Digital Banking

The banking industry in Turkey has been undergoing a transformation for a number of years due to the rise of digital banking. This article explores what has driven this shift, the framework established by the Banking Regulation and Supervision Agency (BRSA) and how digital banking has impacted the banking landscape in Turkey.

Digital banking has revolutionised the sector by changing how individuals and businesses manage their money. It applies to the provision of banking services through channels like apps, websites and digital payment solutions. In Turkey, digital banking has gained popularity due to its convenience, accessibility and ability to provide experiences for customers. The emergence of online banks allows customers to conduct most of their transactions electronically without needing local branches. This transition to digital banking brings advantages such as convenience, accessibility and cost effectiveness.

The BRSA has played a role in promoting and overseeing digital banking in Turkey. To create a safe banking environment, the BDDK has implemented various regulations and guidelines to ensure smooth digital banking operations. As a result, digital banking has gained popularity among Turkish consumers.

However, with the growth of digital banking, it is essential to establish strong regulatory frameworks to safeguard the security and integrity of financial transactions. One crucial aspect in this regard is adhering to know your customer (KYC) regulations. KYC refers to the process of verifying the identity of customers before establishing a business relationship with them. It is a critical component of anti-money laundering (AML) and counter-terrorism financing (CTF) efforts, aimed at preventing financial crimes and ensuring the integrity of the financial system.

The regulatory framework governing digital banking in Turkey is mainly based on Law No 6493 on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions. This comprehensive regulation provides a solid foundation for digital banking services and ensures compliance with international standards.

The role of KYC in financial transparency

KYC guidelines play a crucial role in promoting monetary transparency and preventing financial crimes. By enforcing robust KYC procedures, financial establishments can verify the identification of their customers, assess their risk profile, and review their transactions for suspicious activity. KYC facilitates the prevention of money laundering, fraud, identity theft, and other monetary crimes that can have severe outcomes for both clients and financial establishments.

The first step in KYC is verifying the identity of customers. Digital banks must collect accurate and up-to-date information about their customers, including their name, address, date of birth and identification documents. This information is crucial for establishing the customer’s identity and conducting ongoing due diligence. KYC also involves assessing the risk profile of customers. Different customers pose varying levels of risk based on factors such as their occupation, source of funds and country of residence. Digital banks must classify their customers into different risk categories, such as low, medium or high risk, and implement appropriate risk mitigation measures based on these assessments.

Regulatory requirements for digital banks

KYC (know your customer) regulations

Digital banks are subject to various regulatory requirements to ensure compliance with KYC regulations. These requirements aim to prevent financial crimes, protect customer data, and maintain the integrity of the financial system. In this section, the authors will explore some of the key regulatory requirements that digital banks must adhere to.

With the amendment of the second paragraph of Article 76 of the Banking Law by Law No 7247 (the “Banking Law”), banks are now capable of acquiring customers remotely and through digital methods. Subsequently, with the Regulation on Remote Identification Methods to be Used Use by Banks and the Establishment of Contractual Relationships in an Electronic Environment (the “Regulation”) published in the Official Gazette on 4 January 2021, procedures regarding the remote identification techniques that banks can make use of to acquire new customers and set up contractual relationships through replacing written paperwork with information or digital communication devices have been regulated.

In accordance with Article 4 of this Regulation, remote identification takes place by way of online video calls, without the need for the customer representative  and the person to be in one another’s presence. The methods and systems for use for remote identification are considered to be important. The remote identification process must be carried out by expert customer representatives. According to Article 9 of the Regulation, the video call phase of remote identification will be terminated if visual verification and/or verbal communication with the person is not possible due to issues such as poor lighting, low image quality and other similar issues. After the remote identification is completed, the customer’s declaration of intent must be obtained through internet banking or mobile banking distribution channels. To establish a contractual relationship that may replace the written form, the relevant contractual terms must be sent to the customer through internet banking or mobile banking channels in a format that can be easily read. Upon receipt of the customer’s declaration of intent to establish the contract, it should be signed using the customer’s encrypted secret key, as specified by the legislation.

