w/ Şahin Ardıyok & Ramiz Arslan, originally published @Dentons – Business Going Digital –
Over the last five years, Turkish payment services and payment systems have gone through turbulent times, with pressure both from competition authorities (demonstrated by BKM Express’ rollercoaster ride between 2016 and 2020) and financial market regulators. Though the power of incumbent banks remains strong, the market is liberalizing and opening up for fintech players.
In 2019, the Central Bank of the Republic of Turkey (the Central Bank) assumed regulatory powers over the payment services sector. With the new regulations introduced by the Central Bank, payment initiation services providers and account information services providers are expected to become key generators of innovative services. Marketplaces that currently rely on the commercial agent exemption are the next ones to be affected by the decisions of the Central Bank. The two major projects on which the Central Bank is currently working – Digital Currency and FAST – will change the landscape of the fintech market drastically in Turkey.
As shown below, it is a time of opportunities for fintech players, but some of the changes on the market may not be delivered in the way one would normally expect, hence horizon scanning is crucial for understanding the competitive and innovation landscape in the sector.
Initial interventions by the competition watchdog
Garanti Bonus decision
One of the critical decisions regarding payment services is the TCA’s Garanti Bonus Program preliminary examination decision numbered 17-28/462-201 and dated September 7, 2017, concerning credit card sharing programs. A private bank in Turkey, Garanti, was providing credit cards under the program name of Bonus. In its Bonus program, Garanti was inking agreements with other banks to establish a multi-branded credit card issuing platform, enabling the issuers to acquire member stores for their program. Garanti’s Bonus platform evolved into one of the largest multi-branded credit card issuing platforms. Garanti was charging high fees for non-bank payment service providers, and was inking more favorable agreements with other banks. In addition, Garanti was restricting other banks’ ability to resell their Bonus program access to non-bank payment service providers. Garanti was not in a dominant position in the market. However, Garanti concluded its agreements with most of the banks in the sector in parallel. Such parallelism curbed the non-bank service providers’ ability to join a credit card issuing platform. Since non-bank fintech companies were not able to join this multi-branded credit card issuing platform, they could not compete on equal terms in the market for payment services. This complaint of the payment service providers caught the attention of the TCA. The TCA warned Garanti to remove resale restrictions from its agreements, and ordered it to open up the Bonus program to payment service providers.
BKM Express decision
The most significant decisions concerning payment services in recent years are the series of decisions concerning the BKM Express service of BKM (Bankalararası Kart Merkezi – Interbank Card Center).
BKM is a partnership of public and private Turkish banks that aims to develop rules and standards within the card payment system. Turkish banks issuing credit cards are members of BKM, while BKM Express is a service that is open to these members. The main business of BKM is the settlement of receivables that arise from credit card payments between the banks. The payment system business in which BKM Express operates is strictly regulated by the Central Bank.
On the other hand, BKM Express is a payment service including a digital wallet service where customers can save their card information and use it during online shopping without having to submit the credit card information to the seller, hence speeding up the shopping and securing the card information. Any bank member of BKM can make use of BKM Express without a limitation. However, access of other fintech companies to BKM Express has been limited.
The TCA rendered a number of decisions concerning BKM Express. Since BKM Express was an association of undertakings, and competitor banks were integrating their services to form the BKM Express service, BKM applied to TCA for an individual exemption.
In its decision numbered 16-31/525-236 and dated September 23, 2016 (“Exemption Decision”), the TCA granted an individual exemption to BKM Express, with a disclaimer stating that further evaluation may result in the withdrawal of the exemption. In this Exemption Decision, the TCA considered BKM as an association of undertakings formed by the banks, and the BKM Express service as conduct restricting competition in the market. The TCA also acknowledged the benefits of BKM Express and the electronic wallet systems, as they enable customers to save time and increase card information security. The TCA considered that the BKM Express service met all of the conditions for an individual exemption:
- Ensuring efficiencies (these efficiencies may be new developments or economic or technical improvements);
- Securing consumer benefits by these efficiencies;
- Not eliminating competition in a significant part of the relevant market;
- Not restricting competition more than necessary to achieve the efficiencies and consumer benefits.
