Draft Regulation on Operation Principles of Digital Banks and Banking as a Service Has Been Published for Public Opinion

Summary

Draft Regulation on Operation Principles of Digital Banks and Banking as a Service (“Draft Regulation”) has been published on the Turkish Banking Regulation and Supervision Agency’s (“BRSA”) website for public opinion on Augustus 19, 2021. The Draft Regulation, which is planned to enter into force as of January 1, 2022, includes regulations regarding digital bank and banking as a service (“BaaS”).

Please find our summarized explanations regarding the Draft Regulation below:

• The term “digital bank” has been defined

Draft Regulation defines the digital bank as “a credit institution that provides banking services mainly through electronic banking services distribution channels instead of physical branches”. With digital banks, it will be possible for individuals to access banking services faster and cheaper compared to the traditional banks.

• The activity restrictions of digital banks have been determined

Restrictions Regarding Customer Portfolio: The customers can only be financial consumers or SMEs. Therefore, digital banks cannot provide corporate banking services to institutions/enterprises that exceed the SME threshold. However, digital banks can conduct following activities regardless of the mentioned threshold: (i) operate in interbank and capital markets (ii) accept deposits from other banks or grant loans (iii) open safeguarding accounts for payment or electronic money institutions (iv) can provide BaaS services to interface developers exceeding SME threshold.

Restriction Regarding Loans to be extended: A loan restriction has been introduced for unsecured cash loans to be extended to the financial customer. The maximum amount of unsecured cash loans is four times the average monthly net income of the financial customer. If such amount cannot be determined, the maximum amount will be 10 thousand TL.

Organizational Restrictions: Digital banks cannot open physical branches. However, they need to open at least one physical office in order to handle customer complaints provided that they do not act as a branch. They can set up ATMs and/or provide service through existing ATMs. Also, they can provide cash withdrawal or account deposit services to their customers through the workplaces they have made an agreement with.

The digital banks must be established with minimum paid-in capital of 1 billion TL. However, if they increase their paid-in capital to 2.5 billion TL, it is possible to request an exemption from the mentioned activity restrictions through an application to be made to BRSA. Digital banks will thus be able to carry out all banking activities of credit institutions with an approval from BRSA.

• The conditions to be met by financial institutions that want to operate as a digital bank have been determined

In the Draft Regulation, it is stated that the banks that are already established can digitize their operations without going through separate application process. Payment institutions, electronic money institutions, factoring companies, financing companies and savings finance companies can obtain a digital bank operating license, provided that they meet the conditions set forth in the Draft Regulation and the conditions for the bank establishment.

• The term “banking as a service (“BaaS”)” has been defined

The Draft Regulation defines BaaS as “a banking service model which enables interface developers to intermediate the transactions of their clients through service banks by connecting to service banks' systems directly via APIs or open banking services in return for fees paid to service banks, as a result of which these interface developers can provide new products and services by benefitting from the banking infrastructure of service banks”. According to Draft Regulation, BaaS can be carried out by all banks specified in the Turkish Banking Law.

The mobile application or internet browser-based interfaces to be used in BaaS will be created by the interface developers. Through these interfaces, BaaS offered by service banks will be accessible and thus, customers will be able to perform banking transactions. As is understood from the Draft Regulation, without being subject to any sector restriction, any company, especially FinTech companies, can be an interface developer, but only the interface developer resident in Turkey will be able to benefit from the BaaS.