Draft Regulation on the Operating Principles of Digital Banks and Banking as a Service
“The Draft Regulation on the Operating Principles of Digital Banks and Banking as a Service (“the Draft Regulation”)”, related to digital banking, is published by the Banking Regulation and Supervision Agency (“the BRSA”) on the BRSA official website.
The objective of the Draft Regulation is to determine the operating principles of branchless banks, which only serve through digital channels, and the conditions for the possibility of providing banking services as a service model to demanding businesses and innovative initiatives, in order to encourage financial innovation in the banking sector, increase financial inclusion and facilitate access to banking services.
This newsletter provides information within the general framework regarding the innovations aimed to be brought about digital banking and banking as a service.
A- Definition of Digital Bank and Banking as a Service
Under the Draft Regulation:
“Digital Bank” refers to a credit institution that provides banking services mainly through electronic banking services distribution channels instead of physical branches.
“Banking as a Service (BaaS)” refers to the banking service model in which interface developers connect with the systems of service banks directly through APIs and open banking services and thereupon, enable the performance of banking transactions for their customers through the service bank and thus, can offer new products and services to the market by using the banking infrastructure of service banks, and in which a fee agreed between the parties is paid to the service banks by the interface developers in return for these services they received from the service banks.
B- Operating Principles of Digital Banks
1- General principles and operating limitations
Unless otherwise stated in this Regulation, digital banks are governed by all legislation provisions that credit institutions are obliged to observe within the framework of the Law and the relevant sub-regulations.
However, customers of digital banks may consist of financial consumers and SMEs only. Within this context, digital banks shall not be engaged in commercial banking activities that exceed the SME thresholds.
Except for the head office and the service departments affiliated with head office, digital banks shall not be organized and shall not open physical branches. Any departments that will be established to handle customer complaints shall not constitute a violation of this provision unless such departments are used as a branch for any purposes other than this purpose.
The total unsecured cash loan facilities that digital banks may make available to a single customer who is a financial consumer shall not exceed four times the average monthly net income of the customer. In case it is not possible to determine the average monthly net income, the total unsecured cash loan facilities that may be made available to such customers shall not exceed ten thousand Turkish Liras.
2- Physical access points
Under the Draft Regulation, it is mandatory for digital banks to establish at least one physical office to handle customer complaints. Digital banks may provide services to their customers through the ATM networks they will establish themselves or other existing ATM networks.
In addition, digital banks may provide cash withdrawal or depositing services to their customers through the merchants contracted with them in order to accept payment instruments they will issue pursuant to the Bank Cards and Credit Cards Law dated 23.02.2006 and numbered 5464 and the Law numbered 6493.
3- Minimum initial capital
The minimum capital required for the establishment of a digital bank is in the amount of one billion Turkish Liras, to be paid up in cash and free of any collusions. The Banking Regulation and Supervision Board is authorized to increase this amount.
4- Protection of customers
In case it is alleged that transactions are carried out through the account of the customers without their knowledge, the obligation to prove that these transactions are performed by the customer or that the customer is at fault lies on the bank.
C- Principles of Banking as a Service
Digital banks may provide interface developers, exceeding the SME thresholds, with service model banking services as a service bank.
Within context, service banks may provide service model banking services to the interface developers domiciled in the Country, i.e., only to those interface developers. Payment service provider names such as bank or payment institution and electronic money institution, or a statement that they operate as a bank/payment service provider, or words and phrases which would make the the impression that they collect deposits, participation funds or funds as a bank/payment service provider shall not, without obtaining the required permissions, be used by the service model banking services recipient interface developers in their trade names, on any documents they issue, in any announcements or advertisements they make, or in their statements to the public.
In order for a service bank to provide banking services to an interface developer’s customer, a banking services contract relationship must be established between the customer and the service bank.
In case it is alleged that transactions are carried out through the account of the customers without their knowledge, it is the service bank’s obligation to prove that these transactions are performed by the customer or that the customer is at fault.
The service bank is obliged to provide, on its website, information about the scope of the services it provides, showing what banking services it provides and a list of all interface developers it serves. Furthermore, the service bank is obliged to send to the Agency a copy of each service contract it signed with the interface developers, within one week following the date of signature.
In the case that the Draft Regulation is put into practice and that such practices become widespread each passing day both in our Country and globally, physical branches will no longer be needed, and the practice “remote customer acceptance” will become prevalent. As a matter of fact, with this Regulation, the possibility for remote customer identification in respect of the transactions that will take place between banks and bank customers will further pave the way for the branchless banking structure which will operate in digital environments. Then, it is clear that the arrangements dealt in the Draft Regulation will also become complementary to the arrangements made for signing banking contracts in digital environments. Furthermore, it is obvious that service banking, which is also mentioned in the Draft Regulation, will create new business models in both banking and fintech fields.