National Digital Financial Infrastructure in Kazakhstan

Kazakhstan is a global leader in the development of a cashless economy. Over the past five years, cashless transactions among the population have increased more than tenfold, now accounting for an impressive 88% of retail turnover. Today, 8 out of 10 transactions are conducted through digital banking. Every day, Kazakhstani citizens perform approximately 28 million transactions, totaling more than 425 billion tenge, via mobile applications.

All basic financial services—client onboarding (opening a bank account), obtaining a loan, making payments and transfers, and receiving government services—are available digitally and remotely. The digitalization of the financial sector has had a positive multiplier effect on other industries, from GovTech to e-commerce.

This rapid development of the sector is primarily driven by the initiatives of financial market participants and dynamic competition among them. It is this competition that motivates market players to continuously improve their services and implement innovations, ultimately benefiting us all with better quality, cost-effectiveness, and convenience in financial services.

Competition among players is possible only under transparent "rules of the game"—a regulatory framework and equal access to digital financial infrastructure. The National Bank of Kazakhstan is responsible for developing these aspects in the payment sector.

However, along with the obvious benefits for us, active digitalization has brought serious challenges—fraud and cyber threats, as well as the risks of high market concentration due to platform-based business models. Geopolitical turbulence, fragmenting the global financial infrastructure, also contributes to these challenges. Let's delve into each of these risks in more detail.

Market leaders aim to create so-called "network effects" that ensure customer retention within their ecosystem. In other words, the key priority for financial organizations today is to maximize the number of transactions (payments, purchases, government services, etc.) through their application. This allows for cross-selling various products, optimizing costs, and ensuring maximum customer loyalty. It is important to note that building such an ecosystem is quite resource intensive. For network effects to work, it is crucial to gather a critical mass of ecosystem consumers—for example, without a wide coverage of sales points, a payment system will not be attractive to customers and vice versa. The same principles apply in other digital markets—e-commerce, social networks, etc. An even greater challenge is to attract customers from the market leader and retain them within one's own ecosystem.

While digital ecosystem business models bring benefits to consumers (receiving various services under the "one-stop-shop" principle, "super-services"), they also lead to limited competition due to "winner takes it all" effect. In the medium term, limited competition results in increased tariffs, reduced quality, and the infringement of consumer rights.

These principles have also been realized in the Kazakhstani financial market, where the level of market concentration in certain segments is extremely high, and some players, by controlling acquiring channels, effectively control key distribution channels of digital economy which impacts competition in, for example, e-commerce.

In the first four months of this year alone, over 6,500 cases of internet fraud were registered in our country, causing damage of more than 11 billion tenge. The dominant method of fraud is undoubtedly social engineering. The presence of numerous "information silos," actively exploited by fraudsters, is a separate challenge.

Amid increasing sanctions pressure, cross-border payments and transfers are becoming even longer, more expensive, and complex.

In response to these strategic challenges, the National Bank is developing the National Digital Financial Infrastructure (NDFI).

Since the mid-1990s, the National Bank has been developing interbank payment systems—the "arteries" of the financial market, connecting different financial institutions. Interbank payments and transfers, social payments and tax deductions, settlements for the securities and currency markets, and much more are processed in these systems (RTGS and ACH). These transactions today constitute about 85% of the cashless payment turnover—about 4 trillion tenge per day. Additionally, the National Bank successfully operates a biometric identification service for the financial market, processing more than 2 million requests per month. This service has enabled banks to open accounts remotely and secure the provision of various financial services. The operator of this services is National Payments Corporation of Kazakhstan .

Following the President of Kazakhstan's directive, we are developing new services as well.

The National Card Switch ensures the localization of card transaction processing. Partnerships with international payment systems (Visa, Mastercard, UnionPay) maintain market access to advanced innovative services, while the use of the national messaging protocol in the system ensures the security of personal data. In critical scenarios, the system will ensure the uninterrupted operation of card payments within the republic. Today, all second-tier banks are connected to the system.

The interbank Open API payment and transfer system will provide convenient and inexpensive interbank transfers via phone numbers, as well as opportunities for interbank QR payments. This will reduce intersystem barriers (including "prohibitive" tariffs) for the movement of funds—consumers can switch between ecosystems with lower financial costs. The use of QR code technology and lower transaction costs lower the entry threshold for cashless payments for small and medium-sized businesses. In April of this year, all market participants received the necessary technical documentation, and a testing environment was opened. The business model and tariff formation are being discussed within the Tariff Policy Council, which includes all second-tier banks. We hope to launch a pilot in Q4 this year.

In 2023, in collaboration with 4 second-tier banks, KazPost, and international payment systems, The digital tenge platform was launched. As part of its scaling, pilot projects for programming digital tenge for targeted and transparent government spending are being implemented in cooperation with the Anti-Corruption Agency and the Government. Cross-border settlements in national digital currencies are being piloted with the Bank for International Settlements – BIS and Swift , which will speed up and reduce the cost of international payments and transfers. The digital tenge platform is also being piloted as a secure settlement infrastructure for digital assets with market participants.

In December 2022, together with the Agency for Financial Market Development and Regulation and the Agency for Protection and Development of Competition, the Open API & Open Banking Strategic Roadmap was approved. In 2023, the National Bank, together with 5 second-tier banks, launched the Open API platform and consent management service. Consumers can view, provide, and revoke consent for access to their personal data digitally using biometrics. Citizens can also freely manage their financial data in any convenient interface, reducing dependence on specific financial institutions and stimulating competition.

In July of this year, at the request of market participants, the National Bank's Anti-Fraud Center will be launched, which will collect all fraud incidents in the financial market into a single database in real-time as well as help to involve legal enforcement agencies. This will increase the speed of fraud response and prevent it more effectively through the consolidation of "knowledge bases."

These projects are being implemented in close cooperation with market participants based on the principles of consistency and transparency. The National Bank regularly publishes white papers detailing plans for system implementation. Projects are discussed weekly with overseeing executives of second-tier banks in collaboration with the Association of Financiers of Kazakhstan.

These projects, combined with already functioning interbank systems, constitute the National Digital Financial Infrastructure (NDFI), which the National Bank is building on the principles of equal access for all market participants.

This model minimizes the risks of non-market approaches to competition by eliminating artificial barriers (prohibitive tariffs, limitations in payment methods, etc.) between closed digital ecosystems. Implementing NDFI services will simplify and reduce the cost of such interbank operations for citizens and businesses, encouraging banks to compete in the quality and cost of financial services, preventing abuse of dominant market positions.

Importantly, NDFI does not provide services to end consumers. Services are provided only to infrastructure participants—second-tier banks and other financial organizations.