I. Introduction

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

II. Digital Banking

As per Article 3 of the Draft Regulation, digital banks are defined as "credit institutions that provide banking services mainly via electronic banking services distribution channels instead of physical branches." All of the regulatory framework pertaining to credit institutions will also be applicable for digital banks.

As per 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) carry out activities in interbank markets and capital markets, (b) accept bank deposits or give loans to other banks, (c) offer safekeeping account services to payment or electronic money institutions and (d) offer banking as a service to interface developers that surpass the threshold for small and medium sized enterprises.

Digital banks are not allowed to open physical branches. On the other hand, as per Article 6 of Draft Regulation, they must establish at least one physical office which will only handle customer complaints. Also, digital banks can provide services to their customers through the existing ATMs (cash machines) of other banks, or those that they will establish themselves. In addition, they can provide services for withdrawing or depositing cash 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 relevant individual. In case the customer's average monthly net income is not ascertainable, the total of 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 TRY 2,500,000,000 (two billion five hundred million Turkish Liras), it can apply to the BRSA and request an exemption from the activity limitations listed under Article 5 of the Draft Regulation.

As per the Draft Regulation, the general rules pertaining to the licensing procedures for banks, as set out under the Regulation on Banking Operations Subject to Permission and Indirect Share Ownership ("Regulation"), will also be applicable for digital banks. As per Article 11 of the Draft Regulation, the minimum capital requirement for digital banks is TRY 1,000,000,000 (one billion Turkish Liras).

The banks which already have license from the BRSA will not be required to make a separate application to offer digital banking services. Banks that wish to close down their existing physical branches to carry over their services fully or partly to digital will be allowed do so, provided that they act in compliance with a plan to be approved by the BRSA.

Payment service providers, leasing, factoring and financing companies can also apply for a digital banking license on the condition that they (i) provide the application documents indicated under the Regulation on Banking License and the Draft Regulation, (ii) comply with the licensing requirements determined under Banking Law No. 5411 and the Draft Regulation, and (iii) comply with the activity limitations listed under the Draft Regulation.

III. Banking as a Service ("BaaS")

As per Article 3 of Draft Regulation, BaaS is defined as "a banking service model which enables interface developers to liaise their clients` transactions through service banks, by connecting to the service banks' systems directly via APIs or open banking services in return for fees to be paid to service banks, as a result of which the interface developers are able to provide new products and services by using the benefits of the banking infrastructures that service banks have." Conventional banks can also carry out BaaS activities.

Interface developers are fin-tech companies or other businesses/enterprises which enable their customers to perform their banking transactions through the mobile app or internet browser-based interface that they develop, by accessing the banking services offered by the service bank on its API or open banking services. Services banks are permitted to offer BaaS only to those interface developers that are established in Turkey.

The Draft Regulation prohibits financial technology companies from using the words "payment service provider, bank, payment institution or electronic money institution" in their commercial titles or from using any expression that may give the impression that they are operating as a bank/payment service provider. In their customer agreements, they must expressly state that (i) they are not a bank or payment service provider and (ii) banking services are provided by the service bank. They must also share on their websites the 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 home page. If the service bank issues a payment card on behalf of the interface developer, the name and the logo of the service bank must be indicated on the cards.

As per the Draft Regulation, certain mandatory provisions must be included in the service agreement between the service bank and the interface developer, such as provisions obliging the interface developer (i) to comply with the transparency requirements and (ii) not to store bank customer information that is not necessary to offer its services or comply with its legal obligations.

IV. Conclusion

The Draft Regulation that is expected to enter into force on January 01, 2022, is a milestone in the digitalization of banking system, with the purpose to change the banking models in Turkey, in order to keep pace with the digital age.

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 may be found here.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.