Innovation Initiatives in Kazakhstan – Binur Zhalenov – [Episode #17]

Podcast Intro (00:00:00) – Hello. Welcome to P.I.T. Exchange, a podcast by Currency Research. Join us as we discuss the latest in payments, innovation and technology with the industry’s most innovative thought leaders. Today’s payments are changing and moving around the world faster than ever before and P.I.T Exchange gives you the knowledge and insights to keep up. Sit back and relax as we join Currency Research, exchanging ideas with today’s special guest.

Jens Seidl (00:00:33) – Welcome everybody to another episode of The P.I.T Exchange, payments, innovations, technology. I’m very happy to have a guest with us today who I met a few years ago. I can’t even remember where, but it’s, it’s been a while now that we’ve been talking to each other. It’s Binur Zhalenov from, the, well, it’s it’s not the National Bank of Kazakhstan anymore. You’re in a new role, and you’re going to tell us a little bit more, in a minute, you know? Welcome.

Binur Zhalenov (00:01:05) – Hi, Jens, it’s absolute pleasure to be here, excited to have a, a very great chat about payment innovation here in Kazakhstan.

Binur Zhalenov (00:01:15) – So if you want, I can go now, tell them a couple of words about my, bio or..

Jens Seidl (00:01:22) – Well, we’ve got a little game with you first. And that is, before we go into the business aspect, we like to ask three quick random questions about yourself, to, to get to know you a little bit more. So first question is on a plane window or aisle?

Binur Zhalenov (00:01:40) – Oh, well, on a plane, its window.

Jens Seidl (00:01:44) – Okay. Do you prefer mountains or the seaside?

Binur Zhalenov (00:01:45) – Mountains.

Jens Seidl (00:01:46) – Well, no wonder in Kazakhstan, I understand that. Yes. And, what’s your favorite cuisine? Your favorite national cuisine?

Binur Zhalenov (00:01:58) – Well, it’s Kazakh sweets.

Jens Seidl (00:02:00) – All right. Lovely. Okay. Thank you very much. Now, yes, let’s jump in and please tell us a little bit about your career and what you’re doing now.

Binur Zhalenov (00:02:10) – Yeah. Thank you. So I have a background in technology, in 2020, I joined the team of the National Bank of Kazakhstan as a technology advisor. So, in that year, we developed, several strategic documents that outlined, our journey, to the future of payments.

Binur Zhalenov (00:02:33) – So we developed, the strategic roadmap for, National Payment system development and strategic roadmap for, fintech and innovations in financial industry. Then, apparently in 2021, we created a special purpose vehicle, called Paynet Financial Technologies Development Center, which was an island center, where we, developed, the, prototypes for CBDC digital team developed another roadmap for open banking implementation. So I did a bit of, research and development, essentially. And, in 2023, last year, we decided to merge this island center with Kazakhstan Interbank Settlement Center, which is also 100% subsidiary of the National Bank of Kazakhstan and which operates RTGS key and automated greenhouse. And so we merged these two entities to create the National Payment Corporation, 100% subsidiary of the Central Bank of Kazakhstan. And now we operate all these national payment systems and schemes and, are responsible, responsible for, implementing CBDC and backing many other innovations.

Jens Seidl (00:04:04) – All right. Great. Now, thank you for that introduction. And, I have been, watching this journey, if you like, now for quite a while.

Jens Seidl (00:04:14) – I was really impressed with how strategic the National Bank of Kazakhstan and yourself were about this. And I think how you were piecing all of these different parts together to, to form this new infrastructure. And maybe before we go into the the more cutting edge and, and more recent developments in the payment space, I think that one of the first steps you, you did to innovate or to update your payment landscape was to update your RTGS system. Is that right? And can you tell us a little bit more about that?

Binur Zhalenov (00:04:45) – Yeah. that’s very true. So, I think starting from 2021, we started preparation of migration to ISO20022, to comply with international standards, suite standards. And this year we aim to, fully, transfer through the local payment schemes to, ISO 20022. It’s, quite, big journey because we are not only updating our own systems, but also, adapting the standards for local market participants, conducting, conducting a series of workshops for them, making the test so that everything works smooth.