However, in 2018, BKM was requested to file a new exemption notification for the TCA to evaluate whether the exemption conditions were still met. With its detailed assessment in its decision numbered 19-20/291-126 and dated May 30, 2019, the TCA withdrew the individual exemption of BKM Express, and granted 60 days for termination of the service, until November 2019 (“Withdrawal Decision”).
In its Withdrawal Decision, the TCA raised significant competition concerns about the BKM Express service. The TCA focused on the lack of competition to BKM. There were a number of competitive concerns over BKM, which the TCA discussed in detail in its Withdrawal Decision as follows:
- The main concern is the possible restriction of competition through the unique integration between BKM and its member banks;
- BKM uses the banking infrastructure of its members to place favorable features in its digital wallet service, which provides an advantage to BKM Express compared to the other services in the market (no need for the full credit card number, automatic update of the expiration date, SMS-OTP application that is specific to BKM Express);
- The above-mentioned features can only be provided due to the integration between BKM and its member banks;
- The mentioned integration services have not been offered − at least in practice − to the other digital wallet services.
- Opening up the mentioned features to other digital wallet services through BKM cannot be a solution to address competition law concerns, since such a practice makes the non-bank fintech companies dependent on BKM. Putting such measures in place, instead of terminating BKM Express, would make non-bank fintech companies mere resellers, and this approach would limit the innovation that may provide diverse value-added services;
- The entrance of BKM to new markets with the financial power generated by the BKM’s settlement business may heavily affect competition. The fact that the books of BKM are inseparable in terms of business lines contributes to these concerns.
Following these evaluations, the TCA decided to terminate the BKM Express service, and also ordered BKM to distinguish financial records on the basis of businesses. Upon a re-evaluation request, the TCA extended the termination period of BKM Express by eight months, until June 2020.
Introducing open banking rules to the Payment Services Law
At the time of the TCA’s BKM Express Withdrawal Decision and the Garanti decision, there were no rules in the Turkish payment services legislation that opened the market up to the new fintech companies. Consequently, fintech companies and payment service providers often felt excluded from the market by the banks.
By its decisions on the Garanti Bonus Program and BKM Express, the TCA aimed to open up the market for payment services to new and innovative fintech companies, by curbing the integration and parallel agreements between the incumbent banks. In the BKM Withdrawal Decision, however, the TCA pointed to the need for regulations to reflect the open banking principles of the EU’s Payment Services Directive-2 (PSD2). As per the TCA’s evaluations in its BKM Express Withdrawal Decision, amending Turkish laws and regulations to be in line with the PSD2 could open the market for payment services to the new fintech companies.
Following the TCA’s Withdrawal Decision concerning BKM Express, Turkish lawmakers amended the main legislation governing the payment services sector: Law No. 6493 on Payment and Securities Settlement Systems, Payment Services and Electronic Money Institutions (Payment Services Law). The Payment Services Law was amended in a way to harmonize national legislation on payment services with the EU’s PSD2. The changes introduced open banking services such as payment initiation services and account information services with effect from the end of 2019. Fintech players that provide or were planning to provide payment services were expected to benefit from the newly adopted rules. The amendments also concerned marketplaces, due to the narrowing of the commercial agent exemption (see more below).
Regulator of payment services
With the 2019 amendment to the Payment Services Law, the regulatory powers, which were previously exercised by the Banking Regulation and Supervision Agency (BRSA), were transferred to the Central Bank. The Central Bank was previously regulating payment system operators, which are of systemic importance compared to payment service providers. With the amendments, the Central Bank started regulating the payment service providers along with payment systems.
The Central Bank’s supervisory authority over payment systems was widened to include system users. Previously, the Central Bank’s supervision power for payment systems only covered system operators.
