Soon, all companies, regardless of their business area, will have to engage with fintech. Back in 2020, this was the forecast presented by analysts at the Andreessen Horowitz venture capital fund. For instance, taxi and delivery aggregators are creating their own payment services, financial transfer systems are being integrated into messengers, giants such as Apple are launching their own bank cards, and retail chains are connecting cashback programmes and microloans. The analysts’ predictions are coming true.
This has become possible thanks to the democratization of banking services. Outdated, cumbersome legacy structures are becoming more mobile and flexible. And banking is becoming a service based on outsourcing. Startups can delegate the processing of payments to an intermediary and focus on their product and marketing, and innovation. This is reminiscent of the heyday of the electronics market in the 2000s. Why open your own lab, try to reinvent the wheel, and spend millions on developing microchips, if devices can be assembled from ready-made components in Shenzhen, the global electronics capital?
When it comes to the development of banking as a range of services, everyone’s a winner, everyone wins. It’s easier for startups to enter the market, banks can more easily withstand competition, and customers don’t have to use the services of monopoly banks with their seemingly endless poor-value tariffs and huge commissions. The state also benefits from a boom in banking. The ratio of digital services grows, cash circulation decreases, and, consequently, the gray economy shrinks. But this fintech utopia can only become reality if regulation keeps pace with market trends. So far, however, not all countries have managed to adapt.
Neobanks. A Driving Force of GDP.
Uzbekistan, like any developing economy, is at a stage of transition and growth. Changes are taking effect, but sometimes not as quickly as entrepreneurs might like; the market tends to be ahead of regulators, sometimes by three to five years, other times by decades. On the whole, the dynamics in Uzbekistan are positive. For example, remote banking services in the country have almost 30 million customers. And the popularity of various formats of payments and transfers, ranging from NFC to online QR codes, is growing. Strikingly, the overall volume of transactions that are conducted using local payment organizations, doubled between 2021 and 2022.
But why is it worth increasing the proportion of digital payments at all? Recently, experts from the UN calculated that annual GDP per capita grows one percentage point faster in places where mobile payment services have been successfully implemented compared to countries where cash transactions predominate. And developing mobile payment services can reduce the level of poverty by at the very least 2.6%. What’s more, in developing countries that transition to cashless payments, according to estimates made by BCG analysts, annual GDP grows by three percentage points.
It is clear that developing fintech in a country stimulates the inflow of capital into the region. For example, Lithuania, which introduced a Specialised Bank license for neobanks, gives the green light not only to local startups but also to fintech companies from other countries. It was in Lithuania where the neobank Revolut obtained a simplified license that provides the right to operate in all countries in the European Economic Area.
How has this affected Lithuania’s economy? In 2022 alone, the country’s fintech market attracted investment to the tune of €67.9 million, while local companies earned €375 million in just the first half of the year, 80% more than the year before. Note that developing a country’s banking licensing market also stimulates growth in related areas; infrastructure providers, legal firms, and intermediaries also get their share of capital. The region is now becoming more attractive for investors and businesses. In 2014, 55 fintech companies were registered in the country. That figure is now over 260, with the head offices of 40% of these companies based in another country.
Uzbekistan. Products from the Future. Regulation from the Past.
In Uzbekistan, the fintech industry is gaining momentum, the development of digital payments is already stimulating economic growth. According to projections by the World Bank, the local economy is expected to show the highest GDP growth within Europe and Central Asia, an estimated 5.1%. In 2022, the economy grew by 5.7%, thanks to financial transfers, consumption and exports. The proportion of online payments in the country is also increasing remarkably rapidly. In 2022, twice as much money passed through payment services as the previous year. But the country’s full potential in this regard is still yet to be revealed.
One of the reasons for this is the relatively conservative banking regulation that exists in Uzbekistan. For example, the law does not differentiate between classic and digital banks, both of them require a standard banking license. A fledgling fintech company is unlikely to obtain one, and even existing banks struggle to adapt and conform to the regulatory requirements.
As of the 1st of September, the Central Bank increased the minimum capital requirements, which a number of existing banks did not meet. The Central Bank has recommended that banks that are unable to adapt should seek a merger. In other words, the regulator realizes that even existing companies will be unable to meet the new requirements. In theory, company mergers will lead to a reduction in competition and the creation of market monopolies. What’s more, in January 2025, all new banks will need to have at least UZS 500 billion in charter capital. That is to say, the minimum threshold is continuing to increase.
What alternatives do fledgling fintech companies have? They can sign a long-term agreement with an intermediary bank. Most fintech startups in Uzbekistan operate according to this principle, and their popularity is growing year on year, but this growth could be even faster-paced if the country had specialized regulation and licensing for neobanks.
Neobanks. Fewer Options. Fewer Risks.
The key differentiator for a neobank, compared to a traditional bank, is the digital-first model. Fintech companies rely on convenience and an intuitive interface, and they build their business logic around their customers’ needs. The life cycle of a fintech service is faster and shorter than that of a banking service, competition is higher, and companies have to constantly improve. In contrast, traditional banks dictate their own rules to customers. In marketing, there’s even the concept of a “product prisoner”, a term given to unsatisfied customers who simply have nowhere else to go due to a lack of alternative options. In many countries, there is generally a tradition of using the services of a single bank for decades, simply because “that’s what people do”. For such banks, maintaining the status quo is the most profitable avenue.