Binur Zhalenov (00:05:31) – Not only financial institutions involved, but also governmental institutions, obviously, treasury and other entities who are responsible for social distribution. Quite large scale project. And we hope that everything should go well and we will switch, all of the payment systems to this standard this year.

Jens Seidl (00:05:55) – Okay. Interesting. I think that’s an aspect that’s often forgotten when talking about ISO 20022, that it’s not just the central bank, of course, that need to update their systems and adopted, but it is the whole payment landscape that need to follow. So are you quite happy with the adoption rates and are you on track with that, with your expectations?

Binur Zhalenov (00:06:15) – Well, obviously there has been, there have been many different issues throughout this journey, but so we decided that everyone would switch. And it was a regulatory decision to switch every payment system, private and public systems to this standard. So, we’re getting that, this July will be, in one day, we will, switch every payment system in Kazakhstan to this new, so that was that.

Binur Zhalenov (00:06:46) – That’s why it took almost three and a half years to reach this.

Jens Seidl (00:06:51) – All right. Yeah. And it is a journey. Absolutely. I appreciate and understand that, and am I right in saying that this also that has enabled instant payments now, this this upgrade?

Binur Zhalenov (00:07:04) – Yes. Of course. yes. Payment of any new payment scheme will be welcomed like this. Yes. Yeah.

Jens Seidl (00:07:14) – Okay, cool. Maybe let’s talk about then some of the more, cutting edge, new things that are happening. And maybe let’s start with open banking. You’ve been working on open banking, and can you just give us an overview of where you are now with, your initiatives? What’s, what’s the status quo and what’s next?

Binur Zhalenov (00:07:34) – Sure. I think in December 2022, three regulators, which is Central Bank, National Bank of Kazakhstan, financial supervision agency, financial regulator and antitrust agency. So we, establish a strategic roadmap for open banking implementation in Kazakhstan to, foster competition, in, financial markets. So, and last year, in 2023, we, pilot scheme in cooperation with five banks.

Binur Zhalenov (00:08:10) – We have quite, I think unusual scheme for banking, here in the National Payment Corporation. We are developing a centralized infrastructure, to enable, open APIs and, central centralized infrastructure consists of several layers. First, we have a centralized, consent management, essentially the consumer providing consent to grant that to third parties through our service, which is biometric enabled. two-factor. identification and authentication. Then we also have a centralized API, aggregator, and then when the bank or other financial institutions develops their API, it goes through a series of different tests and then being published on this, centralized and aggregate. So, yeah. So we piloted the scheme last year with account aggregation. So essentially the consumer, was able to, in the application of one bank to see all of, their accounts in different points. So, and we now scale in the scheme, not only with account aggregation, functionality, but also with payments. what we are doing now, essentially integrating instant payments and open API platform so that, payment initiation would work, on, instant payment, rates.

Binur Zhalenov (00:09:50) – So that’s sort of the journey.

Jens Seidl (00:09:53) – Okay. And you mentioned biometrics there from a consumer perspective. Can you tell us a little bit more about that and, and how that exactly works?

Binur Zhalenov (00:10:02) – Sure. In 2020, during the pandemic, the National Bank of Kazakhstan launched a nationwide KYC scheme, enabled by biometrics. So we have, centralized identity registry here in Kazakhstan. So essentially there is a 20 million, or 20 million Kazakhstan is, in one database, we have the, photo single source of truth. And in 2020, we built a scheme that allowed banks to convert, consumers in a fully remote mode. So essentially, when you’re trying to, open your bank account or to any other financial operation, you simply identify yourself with camera on your smartphone. This image then goes through a liveness check and all of the security measures. Then it’s, much, versus your thoughts in government database. And then the decision is made much faster. And, we then, sort of integrated this, biometric solution with, public key infrastructure API that we also manage, which allows us to essentially provide an opportunity to sign the documents or consent through your biometric, identification.

Jens Seidl (00:11:35) – Very interesting. And, and so I had to go off on a tangent, but, has this also helped with financial inclusion or is that a completely separate aspect?

Binur Zhalenov (00:11:45) – Of course, you’d also, with the smartphone penetration is quite high in Kazakhstan, so almost everyone has a smartphone. So now being anywhere online, you can open your bank account and get credit fully online.

