According to the December 2022 Digital, Internet and Mobile Banking Statistics published by the Banks Association of Turkiye, the number of customers using active digital banking, mobile banking and internet banking services in Turkiye reached 94 million, with an increase of around 16.5 million in comparison to the previous year.
One of the main reasons for this significant increase in 2022 is that the Regulation on the Working Principles of Digital Banks and Service Model Banking ["Regulation"] issued by the Banking Regulation and Supervision Agency ["BRSA"] which entered into force on January 1, 2022. The Regulation, which aims to facilitate digitalization, financial innovation and access to banking services in the banking sector, regulates the procedures and principles regarding the activities of digital banks and service model banking and provides guidance to financial institutions operating and wishing to operate in this sector.
According to the Regulation, digital banks are defined as credit institutions that provide banking services solely through electronic banking services distribution channels instead of physical branches and may operate as deposit or participation banks. In this framework, digital banks can engage in all activities that credit institutions carry out, as long as they comply with the activity restrictions set out in the Regulation and other banking legislation. In addition, digital banks may also operate in interbank markets and capital markets and carry out transactions that are considered as loans under Article 48 of the Banking Law No. 5411, extend foreign currency loans for enterprises exceeding the size of SMEs, and extend loans to other banks. The activity restrictions that digital banks are subject to are as follows:
- The digital bank's loan customers can only be financial consumers or SMEs. In the event that some enterprises subsequently exceed the SME size, only foreign currency loans can be provided until such enterprises are back within the SME size limits.
- The amount of unsecured cash loans that can be extended to customers who qualify as consumers cannot exceed four times the customer's monthly net average income. It is possible for digital banks to use their own estimation models to determine the income, and if the income cannot be determined, the amount of unsecured cash loans shall not exceed 10,000 Turkish Liras.
- Digital banks cannot open physical branches, provide physical custody services, and organize themselves outside the head office and service units under the head office. The physical access points of digital banks are limited to ATMs and mandatory customer complaints offices. However, for transactions that cannot be completed due to physical impossibilities, digital banks can communicate face-to-face with the customer through its own personnel or the personnel of the organization from which it receives support services.
- Digital banks are required to make service continuity commitments on the basis of each distribution channel they offer services and announce them as a percentage on the main pages of their websites, and this value must be at least 99.8% for internet banking and mobile banking distribution channels.
Digital banks, like all banks operating in Turkiye, are subject to the Regulation on Banks' Transactions Subject to Authorization and Indirect Shareholding and must obtain an operating license. However, digital banks are also required to include additional aspects such as marketing strategies for the target audience, market size analysis, information systems strategy plan in the activity program and business plan documents. In addition, digital banks are required to have a paid-in capital of at least 1 billion Turkish Liras in order to obtain an operating license, which is much higher compared to the minimum paid-in capital requirement for conventional banks. While this high capital requirement is intended to ensure that digital banks have sufficient financial strength and stability to operate without physical branches, it also risks creating an entry barrier for new players seeking to enter the market.
If digital banks increase their minimum paid-in capital to 2.5 billion Turkish Liras, it is possible that the operating restrictions may be lifted completely upon application or gradually within the framework of a transition plan to be approved by the BRSA. In addition, the BRSA may require additional conditions if the controlling shareholder of the company applying for an operating license is a legal entity providing technology, e-commerce or telecommunication services.
For banks that are already established and operating through their branches, it is possible to convert to digital banking or to offer digital banking services under a different brand name under the same legal entity without a separate application. Moreover, these banks will be able to operate without being subject to the restrictions on digital banks. However, if physical branches are closed for the transition to digital banking, the BRSA's approval must be obtained in line with the principles regarding digital banks.
Service Model Banking
Service model banking (BaaS: banking as a service) is another banking model introduced to the Turkish legal system. This banking model, which allows service banks to offer banking services through interface providers that are normally non-bank platforms, such as FinTech companies and e-commerce service providers, is considered a milestone for the development of the service finance sector and the FinTech ecosystem. In theory, it also enables customers to access multiple banking services through a single platform. For example, when using online shopping applications, the ability to use consumer loans directly from within the application is one of the most relevant examples of service banking for end users.
In order for a service bank to provide services within the framework of an operating license, the interface provider -except for banks- must be a domestically resident corporation. In order for a service bank to provide banking services to the customer of the interface provider, a contractual relationship must first be established between the customer and the service bank. The contractual relationship may be established electronically or through the interface provider. In these cases, the service bank is required to check that the service channels of the interface provider comply with the technical and data privacy security criteria required for the establishment of the contract. In addition, the service bank has an obligation to inform the public about the interface providers it serves by publishing a list of them on its website. After the conclusion of the contract, the interface provider and the service bank are jointly and severally liable for the compliance of the interface with the authentication and transaction security obligations.
Another function of the interface provider in the service model banking is that it is a support service organization that provides services to the service bank. However, the limitations set forth in the Regulation on Banks' Procurement of Support Services do not apply to the support services to be provided to the service bank within this framework, and it is possible for the service bank to collect credit card requests through the service channels of the interface provider.
Finally, the Regulation also prohibits interface providers from using the names of payment service providers such as banks or payment institutions and electronic money institutions in their trade names, all kinds of documents, announcements, statements or advertisements, or expressions that may give the impression that they operate as a payment service provider or collect funds without obtaining the necessary permissions.
Digital banking and service model banking have entered Turkish law relatively recently with the Regulation but have not yet reached sufficient maturity in practice. While it is not yet foreseeable whether the regulations on digital banking and service model banking will be adequate or compatible with the rapidly evolving technological developments and customer expectations in the financial sector, it is vital that both regulators and market actors closely monitor the implementation and impact of the Regulation and adapt accordingly in the near future.
By Zahide Altunbas Sancak, Partner, and Aziz Can Cengiz, Attorney, Guleryuz & Partners