Digital Banks and Service Model Banking in Turkey

Digital Banks and Service Model Banking in Turkey

The Regulation on the Operation Principles of Digital Banks and Service Model Banking (“Regulation”), published in the Official Gazette dated 29 December 2021 and numbered 31704, was issued by the Banking Regulation and Supervision Agency’s (“BRSA”) and it entered into force on 1 January 2022. In a nutshell, the Regulation provides the principles and procedures of the (i) operations of digital banks -branchless banks-, and (ii) banking services provided to customers by the service banks through interface developers, such as FinTech companies.

The Regulation, enabling the establishment of digital banks and introducing service model banking, is considered a milestone by the BRSA in terms of the development of Turkey’s financial sector and FinTech ecosystem by enabling numerous innovative business models.

1. Digital Banks

Digital banks are credit institutions without physical branches, providing banking services through electronic distribution channels. Being credit institutions, they are subject to laws and regulations applicable to credit institutions and can perform all activities available to credit institutions, depending on whether they are deposit or participation banks, subject to restrictions set out in the Regulation.

Pursuant to the Regulation, digital banks:

• must obtain an operation licence from BRSA subject to requirements provided under the Regulation as well as the Regulation on the Activities of Banks Subject to Permission and Indirect Shareholding dated 28 June 2014 and numbered 29044.

• must have a paid in capital of TRY 1 billion.

• can only act through their headquarters and service units organized under the headquarters without having any other physical quarters under any name such as branch, agency, representation office, etc.

• can only extend loans to financial consumers and SMEs. Extension of foreign currency loans to enterprises larger than SMEs, extending loans to credit institutions and engaging in transactions deemed as loan transactions in the interbank market or financial markets are exemptions to such restriction.

• cannot provide physical custodian services other than those provided through digital mediums.

• must have at least one physical office for customer complaints and can further provide services through the ATM networks.

• cannot extend unsecured cash  loans to consumers in an amount exceeding four times the declared average net monthly income of the relevant customer. In case the average net monthly income of the customer cannot be determined, the threshold shall be deemed as TRY 10,000.00. The credit card spendings and cash withdrawals from credit cards are exempt from such threshold.

• cannot have undertaken service continuity levels lower than 99.8% for the internet and mobile banking distribution channels. The undertaken service continuity levels must also be published on the website of the digital banks.

• The restrictions set out in the Regulation and detailed above may be completely or gradually released by the BRSA upon application once the paid in capital of the digital bank is increased to TRY 2.5 billion.  

Existing Banks’ Performing as Digital Banks

The existing banks can provide digital banking services without the requirement of making further operation licence application under the Regulation and the restrictions stipulated under the Regulation will not be applicable. If such banks desire to close their branches to perform digital banking services partially or wholly, they should apply to BRSA with a branch closing plan and obtain the approval of the BRSA. If such banks desire to continue performing their activities solely through electronic banking services distribution channels, the affirmative opinion of the BRSA confirming the adequacy of their information systems must be obtained. 

2. Service Model Banking

Service model banking, also known as BaaS (banking as a service), is a model enabling service  banks to offer financial services, to the customers of non-bank interface developers, such as e-commerce platforms and FinTech companies, by integrating banks’ systems with interface developers’, through APIs. With such integration interface developers offer service banks’ financial products to their customers and service banks may charge fees to interface developers for providing services to their customers.

The Regulation acknowledges BaaS as a banking model and provides general principles applicable to such model, including the relationship between service banks, interface developers and their customers and restrictions for interface providers.

Relationship between the Service Bank, the Interface Developer and the Customer

For the service banks to provide banking services to the customers of the interface providers, a contractual relationship must be established between the service bank and the customers of the interface providers. Such contract can be concluded through an electronic platform of the interface provider or by physical means. In cases where the contract is concluded and/or the financial services are provided by the service bank through the platform of the interface provider, the service bank is liable for interface developers’ compliance with security requirements and KYC processes as regulated under the banking legislation.  

A service agreement must also be concluded between the service bank and an interface developer for the service bank to provide services to the interface developers. Where the service bank charges fees to interface developers for their services provided to their customers, the relationship between the service provider and the interface developer falls into the scope of the Regulation on Support Service Procurement by Banks and the provisions of the relevant regulation are also applicable.

Under the Regulation, the service banks are required to publish information on their websites on the scope of the services they provide to interface developers as well as the list of the interface developers to which they provide services. Furthermore, service banks are under the obligation to submit a copy of each service agreement executed to BRSA within one week following the execution of such agreements.

Transparency of the Relationship

The Regulation also contains mechanisms to ensure that the customers fully understand the nature of the relationship between them, interface developers and the service banks. Pursuant to the Regulation:

• service agreements must contain provisions indicating that the interface developer is not a bank, payment institution or an electronic payment institution (in cases where the interface developer dost not have any related licenses).

• copies of the template agreements to be executed by and between (i) the interface developer and the customer; as well as (ii) the service bank and the customer must be demonstrated on the home page of the website of the interface developer.

• the logo and the title of the service provider service must be visibly demonstrated on the home page of the website of the interface developer.

• in cases where the service bank provides interface developers with cards as payment instruments, the title and the logo of the service bank must be included on the cards.

Restrictions for Interface Providers

Pursuant to the Regulation:

• service banks can only provide services to the interface providers residing in Turkey.

• interface providers, obtaining services from a service bank, cannot use the words of “bank”, “payment institution” or “electronic money institution” or other words and expressions that may give the customers the impression that they are operating as such, in their trade names, documents, announcements, etc. to ensure transparency of the relationship.

• customer information can only be transferred to the interface developers by the service bank with the instruction of the customer.

For further information please contact:

Zeynel Tunç / Partner / zeynel.tunc@tuncfiratdereli.com

Bengü Coşkun / Senior Associate / bengu.coskun@tuncfiratdereli.com