TURKEY: An Introduction
Current Economic Conditions Affecting Clients or the Legal Profession
Turkey: Introduction
Turkey, an economic, cultural and geographical bridge connecting Europe and Asia, is also an economic gateway to various regions, including Europe, the Middle East, North Africa, Russia, and the Turkic states. With a population of roughly 85 million, Turkey ensures a highly educated, motivated, dynamic and productive workforce with approximately 52% of its people falling within the 15-49 age group. In 2022, the workforce participation rate for those aged 15–64 stood at 68.1%, highlighting Turkey’s human capital.
Ambitious targets for economic development
Recent years have seen Turkey striving with high inflation rates and volatility in the value of the Turkish lira. In response to these challenges, the Presidency of Strategy and Budget introduced an ambitious plan through the Medium-Term Programme for 2024–2026, which was published in the Official Gazette on 6 September 2023. This programme sets the target of achieving an 8.5% inflation rate by 2026. Turkey faced a setback with two devastating earthquakes, the most recent one being on 6 February 2023, centred in the south-east of the country. These events resulted in substantial damage, affecting 16.4% of the population and 9.4% of the economy. Direct losses were estimated at USD34.2 billion, with reconstruction needs potentially double that, as assessed by the World Bank. To meet the public financing needs arising from the earthquakes, the government introduced various tax regulations.
Foreign investment opportunities
Turkey maintains a liberal foreign investment policy, aiming to offer equal treatment to both local and foreign investors. The relative weakness of the Turkish lira against the euro and the US dollar makes the Turkish workforce highly accessible to foreign investors. A young and skilled workforce swiftly adapts to digitalisation trends and shows a strong interest in the fintech industry. These attributes position Turkey as an ideal location for businesses to thrive.
The Level of Activity, Trends and Developments in This Area
Indicators for digital adoption
There are 70.3 million internet users in Turkey as of 2023 according to Statista. Turkey’s internet penetration rate stood at 83.4% among the total population at the start of 2023 as well.
As of 2022, the share of individuals using the internet was the highest in the age group of 25–34, measuring 96.5%, while internet usage was recorded at 36.6% among individuals aged 65–74.
According to a Statista leading countries report, Turkey stood in fifth place around the globe based on Instagram audience size, with 62.55 million Turkish Instagram users. Also, there are 18.55 million Turkish X (formerly Twitter) users, as Turkey ranked seventh place among other countries.
Statistics for Digital, Internet and Mobile Banking published by the Turkish Banking Union in 2022 illustrated that 90.57 million people are using digital banking applications in the country.
These statistics perfectly highlight the younger Turkish generation’s integration into the digital finance world, considering that 41% of these individuals are under 36 years old.
Level of activity and trends
Fintech is a growing industry in Turkey. As of February 2023, 739 fintech companies have been established in the country, with 637 actively operating in the industry. Payments take the lead with 255 organisations, followed by decentralised finance (92), banking technologies (91), and corporate finance verticals (66).
As many as 100 fintech companies obtained licences from Turkey’s regulatory bodies including the Central Bank of the Republic of Turkey (CBRT), Capital Markets Board (CMB), Banking Regulation and Supervision Agency (BRSA) and Insurance and Private Pension Regulation and Supervision Agency (IPPRSA). These include 45 electronic money institutions and 29 payment institutions as well as crowdfunding platforms, insurance technologies, payment systems, digital banks and brokerage firms.
Turkey takes the lead in ownership of cryptocurrencies around the globe. The country ranks as Binance’s third largest market after China and South Korea. Recent research illustrates that more than half of Turkish people aged between 18 and 60 invest in crypto-assets. Such high demand is attractive to many global crypto-asset service providers who have been involved in investment or are considering investing in Turkey.
Developments
Our observation is that the recent legal and business developments in Turkey incentivise the fintech industry from both a financial and innovation perspective. For instance, the implementation of a legal framework for banking-as-a-service is a fair example of innovative incentives that are put forth by lawmakers and which position Turkey at the forefront of global developments in this area.
Financial incentives are also important, especially for start-ups and small-medium sized enterprises. In that sense, the Istanbul Finance Centre (IFC) has been introduced to meet evolving needs in the financial sector and entrepreneurship. The companies operating in the IFC benefit from several tax deductions. The IFC will also host a regulation testing environment (sandbox) on payment systems. Enterprises operating in areas such as digital banking, borrowing, asset management, payments, crypto-assets, insurance technologies, capital markets and participation fintech will be provided with training, mentoring, technical and technological infrastructures, networking and several other opportunities.
It is also worth noting that innovators and entrepreneurs enjoy several incentive programmes supported by organisations such as Scientific and Technological Research Council of Turkey (TÜBİTAK) and Small and Medium Enterprises Development Organisation (KOSGEB) as well as government bodies including the Ministry of Commerce and Ministry of Industry and Technology.
New Legislation That Will Have an Effect on Clients
The fintech industry has witnessed progressive regulations in recent years. In particular, the Regulation on Payment Services and Electronic Money Issuance and Payment Service Providers and, the Communiqué on Information Systems of Payment and Electronic Money Institutions and Data Sharing Services of Payment Service Providers in Payment Services Area, also known as secondary regulations (together the “Secondary Regulations”), are important milestones that are closely aligned with the European Union’s Second Payment Services Directive (PSD2).