In countries where banking only developed relatively recently, force of habit is less strong, and it is easier to launch new products. The classic examples are China and India, where millions of people for some 10 to 15 years have had access to banking services and digital payments. And many people have switched from using cash to making payments with QR codes or messengers. All enabled by regulation.
In India, which is regarded as a world leader in terms of digital transactions volumes, the process was not instantaneous.The government first stimulated banks to open as many branches as possible in the country and to rely on credit and loans. This is reminiscent of the situation in Uzbekistan. Almost half of the population live in rural locations, while in India, that figure is 64.5%. In small villages and towns, there are no bank branches, so people prefer to accumulate cash and this habit is difficult to eliminate. Incidentally, in India, opening bank branches didn’t solve the cash hoarding problem.
The boom in cashless payments only occurred once services had been decentralized, when the government gave the green light to small companies. The new market players reduced the size of the minimum deposit and decreased service costs, and as a result, within six years (from 2016 to 2022), the proportion of payments being made using cash reduced from 90% to 20%. It is interesting that not long before this boom, in 2013, the Indian regulator introduced a separate category for payment banks that offered payments and transfers but were unable to issue loans or credit cards. Thus, the concept of the digital bank branch emerged, an office with a limited range of services, where customers can quickly open a card, get a consultation or update their personal information in the database.
Lots of European countries, including Britain, have introduced practices to simplify the licensing of digital banks. Neobanks can obtain a special type of license that grants them the status of an electronic money institution (EMI) or payment institution (PI). Often, EMIs and PIs are divided into small and large, depending on their monthly transaction turnover. For example, in Britain and many countries in Europe, this limit is €3 million. In Lithuania, however, banks can get a specialized bank license that allows them to issue loans and accept deposits but does not permit them to offer investment services. The start-up capital requirement for such banks is €1 million minimum, whereas for regular banks, the minimum is €5 million.
Clearly neobanks have limited opportunities, but the risks are fewer too. Digital and payment banks are not in a position to accumulate non-performing loans (NPLs) and thus increase the population’s debt load. However, they are able to increase access to cashless payments and transfers.
Uzbek Neobanks. How We Can Accelerate Their Evolution?
Uzbekistan is gradually developing and the government is responding to global trends. For example, in spring, it proposed the creation of a unified payment system for the whole of Central Asia. And in 2020, the Central Bank outlined regulations for the issuance and circulation of electronic currency. As a result, services such as e-wallets and prepaid cards have been introduced into law. That said, it likely doesn’t fully recognise the potential benefit of accelerated payment digitisation. However, the market isn’t standing still, new banks are opening, payment systems are being launched, and capital and investment are flowing into the country.
The regulator could stimulate growth in several stages. For example, introducing a special type of license for digital banks, with simplified requirements but also limited functionality. For instance, they could be allowed to conduct payments and transfers, launch cards and open e-wallets but be prevented from issuing loans or opening deposit accounts. The minimum start-up capital requirements for digital-first banks should also be reduced and shouldn’t be in the $40 to 50 million range, but $500,000, for instance.
Along with this, it would be worth launching a government support programme for fintech as a separate industry, not as a type of digital business but as a distinct and potentially large market. This would be a positive signal for companies and investors alike.
But importantly these innovations shouldn’t be implemented in a top-down manner. It’s important to involve major market players in dialogue and not just focus on formal indicators but actual market activity. For example, in the registry of payment organizations and e-currency systems, you certainly won’t find all of the brands that are actually operating on the market. A special research group or think tank (analytical centre) should be created to explore such questions as what brands are widely known on the market, what services Uzbeks are using, and what problems they are encountering. But this research could take years, so it is important to create “sandboxes”, even in a limited manner, or special economic zones specifically for fintech companies. The Dubai International Financial Centre (DIFC) is one example of this.
The advantage that Uzbek fintech has lies in the fact that there are successful, active companies that have been able to build a business despite the restrictions and the lack of tax exemptions and special preferential treatment. Click, Humans and PayMe are already catching up with major banks in terms of how many customers they have and their volume of transactions. But they are still dependent upon banking service providers since they are unable to obtain a traditional banking license. Nonetheless, these companies are continuing to grow, to increase their customer base and to integrate with major payment services such as Visa. If startups were to be given the green light, nothing would stop them from turning into the Uzbek equivalent of Revolut, N26 (a German neobank that also operates in Switzerland) or Robinhood, an American financial startup that has launched an online app for customers to trade on the stock market commission-free. And it has potential to enter into other markets.
The best case scenario in Uzbekistan would be having more than 30 fintech companies in the region that could compete for customers on an almost-equal footing, and with no more than 5% of the market belonging to the largest market player. Consequently, digital payments would be used by a minimum of 70% of the population. It wouldn’t be a single service from a monopoly bank that issues salary and pension cards, but an assortment of three or four fintech services. At a wider level it’s the perfect formula for open market demonopolization.
Overall, a legislative initiative and innovation on the part of the regulator could become a driving force for positive changes in Uzbekistan. The more companies operating in the market, the more competition and the more taxes paid into the treasury. Demonopolization always brings progress. The development of digital payments inevitably leads to the decline of the gray economy and the “whitewashing” of revenue and expenditure. Also, increasing access to digital services consistently leads to GDP growth and an increase in liquidity. Fintech could well be the key to economic growth during economic turbulence and the stagnation that tends to follow.