Jens Seidl (00:12:09) – Yeah. Okay. Interesting. Thank you. But coming back to open banking, then the one side of open banking, of course, is the banks engaging and opening up their APIs, etc.. But the other side is fintechs, then joining the ecosystem, if you like, and offering new services and, and entering that space. But what have you seen so far in Kazakhstan? Is it mostly new local players? Is it international players? A bit of both. What’s the landscape like?

Binur Zhalenov (00:12:37) – So at the moment, we are testing the, like all of the schemes only between banks. Right. So it’s quite unusual. It’s not quite an open banking at the moment. It’s more of a open APIs between banks at the moment. We’re doing that, to ensure that the scheme is secure and is protected from potential fraud and scams. But we still, providing a sandbox for non-bank fintech so they can offer, their solutions. At the moment, the interest is mostly in personalised financial management solutions. Specifically, given that, government in Kazakhstan is introducing some new legislation related to, tax declaration. And solutions like found can automate the process of tax declaration, right? Because you can simply use one button to see how many spend you have. You see solutions like that, like between PFM, GovTech and fintech. So then, they are now being developed, this market. And we hope that it can work with full scale manner starting from next year.

Jens Seidl (00:13:55) – Okay. Excellent. Thank you. Maybe let’s move on and talk about another initiative that you’ve been working on for a number of years now. And I think that’s actually where we first met over, over that topic.

Jens Seidl (00:14:07) – And that was, CBDCs. The National Bank of Kazakhstan has been really active in, again, I think in a very structured and strategic manner, starting with some research, understanding what’s happening, talking to potential partners, rolling out pilots or testing first, then pilots, etc. Can you tell us a little bit about that journey in in more detail and and, give us some a feel for that journey that you’ve been on.

Binur Zhalenov (00:14:38) – Yeah. So we started our journey in 2020 or so, I believe. In October 2020, the governor asked me to conduct my very first research of what is CBDC and what other central banks are doing. So at the moment, it was a very, sort of, a lot of hype around CBDC topic. And, so we started the research, in May of 2021, we published our first green paper, sort of consultative paper, where we discussed the potential concept of digital and how it might work, which should be the key principles. And from 2021 up to the end of 2022, we conducted a comprehensive series of, research, that, included the technological pilot, proof of concepts, MDPs, friends and family pilots, economic research, assessment of financial stability, impact assessment of potential demand for, digital technology.

Binur Zhalenov (00:15:46) – We also consulted with many different international partners, including IMF, World Economic Forum, a Bank of International Settlement. And finally, by the end of 2022, as a country, we made a decision to issue, digital team here in three phases, starting from, 2023, last year, the November 15th and 30 year anniversary of our national currency, we completed the first transaction, in a digital theme. So, we collaborated with, local banks. It was five different banks. Now, we also, built an interoperability solution with international payment systems like Visa and Mastercard. So essentially, you can link your CBDC account to your visa Mastercard card and anywhere in the world. And we also launched a pilot for social paid, distribution enabled, by digital team. So we call this scheme digital vouchers. And last year we piloted this digital voucher for school canteens for free food in schools. Essentially, the government subsidizes, food in, in the schools. So the food is free for students, and these digital vouchers enabled the streamlining, the entire process.

Binur Zhalenov (00:17:25) – So every student here in city of Almaty has, transportation card. So essentially, when student comes to canteen, they top of the terminal. So based on that trigger, the funds, automatically, being sent from the account of the school to the account, of the operator of canteen. And, this archetype, of digital voucher can be perfectly scaled not only for this specific scenario, but, for other scenarios where a government indirectly subsidizes certain expenses of the city, medicine, I don’t know, other types of solutions. The so based on this experience this year, we scaling the functionality, focusing on several use cases, the first use cases related to transparent budget spending, integrating digital single with public procurement system. So the idea is also very simple that we have a programmable CBDC around digital single, and we program certain digital things, so that it could be spent only for specific goods or services with the public procurement schemes. So, for example, if the government procured, construction of schools, you can spend with each person only for certain services and goods, that are needed for construction of schools and, this is a very complex topic.

Binur Zhalenov (00:19:08) – Of course, it involves a lot of methodological questions. That’s why we collaborated with Ministry of Finances and Anti-Corruption agency to conduct this pilot, and we hope to have results this year. Second use case with scaling, digital voucher schemes. So our ambition is, to have, this scheme, scaled to entire country. So all the schools in the country will be using that. We also pilot in digital vouchers for subsidies in medicine.

