Revolution on the Way: Long-awaited Branchless (Digital) Banking Regulation

Recent Development

The Banking Regulatory and Supervisory Authority (BRSA) published the Draft Regulation on Operation Principles of Digital Banks and Service Model Banking (“ Draft Regulation “), which aims to determine the principles of branchless banking and service banking.

What’s New?

The Draft Regulation will pave the way for banks that provide services only through digital channels without having any physical branches, and set forth operational principles for these branchless banks as well as principles for service model banking.

Digital Banking

Incorporation Requirements

• Digital bank will have a paid-in capital of at least TRY 1 billion.
• Digital banks cannot have offices other than their headquarters and service units linked to the headquarters and they cannot open physical branches. That being said, they must open up at least one physical office for handling client complaints.
• Incorporation and operating license requirements applicable to conventional Turkish bank will apply to digital banks as well.

Client Portfolio, Operation Limitations and BRSA Supervision

• Digital banks’ clients will consist of only financial consumers and small and medium-sized enterprises.
• The total unsecured cash loans that can be extended to any financial customer client cannot exceed four times the average monthly net revenue of the client. If the average monthly net income of the client cannot be determined, the upper limit will be a maximum of TRY 10,000.
• If the BRSA determines that the digital banks set aggressive pricing policies, such as excessively low prices for financial products or excessively high interest rates for deposits, compared to conventional banks, endangering their risk-management capacity and the stability of the financial market, the BRSA will take the necessary measures.

Service continuity undertaking

• The service continuity percentage undertaken for the internet banking and mobile banking distribution channels of digital banks cannot be lower than 99.8%, and digital banks will be obliged to announce the committed continuity percentage values on the home page of their websites.

Service Model banking

• The Draft Regulation defines service model banking as “a banking business model which which enables financial technology companies to intermediate the transactions of their clients through the service banks by connecting to the services through direct APIs or open banking services in return for fees paid to the service banks, as a result of which these financial technology companies can provide new products and services by benefitting from the banking infrastructure of service banks.
• Financial technology companies developing interfaces are strictly prohibited from using payment service provider, bank, payment institution, electronic money institution titles or words or expression that may give the impression that they are operating as a bank/payment service provider or that they collect deposits, participation funds or funds.
• Service banks will have to publish a list of interface developers to which they provide services and the banking services they provide on their websites, and submit copies of each service agreement executed with interface developers to the BRSA.
• The client information transferred to the interface developer pursuant to the customer’s request will be stored by the interface developer or the parties from which the interface developer receives services only if storage is necessary and directly related to the establishment or performance of the agreement executed between the interface developer and the customer; mandatory for compliance with the legal obligations of the interface developer, or mandatory for the establishment, use or protection of a right for the interface developer.

Status of Existing Banks, Payment Service Providers and Other Financial Institutions

• Banks that already have an operating license will not need to engage in a separate regulatory process to digitize their operations. However, the banks that are contemplating moving their operations to digital banking partially or completely will have to close their existing branches within a plan that must be deemed appropriate by the BRSA.
• Payment institutions, electronic money institutions, financing companies and savings finance companies will be able to apply for an operation license if they satisfy the conditions set out under the Draft Regulation.

Conclusion

The Draft Regulation aims to set out the principles that will apply to the long-awaited branchless banking, which is expected to trend as a new generation of banking and put in place regarding the service banking model which enables financial technology companies to present financial products and services with the infrastructure of conventional banks.

With the entry into force of the Draft Regulation on 1 January 2022, a new era will begin in banking.