number of transactions using Ani QR has increased by more than 30 times in just one year. This month, the figure has approached 40 million. It is estimated that more than 100,000 POS terminals operating in the country already support QR payments.

Ramil Mahmudov, Deputy Director of the Department for the Inclusiveness of Payment Systems and Products at the Central Bank of Azerbaijan (CBA), has announced that the next stage of the project will be the introduction of static QR codes. These will enable even small retail outlets to accept cashless payments without the need for expensive equipment.

The growth in government payments is equally significant. Over the past year, the number of transactions carried out via the Instant Payment System through the Government Payments Portal has increased more than twentyfold.

The next stage

Another priority for the Central Bank is the development of the Open Finance model. While the previous stage concentrated on the introduction of open banking, the current focus is on a broader concept that brings together banks, payment organisations, insurance companies and other financial institutions within a single digital space.

Edgar Abdullaev, Chairman of the Board of the Azerbaijan Fintech Association, has stated that cooperation between market participants has reached a new level following the introduction of the Single Payment System (SPS). Therefore, one of the key benefits of the new model is the interaction between licensed payment organisations and electronic money institutions. "Thanks to this model of cooperation, secure payment services are provided through all legitimate payment channels from a single point," emphasised Abdullayev.

Digital transformation is also becoming a key focus area for businesses. As highlighted by Zeynal Karimzade, a member of the AzFina board, the market's potential is currently only being partially utilised.

According to the State Tax Service, there are 882,000 active taxpayers in Azerbaijan, of whom around 822,000 are small and medium-sized enterprises. However, less than 1 per cent of entrepreneurs have fully digitised their businesses.

"The positive aspect is that there are significant opportunities in the market. In the future, thousands of entrepreneurs will adopt digital technologies, and the services they use will also become digital," said Karimzade.

At the same time, he drew attention to the existing problems. "At present, a significant proportion of payments are made through informal channels. We anticipate that, in the coming years, and potentially even in the coming months, the majority of these transactions will transition into a formal and transparent digital environment," he emphasised.

Furthermore, Karimzade has stated that the introduction of the 'ƏDV Geri Al' mechanism (a refund of a certain portion of VAT) for online purchases, B2B lending, the use of artificial intelligence and biometric identification technologies for payments, and so on, is to be expected.

The growth of the formal digital market will enhance transparency and create new opportunities for fintech companies, which currently compete for a limited number of active users.

As is evident, while the primary objective a few years ago was the introduction of digital financial services, today the focus is already on the development of a fully-fledged fintech ecosystem. In the long term, this could become one of the factors enhancing the competitiveness of Azerbaijan's economy and strengthening its position as a regional hub for modern financial technologies.