Binur Zhalenov (00:19:43) – So essentially we now in the very deep, collaboration with the government, to see how digital changes can help, to make the procedures more transparent and more efficient. Okay. The second group of use cases are related to digital assets industry. So for example, digital team here will enable a so called, cryptocurrency. So we have a license, virtual asset providers here, in Kazakhstan. And citizens have, the accounts that, crypt, exchanges and the, digital team would enable, source of their spending from your, account in crypto exchange, for example, I have my account, in Binance.

Binur Zhalenov (00:20:37) – I will be able to spend, USDT at my Binance account directly with my Visa Mastercard. Right. The solution also is very simple. Bank has its own node in digital platform and open account for crypto exchange and for the merchants. And when the transaction is made, the funds be sent from the, wallet of, crypto exchange to the wallet of the merchant at the same bank, and, so this is roughly. We also made, in cross-border in, transactions starting from, from last year. We, became the observers in mBridge project. We collaborated with Swift in the Swift CBDC sandbox to conduct the test transaction with Hong Kong Monetary Authority. And we aim to continue this work this year as well. So that’s a long story short. That’s all sorts of key use cases that we are now exploring. And by this journey, we are going to publish another paper, like a compendium of use cases that we are working on in digital singular.

Jens Seidl (00:22:02) – Excellent. Now, thank you for that overview. And, again, for what fascinated me most about your, your CBDC initiatives was really that, I think a lot of retail CBDC initiatives are being accused of being a solution, looking for a problem. And I don’t think that is the approach you’ve taken. It’s quite the opposite. You actually looked at very specific use cases where there are issues, or at least the the mechanisms can be improved. And that’s where you targeted your pilot. This is my, impression. And take the school money. I can imagine previously, without having that kind of mechanism, it was probably almost impossible to actually make sure that money that was distributed was used for exactly that purpose. Is that fair to say?

Binur Zhalenov (00:22:55) – Yeah, absolutely. That’s exactly the goal. We tried to make our pilots and projects as practical as possible. Yes.

Jens Seidl (00:23:07) – Yeah. Okay. And, maybe just a few technical questions around the digital Tanguy. Have you implemented limits on individual wallets and, how how is that working?

Binur Zhalenov (00:23:20) – So, not yet. We are now still discussing the potential limits for the wallet on the business level, and on my own personal level. So there is still ongoing research on financial stability implications and the potential, demands for a digital ten years ago with the introduce and subnetworks. But there is no unlimited set amount yet.

Jens Seidl (00:23:49) – Okay. Which again, I find it a really interesting approach because, in so many cases, central banks are discussing limits right from the start, with the concern over disintermediation. But I personally I quite like that you are starting to use it and then monitor and then decide whether to implement limits and what that limit should be. That that seems like a very sensible approach to me. And I guess so far you haven’t run into any issues.

Binur Zhalenov (00:24:17) – Yeah, I think the problem is quite the opposite. There is no stable demand, and adoption concedes that this would be the case for the majority of CBDC projects. So, and, our approach is that we decided to have a regulatory, a right to impose limits but we are at the moment, decided not to, you know, not reduce that rate because it’s falling at the moment.

Jens Seidl (00:24:47) – Right? Well, I would certainly keep watching very closely what projects you’re working on. As I said, I think it’s fascinating. And, and we do talk to a lot of central banks around the world. We, we, follow what’s being done in the CBDC space. But when it comes to retail CBDC, I think Kazakhstan is really at the forefront in, in testing some very, very interesting uses for CBDC. So I’ll keep watching closely.

Binur Zhalenov (00:25:15) – Thank you. We’ll try to be, just transparent as possible. Also here to share all of the updates.

Jens Seidl (00:25:22) – Okay, okay. But there’s one more thing I wanted to talk to you about before we wrap up today. And that is, you told me that you’re working on establishing a new anti-fraud center, which I believe is opening this summer. Is becoming operational this summer. Can you tell us a little bit about that, what their remit is, what they’re focusing on and what the plans are?