Amendments to the Secondary Regulations (the “Amendment Regulations”) were made on 7 October 2023, as a step forward in various aspects of the industry. It should be emphasised that the Amendment Regulations provide a comprehensive set of rules including on anonymous pre-paid instruments, limitation periods for licensing processes, payment instruments, approvals on the changes of trade names, and employment of risk management personnel.
In a general sense, the Amendment Regulations are considered as a positive step as the limited operation areas of fintech companies have been broadened in favour of consumer needs.
More specifically, payments and electronic money institutions are allowed to offer interface providing services, leading services, intermediary services for the purchase and sale of precious metals and jewels, value-added services and qualified services. However, it should be noted that specific exemptions and restrictions related to such services have been stipulated in the Amendment Regulations and require the utmost attention in this respect.
Another noteworthy change is that the amount of the guarantee deposited to the CBTR will be deemed as a deduction item in equity capital calculations. Criteria for the determination of the amount of guarantee are also reduced.
The Amendment Regulations also set rules for domestic outsourcing of products and services related to critical information systems and security. With this in mind, remote communication systems used for identity checks and user onboarding (establishment of contract) processes are included within the concept of critical information systems, and followed by certain arrangements focusing on the technology and methodology of such processes.
Digital wallets
The Amendment Regulations have introduced digital wallets, allowing exclusively the payment service providers –with specific exemptions – to offer digital wallet services through the operating licence.
Microcredit
Despite the longstanding expectations of fintech players, the microcredit industry remains unregulated.
Open banking
On the open banking front, the concept of open banking was initially defined under the Regulation on the Information System of Banks and Electronic Banking Services; however, it lacked practical application until 2023. Open banking found its application area through the implementation of the Secondary Regulations, and was followed by the public announcement of the CBTR on 1 December 2022. Today, the CBTR grants licences to open banking firms.
Integration with FAST system
Payment and electronic money institutions have been integrated into the FAST system as of 2023.
Remote identity verification
During the pandemic, the regulatory framework allowing banks to conduct remote identity verification has been established under the Regulation on Remote Identity Verification and Remote Contract Execution of Banks. In 2023, payment and electronic money institutions are included within the scope, through amendments to the Financial Crimes Investigation Board’s (FCIB) and the CBTR’s regulations.
Banking as a service and digital banking
Banking as a service and digital banking has been introduced by the Regulation on Operating Principles of Digital Banks and Banking as a Service on 1 January 2022, which maintains its importance as one of the most significant innovative steps in the fintech sector in recent years.
Crypto-assets
With regard to the current crypto regulatory framework in Turkey, there is no specific regulation specifically designed for the crypto-assets market. However, certain regulations apply to crypto-assets and must be considered by the industry participants.
Having stated that, with an effective date of 30 April 2021, the CBRT has prohibited (i) the use of crypto-assets as a form of payment, or offering services for such usage; (ii) payment service providers from developing business models enabling crypto-assets to be used in the provision of payment services and electronic money issuance, or providing any services related to such business models; and (iii) payment and electronic money institutions from intermediating with platforms offering trading, custody, transfer or supply services for crypto-assets, or fund transfers from these platforms.
Subsequently, the FCIB amended the Regulation on Measures to Prevent Money Laundering and Financing of Terrorism on 1 May 2021, therefore crypto-asset service providers are included as an obliged party with specific obligations such as the implementation of know your customer processes, conducting ongoing monitoring, reporting of suspicious activities, retaining and submitting documents, periodically reporting of transactions that exceed a certain threshold, and providing information and documents when requested.
Following the latest report of the Financial Action Task Force (FATF) regarding Turkey, the Minister of Treasury and Finance has announced that the prospective Crypto Law will be enacted shortly. The Crypto Law was reportedly anticipated to enter into force in 2022, as the final version was ready to be passed after the contributions of stakeholders. In the meantime, as there are no bans on crypto-asset service providers; such companies operate within the country and offer their services without being subject to any licences.
Data privacy
The Law on the Protection of Personal Data (LPPD) applies to all companies processing personal data without sector specification. It is heavily influenced by the European Union’s Data Protection Directive numbered 1995/46.
The Human Rights Action Plan published by the Ministry of Justice in 2021 and the 2024–2026 Medium-Term Programme released by the Strategy and Budget Presidency in 2023 indicate that the LPPD will be amended in the near future and brought into alignment with European Union standards.
This anticipated adjustment is viewed as a positive improvement that will encourage investors, especially considering its potential to address existing challenges in terms of cross-border transfer of personal data and the processing of special categories of personal data.
Potential Hurdles or Difficulties Faced by Clients and How These Can Be Overcome
Turkey’s legal environment and specific business cultural have unique dynamics. One of the primary considerations for global companies operating in Turkey pertains to language differences as the user interface in a native language would enhance customer interaction and engagement.
Language localisation necessities could also become a must in legal operations, for instance in contract management, as the provisions set forth in Law 805 on Compulsory Use of Turkish Language in Economic Institutions require Turkish as a documentation, official reporting and contractual language under certain conditions.
Turkey also sets clear provisions regarding the localisation of data and systems, coupled with a licensing regime requiring a local presence within the country.
Companies must navigate these challenges by putting proper compliance programmes and risk management mechanisms in place, often with the assistance of local advisors.