In contrast to the EU’s PSD2, the Central Bank was authorized to be a shareholder in a payment system operator that it deems systemically important. At the time of the amendment, payment systems authorized by the Central Bank were the following:
- Interbank Card Center (BKM) – Domestic Clearing and Settlement System
- Istanbul Clearing, Settlement and Custody Bank Inc. (TAKASBANK)
- Equity Market Clearing System
- Debt Securities Market Clearing System
- Takasbank Cheque Clearing System
- Central Registry Agency (MKK) – Central Registry System
- Garanti Payment Systems Inc. (GÖSAŞ) – Takasnet System
- Paycore Payment Services Clearing and Settlement Systems Inc. (Paycore) – Paycore Clearing System
The new authority of Central Bank to be a shareholder of system operator played a key role later on in the TCA’s approach to BKM Express, as detailed in the next chapter.
New services relating to open banking
Payment initiation services and account information services were acknowledged as payment services within the framework of the Payment Services Law. With these amendments, payment initiation service providers (PISPs) and account information service providers (AISPs) are expected to become key players in the market for innovative services. For AISPs to exercise their functions, the Payment Services Law requires other payment service providers to open access to their customers’ account information, mainly forcing incumbent banks to open access to their data. This resembles the access to essential facility doctrine in competition law. Essential facilities doctrine requires the owner of an “essential” or “bottleneck” facility in a market to provide access to that facility on non-discriminatory terms. Compared to access to essential facility doctrine, however, the aim and the functioning of access to account information differs in many ways. The access to account information is subject to the account owner’s prior approval. In addition, unlike the essential facilities doctrine, the services of an AISP will also be accessible to other payment service providers, creating a reciprocity between the players.
Marketplaces’ exposure to narrowing commercial agent exemption
Under the Payment Services Law, there is an exemption called commercial agent exemption, which the marketplaces are benefiting from. According to this exemption, payments between a payer and payee made through a commercial agent ̶ with permission to negotiate or to conclude the sale or purchase of goods and services on behalf of the payer or payee ̶ are not considered as payment services, therefore, such a commercial agent is exempt from regulation. Marketplaces are relying on this commercial agent exemption; however, their elbowroom is narrowing. The 2019 amendment enables the Central Bank to determine payment transactions reaching certain thresholds as payment services within the meaning of the Payment Services Law, even if they are benefiting from commercial agent exemption.
Shifting from competition to regulation
By the time the open banking amendments to the Payment Services Law came into effect in December 2019, the TCA had already withdrawn the exemption of BKM Express with effect from the end of June 2020.
Two months before the BKM Express service’s termination deadline, in May 2020, the Central Bank used its new power in the Payment Services Law to acquire 51% and management control of BKM. In the competition law community, this transaction was generally considered insignificant for the TCA’s approach to the BKM Express decision, since it did not affect the competitive concerns on the surface. In addition, the Central Bank aimed to become a market player by this move. However, this move of the Central Bank changed many things in the payment services market.
Shortly after its acquisition, the Central Bank filed a request to the TCA for the abolition of the withdrawal decision, as the controlling shareholder of BKM. With its request, the Central Bank expected to get the TCA’s green light for BKM Express, cancelling the termination of the service. In June 2020, 14 days before the termination deadline of BKM Express, the TCA abolished its Withdrawal Decision, enabling the Central Bank to move forward with BKM Express (“Abolition Decision”). With the abolition of the Withdrawal Decision, BKM once again benefited from the individual exemption for its BKM Express service.
