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Regulation on the Operating Principles of Digital Banks and Service Model Banking (“Regulation”) was published in the Official Gazette dated December 29, 2021 and numbered 31704. This regulation entered into force January 1, 2022.
The Regulation determines the procedures and principles regarding the activities of digital banks, defined as branchless banks providing services through electronic banking services distribution channels, and the provision of banking services to financial technology companies and other businesses as a service model.
The new Regulation establishes the general rule that digital banks can carry out all the activities that credit institutions can perform, depending on whether they are deposit or participation banks and they are obliged to comply with the provisions of the Regulation in addition to all the provisions of the legislation that the credit institutions are obliged to comply with.
Additionally, it has been stipulated that the loan customers of digital banks may only consist of financial consumers and SMEs however they are allowed to perform activities that are considered as loans in the Banking Law no 5411 (“Law no 5411”) by operating in interbank markets or money and capital markets, and to issue loans for other banks and foreign currency loans for businesses that exceed the SME size. If businesses that do not exceed the SME size subsequently exceed the SME size after the commencement of services, digital banks can only offer services that are allowed to be offered to businesses that exceed the SME size in accordance with the Regulation.
Moreover, it has been regulated that digital banks that cannot organize other than the general directorate and the service units affiliated to the general directorate, cannot open physical branches or operate their service units as physical branches, cannot offer safe deposit boxes, safe deposit boxes and custody services except for those that will be carried out in the digital environment. However they are obliged to establish a physical office to process customer complaints, and allowed to employ support service providers for marketing and face-to-face communication with customers and communicate with customers face-to-face with their personnel or through a support service providers to finalize transactions that started in electronic banking services distribution channels but cannot be completed due to physical impossibility in these channels and cannot be carried out through physical access points. At the same time, they can provide services to their customers through ATM networks.
Additionally, the sum of unsecured cash customer loans digital banks are allowed to issue to their customers is limited to four times the average monthly net income of the respective customer, or ten thousand Turkish Liras if the income cannot be determined, excluding expenditures and cash withdrawals made with credit cards and overdraft accounts.
The Regulation also stipulates that the systemically important bank buffer applied to the systemically important banks set forth by the Regulation on Systemically Important Banks published in the Official Gazette dated February 23, 2016, and numbered 29633, is also applied for digital banks.
If the digital bank, during the process of obtaining an operating permit or after obtaining an operating permit, increases its capital amount to two billion five hundred million Turkish Liras paid in cash and free from all collusion, the Banking Regulation and Supervision Board (“Board”) may decide to remove the operating restrictions entirely or gradually, upon the application of the digital bank. If is the operating restrictions are removed entirely, the digital bank can do all the banking activities that other credit institutions can do.
Besides, digital banks are required to announce the committed availability percentage values for the electronic banking services they offer, to appear on the home page of their websites, and the committed availability percentage cannot be less than 99.8%. Digital Banks are obliged to report MTBF, MTTR, and availability percentage values to Banking Regulation and Supervision Agency (“Agency”).
The regulation determines the general terms for establishment and operating permits of digital banks as the terms stipulated for banks’ establishment and operating permits by the Regulation on Transactions Subject to Permission and Indirect Shareholding of Banks published in the official gazette dated November 1, 2006, numbered 26333, and that the provisions of the Regulation regarding these terms are additional rules for digital banks. In the cases where the controlling partners of the applicants are legal persons providing technology, e-commerce, or telecommunications services, the Board may impose additional requirements for these partners. The minimum capital for digital banks is one billion Turkish Liras.
Furthermore, it is stipulated that the top-level manager responsible for information systems shall be appointed at least at the level of assistant general manager, and that at least one of the members of the board of directors of the digital bank shall have at the minimum ten years of professional experience in the field of information systems management.
The Regulation also determines the principles for service banks that provide service model banking. Service banks can only provide services to domestically resident interface providers and only within the framework of their own operating permits, banks cannot be interface providers. Interface providers are not allowed to use the names of a bank or payment service provider such as a payment institution and electronic money institution and to give the impression that they are collecting funds like a bank or payment service provider without the necessary permissions. The service bank decides whether to provide banking services to customers through the interface of the interface provider, and the services to be provided are carried out over the balance sheet of the service bank.
Additionally, for the service banks to provide banking services to the interface providers’ customers, a contractual relationship must be established between the customer and the service bank. Additional security measures and obligations for service banks and interface providers if this contract between the service bank and the customer is issued electronically or through the service channels of the interface provider.
In addition to receiving service from the service bank, the interface provider is a support service institution that provides services to the service bank within the scope of the Support Services Regulation, in terms of mediating the establishment of a contractual relationship between the service bank and the customer or enabling the provision of banking services to the customer by the service bank. It is possible for the service bank to receive support services from the interface provider by collecting credit card requests through the service channels of the interface provider and such support services are not subject to the limitations stipulated by the Support Services Regulation for support services. Providing support services to a service bank as an interface provider is subject to the permission of the Board.
At the same time, for the service bank to provide service to an interface provider, the requirements to be included in the service contract between them are regulated by this Regulation.
In accordance with the Regulation, the service banks are required to provide information on the scope of the services they provide on their website, showing the list of all interface providers they serve and which banking services they provide, and to provide a copy of each service contract signed with interface providers and of each contract change that constitutes a change in the scope of the services provided to the interface provider to the Agency within one week following the date of signature. In addition, the Board’s permission is necessary for an interface provider to work with more than one service bank.
Banks that have obtained an operating permit other than digital banks and are able to provide services through their physical branches within the framework of their current operating permits are not subject to the Regulation in order to services partially or entirely through electronic banking services distribution channels or within the scope of their operating permits to provide services partially or entirely through electronic banking services distribution channels in a different brand under the same legal entity. Such banks’ processes of closing branches and transition operating only through electronic banking distribution channels are subject to the Agency’s supervision.
Kortan Gödekoğlu, Zeynep Türe
