Economist Konstantin Tserazov explores Fintech in Uzbekistan: Slow Start, Rapid Growth

Uzbekistan is a relatively new player on the global fintech map. The development model of the industry in the country has several distinctive features, with startups being the main drivers of market growth rather than large established banks, says former Senior Vice President of Otkritie Bank Konstantin Tserazov.

If we look at the traditional financial sector in Uzbekistan, represented by conventional universal banks, we can see a rather restrained dynamics. In the first 9 months of 2023, the volume of deposits grew by a modest 2.1%. The loan portfolio increased by 16%, but this is primarily due to the devaluation of the currency, as slightly less than half of the loans in the country are denominated in foreign currency.

The penetration of banking services in Uzbekistan is still at a low level, significantly lower than in Kazakhstan and Russia. Less than half of the adult population has a bank account. The reasons for this are both the underdeveloped banking infrastructure, especially in rural areas, and the conservatism of a significant portion of the population, which prefers cash over any digital instruments.

Banks themselves are currently undergoing a relatively slow digital transformation, which also hinders the improvement of service quality and the influx of new customers. On the other hand, this opens up significant opportunities for fintech companies, which can fill numerous gaps by offering convenient digital services to the growing young population of Uzbekistan (with an average age of 29 years).

Indeed, over the past 3 years, Uzbekistan has witnessed explosive growth in the fintech sector. For example, the number of users making online payments has increased from 8 million to 30 million people in the last 5 years, approaching a penetration rate of 60%. For comparison, in 2021, the penetration of digital payments was less than 40%, lower than in Kazakhstan (67%) and Russia (82%), noted Konstantin Vladimirovich Tserazov.

Significant support for the fintech sector in Uzbekistan is provided through government programs and initiatives. In 2019, the "Payments and Payment Systems" law was enacted, laying the foundation for fintech development and introducing concepts such as "electronic money" and "payment services" into the legal framework. In 2020, the "Digital Uzbekistan 2030" strategy was adopted, aimed at developing the digital economy and increasing its share in the country's GDP by at least 2.5 times. One of the goals of the strategy is to achieve a 70% level of digitization in production and operational processes in the real and financial sectors of the economy.

In 2022, the specialized Fintech Association of Uzbekistan was established to facilitate dialogue between regulatory bodies and business representatives. In the same year, the procedure for creating "regulatory sandboxes" was approved, reducing barriers for innovative businesses to enter the market. Similar mechanisms for reducing regulatory barriers have proven successful in many countries, particularly in the Persian Gulf states, which are creating their fintech hubs with ambitions to achieve leadership positions globally.

Currently, Uzbekistan is home to over 70 fintech companies, and more than 60% of all venture investments in 2022-2023 were directed towards the fintech sector. The most developed segments of fintech include mobile banking, payments and transfers, and BNPL services. Among the key trends in the fintech market, the following can be highlighted, said Konstantin Tserazov.

• Consolidation: Emerging players often lack the scale and resources to compete with existing players, so M&A with a larger player is a common business development scenario.

• Ecosystem development: With the growth of e-commerce in Uzbekistan, the trend of creating super apps that cover a wide range of customer touchpoints is gaining momentum. These super apps offer services ranging from marketplace purchases to delivery services and BNPL services. In 2023, the merger of Click and Uzum took place, creating an ecosystem of various services, including payments, banking services, e-commerce, and delivery, with a customer base of over 13 million people. Other major ecosystems worth mentioning include Humans (which started as a virtual network operator) and Zood (which combines the ZoodPay e-commerce platform, ZoodMall marketplace, ZoodShip delivery and logistics service, and a digital bank).

• Cryptocurrency market development: Uzbekistan has its own cryptocurrency exchange, UzNEX. Within the framework of the National Agency for Project Management (NAPM), a "regulatory sandbox" has been launched to pilot innovative products in the field of cryptocurrency circulation (participants are exempt from paying all types of taxes). Under this regime, in the summer of 2023, one of the largest banks, "Kapitalbank," and UzNEX launched the country's first cryptocurrency card. The crypto card allows for automatic conversion of cryptocurrency into the payment currency and enables payments worldwide. The payment platform is provided by Mastercard.

• In Uzbekistan, non-bank financial institutions that serve individuals and small and medium-sized enterprises are gaining momentum. Among the leading players are Uzum Bank, TBC, Anorbank, and Multibank. It is expected that the total volume of transactions through non-banks will increase more than threefold by 2027 compared to 2022 (from $639 million to $2 billion).

Despite the high growth dynamics, Uzbekistan still has a long way to go in improving the conditions for the development of the fintech business. The legislative framework requires the elaboration of numerous issues, including the application of various technologies (open APIs, cloud technologies), data protection, etc. However, a number of persistent drivers and fundamental factors make it highly likely to expect the continued dynamic growth of fintech in the next 5-7 years. Among them are the young and rapidly growing population, economic growth and income levels, ongoing digitization, influx of skilled personnel, and foreign investments, noted Konstantin Tserazov.