The Turkish Banking Regulatory and Supervisory Authority (BRSA) recently published the Draft Regulation on Operating Principles of Digital Banks and Banking as a Service. The Draft Regulation was prepared to establish the operating principles of branchless banks that offer their services exclusively through digital channels and to provide the framework for "Banking as a Service" (BaaS) for dynamic businesses and innovative start-ups. The Draft Regulation aims to promote financial innovation, make finance more inclusive and facilitate access to banking services.
According to the Draft Regulation, in addition to Banking Law No. 5411 and the Draft Regulation, digital banks will be subject to all legal provisions with which credit institutions must comply. Digital banks must also have at least one physical office for managing customer complaints.
According to the restrictions to be imposed on digital banks, only financial consumers and small and medium-sized enterprises (SMEs) can be customers of digital banks. "Financial consumers" are defined as consumers who receive products and services from banks, financial institutions, consumer loan companies and card issuers. According to the Draft Regulation, digital banks may not operate in areas of commercial banking that exceed the size or volume of SMEs.
In line with the nature of digital banking, digital banks may not operate physical branches or establish similar units, with the exception of the head office and service units associated with the head office. As noted above, units established for managing customer complaints are not a violation.
The upper limit of unsecured cash loans provided to financial customers is four times the average monthly net income of the customer concerned. If it is not possible to determine the average monthly net income of a customer, an unsecured cash loan of up to TRY 10,000 may be provided to that customer.
A digital bank is required to implement these BRSA measures if it is determined that the bank is jeopardizing its risk management capabilities and the stability of financial markets through aggressive pricing policies (e.g., excessively low prices for financing products compared to other banks or excessively high interest rates for deposit products).
Commitment to continuity of service
The promised continuity percentage for internet banking and mobile banking distribution channels of digital banks must not be lower than 99.8%. As a result, digital banks will be required to disclose their promised continuity percentages on the home page of their websites.
Conditions for the establishment of a digital bank
In addition to the conditions set out in the Draft Regulation, digital banks are also subject to the conditions for establishing and obtaining a banking operating permit under the Regulation on Transactions of Banks Subject to Permit and Indirect Shareholding, will also apply to digital banks.
According to the Draft Regulation, the minimum capital required to establish a digital bank is TRY 1 billion (approximately EUR 90.66 million), which must be provided in cash and free of collusion.
The framework for Banking as a Service (BaaS)
In addition to the general principles for digital banks, the Draft Regulation also includes a framework for BaaS operating principles, which is of utmost importance for improving the fintech ecosystem and is an important tool for leapfrogging the relevant sectors. As a result, service banks (i.e. banks whose operations include service model banking) will only be allowed to provide BaaS services to interface developers based in Turkey. However, these interface developers will not be authorised to use the title as a bank or payment service provider or to make statements that give the impression that the interface developer in question operates as a bank or payment service provider.
Service banks will be required to publish on their websites the list of all interface developers to which they provide BaaS services and relevant banking services and provide BRSA with a copy of each service contract signed with interface developers to the BRSA.
The interface developer or any third party providing services to the interface developer shall not store any confidential information provided to the interface developer at the customer's request unless such storage occurs:
- directly related to and necessary for the formation or performance of the contract between the interface developer and the customer;
- are mandatory in order for the interface developer to comply with its legal obligations; or
- carried out for the purpose of establishing, using or protecting the rights of the interface developer.
Current status of banks and other financial institutions
Banks holding an operating license other than a digital banking license do not need to submit a separate application under the Draft Regulation in order to digitize their business. On the other hand, payment service providers and e-money institutions can apply for a digital bank license provided they meet certain regulatory requirements.
Digital banking is an important tool for providing financial services to customers around the world. Moreover, simplified banking solutions, which include digital banking systems, are seen as a highly attractive banking product by most customers. Given the importance of digital business for banks and the opportunities that digitalization brings for both customers and financial institutions, the Draft Regulation could become an important piece of legislation for a significant period of time.
BaaS is an extremely important component of fintech products and services. The Turkish financial sector, which has been silent on the export of new-era fintech products and services, could take a big leap forward with the Draft Regulation since it offers great potential for existing and planned startups. Given the promise and potential of the Draft Regulation, its release is creating tremendous excitement in the fintech startup sector.
For more information on the Turkish draft regulation on digital banking and BaaS, please contact your regular CMS advisor or a local CMS expert: Dr Döne Yalçın and Alaz Eker Ündar.