It is absolutely obvious that Azerbaijan has all the necessary conditions to drive a successful innovation environment. The country has a solid foundation for introducing fintech.

Key facts

The GDP of Azerbaijan will be about $80 billion (136 billion manat) in 2024 and will be more than $160 billion in purchasing power parity terms. The economy is on track to beat the 2% growth figure this year. The solid economy is based on the oil and gas sector whose development is contingent on the unique logistics perspective since the nation nestles in the crossroads of Europe and Asia. Baku is wisely developing such logistics with Europe, Turkey and other countries and it favors the oil and gas sector. At the same time, Baku is keen to invest oil and gas proceeds into the rapid development of other economic sectors. And fintech stays in the focus.

From 10.402 million the nation's population 9 million are everyday Internet users. The robust economy combined with huge Internet adoption creates the breeding soil for innovations for financial transactions.

According to the Central Bank of Azerbaijan (CBA), in 2023, there were over 17 million payment cards being issued, representing a 22.3% increase compared to 2022. Over 70 percent of them were contactless. Currently, on average, every adult person living in Azerbaijan has at least 2 bank cards. The volume of debit card transactions exceeded $34 billion, and the total value of domestic cashless transactions topped $70 billion in 2023. Over 2023, transactions through mobile banking applications grew by 2.4 times, reaching 290 million, driven by improved accessibility and enhanced UX/UI design of these apps.

The figure is increasing due to the growing number of fintech startups operating in the country. The more options to transact arise. Cashless payments have become a trend not only in the retail sector but also in public transport. For instance, in 2024, cashless payments will be introduced in two thirds of Baku's public buses, the capital of Azerbaijan.

Digitization is gaining ground in the POS payments sector, with already one-fourth of transactions being conducted through mobile phones or other smart devices.

The Startup Culture

The foundation of Azerbaijan's startup landscape began to solidify during the early 2010s, marked by the inaugural Startup Azerbaijan event in 2012. In a significant development that year, Applab, an incubator focused on nurturing tech startups for mobile app innovation, was collaboratively launched by two prominent telecommunication companies in the nation. Additionally, in a strategic move to support technological advancement, the government introduced The Pirallahi High Tech Park as the first business park in Azerbaijan tailored specifically for tech enterprises.

In 2023, Azerbaijan secured the 84th position among the top 100 countries globally for fostering innovation ecosystems and supporting startups.

Young people are highly interested in launching startups in Azerbaijan. In 2023, according to data about registered startups at Enterprise Azerbaijan state portal, operated by the Center for Analysis of Economic Reforms and Communication, more than half of all applications were submitted by the young people under 25 years old.

In 2024 players in the fintech sphere in Azerbaijan include Golden Pay, eManat, PashaPay, Portmanat, CIB, Kassam, Payonix and many others. Currently there are more than 50 fintech startups. Approximately 85% of fintech startups primarily focus on catering to the local market's needs. Some of them experience long journeys in their corporate life. For example, eManat was established in 2013 and currently operates over 3,000 payment terminals in Azerbaijan.

The global players on the local landscape

In Azerbaijan, the key international financial players are actively engaging in the fintech market, introducing innovative solutions to facilitate digital payments and financial transactions. Apple and Google Pay work almost everywhere in Azerbaijan.

Visa has introduced the Visa Tap to Phone technology, enabling businesses to accept card payments through NFC-enabled Android devices. This solution, in conjunction with a Visa Business Card, empowers entrepreneurs to access funds instantly. Starting from 2023, entrepreneurs can set up accounts with any bank to receive payments via smartphones.

Mastercard is enhancing e-commerce in Azerbaijan with its Masterpass platform, simplifying online transactions and money transfers. Masterpass not only facilitates domestic transfers between Azerbaijani banks but also enables cross-border transactions to Turkey and other countries using cell phone numbers. Additionally, Mastercard offers an "Open Banking" solution tailored for entrepreneurs.

Money transfer and payments gateways

In Azerbaijan, the money transfers and payments sector has attracted both foreign and local players. The Turan payment system, from Turkey, is one such example. Monthly transfers to Azerbaijan through this system amount to $350,000, with over 120,000 active users and more than 700,000 transactions processed monthly.

On the local side, Paysis, an electronic payment platform for secure and convenient transactions via smartphones, has garnered significant popularity. With over 500,000 registered users as of 2023, Paysis has gained recognition within the market.

Legislation

On November 9, 2023, the new Law "On payment services and payment systems" went into effect. The legal act was passed by the local Parliament on July 14 and signed by the President of the Republic of Azerbaijan, Ilham Aliyev, on August 9 of the same year.

This law is a pivotal point, as it opens the door for all fintech sphere participants in Azerbaijan to issue payment cards, including those for digital money and electronic money. It is expected to boost the overall number of fintech companies currently operating in Azerbaijan.

CBA and the financial sector development strategy 2024-2026

CBA aims to position itself as a one-stop point for all fintech startups in Azerbaijan, addressing their needs and adopting a friendly approach towards the vibrant fintech community. CBA also intends to launch social media and marketing campaigns to raise global awareness about Azerbaijan's fintech sector.

Let's explore the Financial Sector Development Strategy 2024-2026, developed by CBA. Within three years, the average annual number of cashless transactions is expected to more than double, exceeding 200 transactions per person. Retail trade is anticipated to follow the same development dynamics, with the share of cashless payments in all payments projected to increase from the current 21.1% to over 40%. The share of cashless card transactions in total transactions is estimated to reach 70% by 2028. CBA anticipates further growth in digital payments, with their share in total payments, currently at 80%, expected to rise above 90%.

CBA is also committed to making regulatory improvements. It plans to develop a sandbox regulation to simplify the application process. CBA will increase its efforts to promote new opportunities offered by the sandbox and encourage fintech-oriented entrepreneurs to explore them, particularly those at the beginning of their fintech journey.

CBA is also set to create a more nuanced legislative framework for Open Banking. It will actively participate in this sector of the financial sphere, aiming to establish a centralized platform to provide Open Banking services to the financial market.

At the same time, CBA will closely monitor the share of non-payment fintech startups, aiming to stimulate comprehensive fintech development in the country across all directions.

Fintech corporate landscape: key trends

In 2023, online purchases in the nation reached $11 billion, a figure that highlights the growing importance of fintech innovation in the country. Almost every third fintech startup in Azerbaijan is focused on online payments, while another third is developing their own e-wallets or creating payment aggregators. These companies rely heavily on transaction fees for revenue. The remaining fintech companies focus on financial loyalty programs, payment kiosks, and other innovative solutions in the local financial market.

The typical fintech company in the country has a headcount of personnel up to 25 people. Most fintech startups rely on the financial resources of their founders, family, and friends for growth. However, one-third of fintech companies seek funding from private and venture capital sources.

In 2023, Caucasus Ventures, a venture capital fund based in Baku revealed its ambitious investment strategy. The fund is going to allocate $6.6 million across 50 projects over the next five years. One of the projects the fund supports is Agcurate, a startup that works with agribusiness, agri-finance, and government sectors.

AI and financial sphere

In Azerbaijan's financial sphere, every third participant has implemented AI-powered solutions in areas such as fraud detection, customer service, and credit risk assessment, while every second participant is leveraging big data analysis. These sophisticated tools enable fintech companies to offer Robo-advisors services, with total assets under management expected to reach $430 million in 2023.

Currently, only a relatively small group of investors, numbering in the several thousands, use such technology to invest in the financial market. However, this figure is expected to grow significantly in the next four years, reaching more than 17 thousand users.