Binur Zhalenov (00:25:44) – Of course. You know, It’s very good that the economy becoming more and more digital. Also, it comes obviously with its own risks, and the fraud is probably one of the biggest issue here because the number of frauds in online banking analysis, broadly speaking, skyrocketed, in last several years. And the so when we analyze the issue, we see clearly, one of the problem is that all of the financial market participants have information, and data files regarding the fraud. So every bank developing, its own entire system or payment service provider, it’s own. So and it’s very easy to fraudster to from one bank and then go to another. There is no single source of truth and database of that incidence. So we decided, as a first step to, try to build this collective immune system, when, fraud incident happens in Bank A, it automatically, is being sent to this nationwide database and automatically every participating bank and financial institutions, be, notified about this incident happening here at the, requisites here, the name whatever.

Binur Zhalenov (00:27:18) – And, which helps us to, essentially, prevent. Right, the potential, fraud being happened in other banks as well. the second step is that we will collect essentially the database of incidents which would then enrich the, source of knowledge for scoring systems to make them, more precise, more accurate in, filing this, we also have, integrated with legal enforcement agencies so that they can see, what it’s what the incidents happened, what is like the weakest or the weakest point, etcetera, etcetera, etcetera. And this is the first phase of implementation. It will be launched in July of this year. And then we will try to further develop, also this idea.

Jens Seidl (00:28:16) – All right. And, which agencies then actually connect with that new anti-fraud center? It’s definitely the central bank and the regulator, I imagine. But is it also then law enforcement and other agencies like that?

Binur Zhalenov (00:28:30) – It’s, Ministry of Internal Affairs. So another feature of that anti-fraud center is that when incident happened, for example, in one bank, the bank has right to walk, the transactions up to three days.

Binur Zhalenov (00:28:47) – And within these three days incident is being investigated by Ministry of Internal Affairs and Ministry of Internal Affairs, made the decision that that is a very good. It’s a suspect, then everything is blocked and then the legal enforcement process has started to work. You’ve made a decision that everything is clear. Then the funds are not. That’s how it works at the moment. And we also will enrich the national, interest scoring for Minister of Environmental Affairs. We also connecting other agencies, for example, agency for Financial Monitoring, which is, legal, a government agency responsible for AML and CFT. and so they also publish their blacklists, in our servers. And so we also collaborate.

Jens Seidl (00:29:47) – Okay, great. Very interesting. And do you think the, the anti-fraud center is also going to link to other, international organizations over time, or is that then going to go through the other, institutions that already have these kind of links?

Binur Zhalenov (00:30:04) – Yeah, of course we will try to enrich, our functionality, because one of the important aspects is that we are being connected with all financial institutions.

Binur Zhalenov (00:30:13) – So we are very good distribution mechanism for any type of blacklist essentially. So and ideally we would database by database connect different kind of blocks, function lists or whatever. Right. Because it will be, easier to distribute through our through distribution of anti-fraud center. Yes. And of course.

Jens Seidl (00:30:39) – All right. Great. Well, I think we’re about to run out of time, actually. This this past pretty quickly. But before we wrap up, well, I will ask you in a minute. for your outlook is for Kazakhstan, of course, especially from a payments, point of view. But before we do that, I also wanted to just share some of my personal experience with Kazakhstan. We had the Silk Road conference last year in Almaty, and on the back of that, I was lucky enough to spend a few more days, in your country. And, it was absolutely amazing. So to all of our listeners, if you haven’t been to Kazakhstan yet, it’s definitely worth a trip. It’s, I think the biggest landlocked country in the world.

Jens Seidl (00:31:24) – It’s the fifth biggest country in the world, but there’s only just under 20 million people. So you got these vast, empty landscapes. You got beautiful, canyons. Gorgeous. You got, beautiful rivers and mountain lakes for instance. Where in Europe, these mountain lakes there would be overpopulated with restaurants and bars and people and they’re really just beautiful nature. It’s an amazing place. You know, you already mentioned the cuisine as well, which is also fantastic. So if you haven’t been, I can really recommend Kazakhstan as a fantastic, holiday destination is you’re in for treat. So, Binur, with that, I’ll hand over to you. What’s your outlook for Kazakhstan and its banking and payment landscape.

Binur Zhalenov (00:32:12) – Well, I think it’s very optimistic about that. Well, well, look, in last five years, our industry has, grown, like, in a very extreme manner. So we started with, I think, around 60% of, penetration of cashless payments in 2020, with, more than 86%, this year.

