Digital (Branchless) Banking Regulation in Turkey
The image of banks as physical rooms full of computers, papers and serious looking bank employees belongs already to the past. More and more customers are preferring digital banking services and the Covid-19 pandemic seems to accelerate such trend. According to BKM’s report[1], 31% of the young population in Turkey is unbanked and FinTechs are jumping in to fill the gap. The world’s biggest digital bank- Nubank[2] in Brazil is also expanding massively its business in an environment similar to Turkey as for the number of unbanked citizens and this is certainly increasing the appetite of the investors.
Following legal changes in the banking regulations allowing electronic banking services, the Banking Regulatory and Supervision Authority (“BRSA”) prepared a new regulation on Operation Principles of Digital Banks and Service Model Banking (the “Regulation”) which entered into force as of 1st January 2022.
This Regulation paves the way for banks to operate as branchless and provide banking services to their clients through digital channels.
What is a digital bank?
As per the Regulation, digital bank is a credit institution providing banking services through digital channels instead of physical branches. Credit institutions are defined as deposit banks and participation banks under the Banking Law. Therefore, other banks such as investment banks and development banks are out of scope.
What kind of services might a digital bank offer?
As a rule, digital banks might provide all the services that credit institutions might offer to their clients.
However, there are some restrictions:
1) Digital banks might only provide loans for SMEs and financial consumers. However, they might also grant loans in foreign currencies to larger companies (exceeding the thresholds determined for SMEs) and extend loans to other banks and realise other transactions considered as loan as per Article 48 of the Banking Law in interbank market or money and capital markets.
2) Credit restrictions for consumer loans: The total unsecured consumer cash loans that can be extended to any financial customer cannot exceed four times the average monthly net revenue of such client excluding expenditures and cash withdrawals made with credit cards and overdraft accounts. If the average monthly net income of the client cannot be determined by the Bank, the upper limit will be applied as TRY 10,000.
3) Prohibition to open branches: Digital banks might not open physical branches other than their headquarters to which their service units are linked or representative offices. They might also not provide physical safe deposit and security services. However, digital banks might establish physical offices in order to receive and process customer complaints and complete any transaction that has been initiated through electronic channels but not fulfilled due to some practical impossibility.
It is possible for digital banks to apply for a total or partial exemption of such restrictions, in case they do increase their minimum paid capital to TRY 2,500,000,000.
What are the conditions required to operate as a digital bank?
Capital requirement: In addition to general rules applying for the Bank’s operating in Turkey, there are additional requirements imposed as per the Regulation. The first one applies to the minimum capital requirement. Digital banks should have a minimum paid capital of TRY 1,000,000,000.
Specific requirement for technology, e-commerce or telecommunication companies: In case such companies are the controlling shareholders of a digital bank, BRSA might request that such legal entities or their controlling shareholders (if any) to be resident in Turkey and they sign an agreement on information exchange enabling the sharing of information on their indebtedness and financial status. Even though, we do not know what the BRSA approach would be, it is remarkable that the scope of the requirement is drafted broadly capturing not only the direct shareholders but their holding companies or ultimate shareholders.
Other requirements relating to personnel and other document and information: As per the Regulation, there are some requirements imposed on the personnel and board members relating knowledge on IT and digital bank systems. Also, for the incorporation of the digital bank, a specific plan and business model should be submitted to the BRSA.
Are there additional obligations imposed to digital banks?
Service Continuity Undertaking: Pursuant to the Regulation, digital banks should ensure a service continuity of at least 99,8% for their internet banking and mobile banking channels. They should also publish their service continuity ratio on their web site.
Physical office for customer complaints: Even though digital banks are in principal not allowed to have physical presence they should establish at least one physical office to receive and process customer complaints.
What means the regulation for existing banks?
In case existing banks are willing to provide their services partially or fully through electronic channels either directly or under a different tradename provided that such belongs to the relevant bank, they are not required to obtain any authorisation from the BRSA and the provisions of the Regulation concerning digital banks shall not apply to them. If these banks would like to close their branches, they should do so according to a plan approved by the BRSA.
On the other hand, if existing banks prefer to carry out their activities only through electronic channels, their systems should be examined as per the BRSA regulation on Organisation and they should also receive the affirmative opinion of the relevant BRSA unit on the adequacy of such systems.
[1] https://medium.com/menapay/how-will-menapay-transform-the-unbanked-population-in-turkey
[2] https://techcrunch.com/2021/06/08/fintech-all-star-nubank-raises-a-750m-mega-round/
Av. Derya ŞAHİNER
(01.02.2022)