Although these KYC regulations are essential for ensuring the integrity of the financial system, they also present challenges for digital banks. The authors will now explore some of the challenges and opportunities faced by digital banks in implementing KYC procedures.

One of the challenges faced by digital banks is the process of digital onboarding. Traditional banks can verify the identity of customers through in-person meetings and physical documents. In contrast, digital banks must rely on digital channels for customer onboarding, which can be susceptible to fraud and impersonation. However, advancements in technology, such as remote video identification and biometric authentication, provide opportunities for digital banks to streamline the onboarding process while ensuring compliance with KYC regulations.

Also, digital banks must prioritise data privacy and security to protect customer information from unauthorised access or data breaches. They must implement robust cybersecurity measures, encrypt customer data, and comply with data protection regulations, such as the General Data Protection Regulation (GDPR) and Law No 6698 on the Protection of Personal Data (LPPD). By ensuring data privacy and security, digital banks can build trust with their customers and maintain the integrity of their KYC procedures.

KYC regulations play a vital role in ensuring the integrity of the financial system and preventing financial crimes in the digital banking landscape. Digital banks must comply with regulatory requirements, such as obtaining a banking licence, conducting customer due diligence, and maintaining comprehensive records. While KYC presents challenges for digital banks, advancements in technology and collaboration with regulatory authorities offer opportunities for streamlining KYC procedures and enhancing the customer experience. By prioritising data privacy, security and compliance, digital banks can build trust with their customers and contribute to a safer and more transparent financial ecosystem.

Banking licence and capital requirements

In Turkey, digital banks are required to have a banking licence from the BRSA as the regulatory authority. The licensing of digital banks requires compliance with set criteria, which include capital requirement as one element. Under Turkish law, digital banks must raise a minimum capital of TRY1 billion. For this reason, digital banks must be well financed in order to guarantee the proper functioning and provision of sufficient services for their clients.

Customer due diligence (CDD)

Digital banks are required to conduct thorough customer due diligence (CDD) as part of their KYC procedures. CDD involves verifying the identity of customers, assessing their risk profile, and obtaining information about the nature and purpose of the business relationship. Digital banks must collect and verify customer information, including identification documents, proof of address, and source of funds. They must also conduct ongoing monitoring of customer transactions to detect any suspicious activities.

The digital banks should have complete records on their KYC processes and customer details. The records should contain all pertinent documents including personal identification, transaction papers, due diligence findings, and current monitoring reports. Records should be kept in compliance with the regulatory requirements and be obtainable to the inspecting authority.

Reporting obligations

All digital banks must comply with all statutory disclosures that are mandated by the regulators. In particular, they are expected to report any suspicious transaction or activity to either the Financial Crimes Investigation Board (MASAK) or the relevant authority. While conducting KYC, reporting suspected money laundering transactions is very important in ensuring the proper detection and prevention of money laundering and other related financial crimes by the authorities.

Digital wallet

The digital wallet offers the opportunity to simplify, speed up and secure payment processes and is changing the way financial transactions are conducted. The “digital wallet” has also gained legal regulation with the Regulation Amending the Regulation on Payment Services and Electronic Money Issuance and Payment Service Providers published in the Official Gazette on 7 October 2023.

In order to provide digital wallet services, providers must:

• be authorised to operate within the scope of issuing or accepting payment instruments; and
• be authorised to issue electronic money if the digital wallet is used for workplace payments and funds are transferred through the digital wallet service provider.

Conclusion

There are many benefits of digital banking for both the customers and the banks. Digital banking provides 24/7 access to banking services for clients, eliminating the need for physical visits to branches and enabling fast operations, while banks enjoy and the benefits low operational costs, better efficiency and more personalised services that are tailored to meet each customer’s need.

Digital banking has upended the conventional banking industry in Turkey. Digital-only banks and fintech start-ups have added to the rivalry of traditional banks. In order to ensure they remain ahead of their competition, traditional banks have been forced to invest in digital infrastructure and make their online and mobile banking platforms very user friendly as well as create new and more advanced financial products and services.