Binur Zhalenov (00:32:37) – So, we are becoming more and more, cashless economy, which also creates a great market for, financial industry players, new financial players. I hope that the number that the competition will, foster and increase and we will have more and more, that fintechs also non-bank fintechs. And we hope that our infrastructure will be helpful to reach that goal. And I saw that the Kazakhstan would have one of the leading, financial infrastructures in the world. That’s our ambition. we believe that it is quite realistic, and we hope to become one of the first countries to fully, fully and successfully implemented CBDCs and, faster payments, open banking so that the, consumer would have any type of payment trail, any type of digital financial services at their smartphone. So that’s sort of our ambition and destination. Hope that we will reach that.

Jens Seidl (00:33:45) – That sounds amazing. As I said earlier, I’m really impressed with your strategic vision and the way you’re implementing that, and I’ve got no doubts that you will get there. So again, thank you very much for being on our podcast today.

Jens Seidl (00:33:57) – Really appreciate it was great talking to you as always. And yeah, hopefully see you soon in person somewhere again.

Binur Zhalenov (00:34:05) – Yeah. Thank you.

Jens Seidl (00:34:06) – Okay. Thanks very much, Binur.

Podcast Outro (00:34:09) – Thank you for listening to The P.I.T. Exchange, a podcast by Currency Research. Check out our upcoming events and publications at currencyresearch.com, and join us for our next episode to hear what’s trending in payments, innovation and technology.

In a recent episode of our podcast, we had the pleasure of hosting Binur Zhalenov from the National Payment Corporation of Kazakhstan, a subsidiary of the Kazakhstan Central Bank. The conversation delved into the transformative payment innovations and technological advancements taking place in Kazakhstan. Binur shared his career journey, the strategic initiatives of the National Bank, and the country’s ambitious plans for the future.

Kazakhstan’s Payment Landscape: A Rapid Evolution

The Shift to Cashless Payments

Over the past five years, Kazakhstan has witnessed a significant shift towards cashless payments. The penetration of cashless transactions has surged from around 60% to over 86% in 2020. This rapid growth is a testament to the country’s commitment to modernizing its financial infrastructure and fostering a competitive market for financial industry players.

Strategic Initiatives by the National Bank of Kazakhstan

Binur Zhalenov highlighted several strategic initiatives undertaken by the National Bank to enhance the payment ecosystem in Kazakhstan. These initiatives aim to provide consumers with seamless and secure digital financial services.

1. Open Banking

Open banking is a pivotal initiative that promotes transparency and competition in the financial sector. By allowing third-party developers to build applications and services around the financial institution, open banking empowers consumers with more control over their financial data.

2. Development of Retail CBDC (Central Bank Digital Currency)

Kazakhstan is at the forefront of developing a retail CBDC, aiming to be one of the first countries to fully and successfully implement this digital currency. A retail CBDC can enhance financial inclusion, reduce transaction costs, and provide a secure and efficient payment method.

3. Faster Payments

The implementation of faster payment systems is crucial for enabling real-time transactions and improving the overall efficiency of the payment ecosystem. Faster payments can benefit both consumers and businesses by reducing settlement times and enhancing liquidity.

Establishment of an Anti-Fraud Center

To safeguard the integrity of the payment ecosystem, the National Bank of Kazakhstan has established a new anti-fraud center. This center aims to detect and prevent fraudulent activities, ensuring the security of digital financial transactions.

Kazakhstan is making remarkable strides in payment innovations and technology, driven by the strategic initiatives of the National Bank. From the shift to cashless payments and the development of retail CBDC to the establishment of an anti-fraud center, Kazakhstan is positioning itself as a leader in the digital financial landscape. As podcasters interested in technology and finance, we can draw valuable lessons from Kazakhstan’s journey and apply them to our own contexts.

Payments, Innovation and Technology Week

As we wrap up this insightful journey, we invite you to continue the dialogue and participate in our upcoming event in September, Payment, Innovation and Technology Week. This event will explore the latest trends and research in Digital Currency Use and AI Applications for Central Banks.

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Disclaimer: While we embrace open dialogue and value diverse perspectives, it’s important to note that the views expressed by individuals in our podcast episodes are entirely their own. They may not necessarily align with the views, opinions, or positions of the organization they are associated with.