Although the Withdrawal Decision was fully equipped with competition law concerns, the Abolition Decision was rather concise in terms of competitive assessments. The TCA considered a number of factors when abolishing the Withdrawal Decision, which can be summarized as follows:
- The shareholding and management structure of BKM had been changed;
- Since the reason for the administrative action is now changed, with the Central Bank being a majority shareholder of BKM, the Withdrawal Decision is legally open to amendments or abolition;
- The Central Bank is planning to steer BKM away from being a competitor in the markets at issue. Instead, BKM is expected to help the development of specific Central Bank projects in financial technology (the Central Bank Digital Currency, development of an end-to-end instant payment system);
- The Central Bank may use BKM Express to achieve goals in financial technology;
- The Central Bank promised to find ways to address the TCA’s competitive concerns, and also vowed to keep in touch with the TCA in the future;
- The Central Bank is planning to develop sector-specific regulations to address competitive concerns, which will be aligned with the PSD2, and such alignment will bring measures to address competition law concerns;
- The Central Bank established the General Directorate of the Payment Systems and Financial Technologies for sectoral oversight.
The TCA seems to think that the answer to the problems in the payment systems sector is not competition law enforcement, but regulations with the backbone of open banking and the sectoral oversight of the Central Bank. However, with the Central Bank becoming a majority shareholder of BKM and no detailed regulations adopted yet, it is not clear how the open banking rules will be implemented in the Turkish payment services market.
What’s next for the Turkish payment services market?
As per the Regulation on the Operations of Payment and Settlement Systems, additional services to be provided by the system operators must be approved by the regulator, the Central Bank. Therefore, the Central Bank approves or declines the additional service requests of the system operators. From the sectoral regulation standpoint, the Central Bank is the regulator that will decide which system operator can do what, and to what extent. Following the Central Bank becoming the majority shareholder of BKM, in September 2020, the Central Bank approved BKM’s application and allowed it to perform “innovative infrastructure/platform services” along with its system operations. However, one might question whether the Central Bank should be regulating BKM, which is controlled by the Central Bank. Defining the role of the Central Bank plays a key role here. Should the Central Bank fail to steer BKM away from the market as an economic actor, there is an even more thorny path ahead of the payment services sector. Because this time the Central Bank will be a market player that will not only be regulating itself but also its competitors. However, as the Central Bank promised to the TCA for the Abolition Decision, BKM may exit from the market for payment services, and focus on its payment system duties.
The Central Bank is currently working on two major projects that may change the landscape of payment systems drastically in Turkey. These are the Central Bank Digital Currency, and more importantly the immediate and continuous transfer of funds (FAST – fonların anlık ve sürekli transferi). The FAST system is the embodiment of integration between banks through BKM Express, with the participation of fintech companies through newly introduced payment initiation services and account information services. With FAST, individuals will be able to transfer money to any bank account within seconds.
In addition, FAST is using the easy addressing system (KOLAS – kolay adresleme sistemi), which enables individuals to transfer money to others without knowing their account or IBAN numbers. With the introduction of account information services under the Payment Services Law, service providers will be opening up the account information connected to easy addresses (e.g. phone number, ID number, e-mail) to other service providers for them to initiate the transfer of funds. BKM operates both FAST and KOLAS systems. Who is BKM getting the account information from to transfer, since the Central Bank issued no licenses for account information services yet? The answer to this question is showing the immediate need for the detailed regulations. Although the Central Bank was expected to publish the detailed regulations and commence the licensing of fintech companies for payment initiation services and account information services, no regulation has been enacted yet. Currently, only the bank members of BKM are connected to the FAST and KOLAS systems. Therefore, the incumbent banks are also given a head start for these new services.
Market players were recently provided with drafts of the detailed regulations to govern payment services: the Draft Regulation on Payment Services, Electronic Money and Payment Service Providers, and the Draft Communiqué on Information Systems of Payment and E-Money Institutions and Data Sharing Services of Payment Service Providers in the Field of Payment Services. Although the consultation period is underway and no official regulation came into force yet, it can be seen from these draft regulations that BKM is expected to have new responsibilities and powers concerning the payment services market.
In general, BKM will be responsible for the supervision of the technical adequacy of the service providers wishing to provide payment initiation services and account information services. Providers of these services will be required to connect their systems to BKM within six months of the authorization; therefore, BKM will be acting as an intermediary platform that all information goes through. On the other hand, the proposed rules introduce a data localization rule by requiring service providers to keep their primary and secondary systems in Turkey.