A Milestone in the Turkish Banking System: Draft Regulations on Principles of Operation of Digital Banks and Bank-as-a-Service Model – Finance & Banking



The Banking Regulation and Supervision Agency (“BRSA“) announced on August 19, 2021 the draft regulations which include the operating principles and procedures that are planned to be introduced for (i) digital banks and (ii) the bank-as-a-service model (“Draft regulation“). This project represents an important step in the digitalization of the Turkish banking system.

II. Digital bank

According to Article 3 of the draft regulations, digital banks are defined as “credit institutions that provide banking services primarily through electronic banking delivery channels instead of physical branches.” The entire regulatory framework for credit institutions will also apply to digital banks.

According to Article 5 of the draft regulation, digital banks are only allowed to provide their services to (i) financial consumers and (ii) small and medium-sized enterprises. Digital banks are also allowed to (a) conduct business in interbank and capital markets, (b) accept bank deposits or provide loans to other banks, (c) offer account depository services to payment or electronic money institutions and (d) offer banking as a service to interface developers that exceed the threshold of small and medium enterprises.

Digital banks are not allowed to open physical branches. On the other hand, according to Article 6 of the draft regulations, they must establish at least one physical office which will only deal with customer complaints. In addition, digital banks can provide services to their customers through existing ATMs (cash machines) of other banks, or those that they will establish themselves. Additionally, they may provide cash withdrawal or deposit services through their contracted merchants.

The maximum amount of unsecured cash loans that digital banks can lend to a financial consumer cannot exceed 4 (four) times the average monthly net income of the person concerned. If the customer’s average monthly net income is not verifiable, the total unsecured cash that can be loaned to the consumer cannot exceed TRY 10,000 (ten thousand Turkish liras).

If a digital bank increases the total amount of its minimum establishment capital to 2,500,000,000 TRY (Two Billion Five Hundred Million Turkish Liras), it can apply to BRSA and apply for an exemption from the listed activity limitations in article 5 of the draft regulation.

In accordance with the draft regulation, the general rules relating to the licensing procedures for banks, as set out in the regulation on banking operations subject to authorization and the indirect holding of shares (“Regulation“), will also apply to digital banks. According to Article 11 of the draft regulations, the minimum capital requirement for digital banks is 1,000,000,000 TRY (one billion Turkish Lira).

Banks that already have a BRSA license will not be required to apply separately to offer digital banking services. Banks wishing to close their existing physical branches to fully or partially transition their services to digital will be allowed to do so, provided they act in accordance with a plan to be approved by the BRSA.

Payment service providers, leasing, factoring and finance companies may also apply for a digital banking license provided that they (i) provide the application documents specified in the Banking License Regulation and the draft regulations, (ii) comply with the licensing requirements determined under Banking Law No. 5411 and the draft regulations, and (iii) comply with the activity limitations listed in the draft regulations.

III. Bank as a Service (“BaaS”)

According to article 3 of the draft regulation, BaaS is defined as “a banking service model that allows interface developers to link their customers’ transactions through service banks, connecting directly to service bank systems via APIs or open banking exchange of fees to be paid to service banks, following which the interface developers are able to provide new products and services using the advantages of banking infrastructures available to service banks.” Conventional banks can also engage in BaaS activities.

Interface developers are financial technology companies or other businesses/enterprises that enable their customers to conduct their banking transactions through the mobile application or web browser-based interface they develop, by accessing banking services offered by the service bank on its API or open banking services. Service banks are allowed to offer BaaS only to interface developers established in Turkey.

The proposed regulations prohibit fintech companies from using the words “payment service provider, bank, payment institution or electronic money institution” in their trade titles or from using any expression that might give the impression that they operate as a bank/payment service provider. In their customer contracts, they must expressly state (i) that they are not a bank or a payment service provider and (ii) that the banking services are provided by the service bank. They must also share on their websites copies or templates of the standard agreement to be executed between the interface developer and the customer, and the agreement between the service bank and the customer; as well as the name and logo of the service bank on their homepage. If the service bank issues a payment card on behalf of the interface developer, the name and logo of the service bank must be indicated on the cards.

According to the draft regulations, certain mandatory provisions must be included in the service contract between the service bank and the interface developer, such as provisions obliging the interface developer (i) to comply with transparency requirements and (ii) not to store the bank’s customers information that is not necessary to offer its services or comply with its legal obligations.

IV. Conclusion

The draft regulation which is expected to come into force on January 1, 2022 is an important step in the digitalization of the banking system, with the aim of changing banking models in Turkey, in order to keep pace with the digital era.

This article was first published in Legal Insights Quarterly by ELIG Gürkaynak Attorneys-at-Law in December 2021. A link to the full Legal Insight Quarterly can be found here.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.


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