The Turkish Technology Ecosystem: Digital banking era
As digital banks gain global momentum, traditional banks face challenges from these new players that offer simple, user-friendly products, data-driven interactions, and quick loan approvals, often eliminating fees and commissions. With its tech-savvy population, Turkey is no exception to the worldwide shift in customer preferences toward digital platforms.
Reflecting the growing demand for the digitalization of banking services in Turkey, the Banks Association of Turkey reported that between 2017 and 2022, the number of active digital banking customers in Turkey increased by 160 percent, reaching 91 million as of September 2022. Another survey conducted in 2021 by Strategy & Turkey revealed that 54 percent of bank customers do not use bank branches. Additionally, the industry experts from Strategy & Turkey, noted that transactions performed through digital channels in leading banks comprised approximately 60 percent of the total transaction value. Accordingly, the long-awaited Regulation on Operating Principles of Digital Banks and Service Model Banking (the "Regulation") finally came into effect on January 1st, 2022 to address this accelerating trend.
Overview of the digital banking regulation
The Regulation outlines the procedures and principles for i) branchless banks that exclusively provide services through electronic channels such as internet banking, mobile banking, telephone banking, ATMs, and WAP-banking; and ii) banking services provided to financial technology companies and other businesses via a Banking-as-a-Service (BaaS) model. The Regulation holds significance for allowing entities without banking licenses to establish digital banks, by introducing an exclusive license for digital banking.
In line with general principles, digital banks can perform all activities allowed for credit institutions, while adhering to both the Regulation and other legal provisions applicable to credit institutions. These activities vary according to their classification as deposit or participation banks. Likewise, digital banks are subject to same conditions for establishment and operation as traditional banks, as set out in the Regulation on Transactions of Subject to Authorization and Indirect Shareholding ("Authorization Regulation"). Additional provisions from the Regulation, however, apply to digital banks without prejudice to the provisions of the Authorization Regulation. Such additional provisions also include a TL1bn minimum capital requirement to be paid in cash without any kind of collusion, and conditions regarding digital banks' management, operating program and business plan, and the adequacy assessment of information systems.
The Regulation further introduces restrictions for enabling a smoother integration of digital banks into the Turkish banking landscape and maintaining the distinction between business models. Accordingly, digital banks can only engage with financial consumers and small and medium-sized enterprises ("SMEs"), but may extend loans to large sized enterprises and other banks. Although digital banks must open a physical office and may receive support services from support service organizations, they cannot operate branches. This restriction furthermore includes correspondents, agencies, representation offices and other similar units, and excludes the general directorate and associated service units. Digital banks must also apply income-based limitations when offering unsecured consumer loans and face monetary limits if the income cannot be determined. To lift some of these limitations, digital banks may apply to the Banking Regulatory and Supervisory Authority ("BRSA") after increasing their minimum paid-in capital, TL1bn to TL2.5bn.
Current status of traditional banks
The traditional banks holding an operating license do not have to submit a separate application for their digital banking services. In a similar way, the digital banks operating under the same legal entities may continue to benefit from their parent bank's license by using a new trademark.
Market overview
As of May 2023, BRSA granted authorization for five digital banks: Hayat Katılım, Kasa Katılım, T.O.M. Katılım, FUPS Bank, and Ziraat Dinamik, the first digital bank to reach a TL2.5bn capital threshold. Ziraat Dinamik also becomes the first digital bank to be established as a separate entity despite having a traditional bank as one of its founding shareholders, following a path different from Enpara and CEPTETEB.
T.O.M. Katılım and Hayat Katılım are both digital participation banks owned by, respectively, A101, a leading discount store in Turkey, and Hayat Holding. While A101 is also known for its digital solutions such as A101 Kapıda, a grocery delivery app designed for A101's market chains, Hayat Holding's activities center around fast-moving consumer goods, wood-based panel production and port management.
Kasa Katılım, on the other hand, differs from other digital banks due to the presence of foreign shareholders among its founders, one of them being Great East Capital. Great East Capital previously collaborated with Boustead Holdings Berhad to explore investment and cooperation opportunities for Kasa Katılım, becoming proof of Turkey's new regulations' potential to attract foreign investment.
Lastly, the Founder of FUPS Bank, Lydians Elektronik Para ve Ödeme Hizmetleri, qualifies both as a payment service provider and electronic money institution. Despite already offering many financial solutions for its users, Lydians also became the first company to establish a digital deposit bank.
Conclusion
The rapid growth of digital banking in Turkey demonstrates the country's ability to adapt to the digital shift in global finance. The introduction of the digital banking regulations, on the other hand, promotes a competitive environment and opens the door for further growth and foreign investment in Turkey's technology ecosystem. As traditional banks transform and newcomers enter the scene, the future of digital banking in Turkey looks bright and full of potential.
