“Banking is essential, banks are not…”(Bill Gates, 1994)
In the 21st century, which can be described as the age of technology, many publicly traded companies have internet-centric and platform-based business models. The digitalization trend and the internet and technology-oriented adventure are showing their effects in the finance sector as well as in other sectors. The best example of this can be defined as 'Neobanking', which is the trend of today and open to developments. Thanks to neobanks, which is one of a series of FinTech banking initiatives, customers can perform all their transactions with financial institutions in a digital environment. In these digital banks, which do not have a physical branch, the process is to be able to perform all banking transactions via computers and phones. The benefit for customers is that such banks can benefit from banking products and services with low fees, commissions and interest rates, since there are no cost items such as branch opening in their balance sheets. In addition, customers can perform their transactions in international money transfers and online shopping without being subject to high exchange rates. With the Regulation on the Operating Principles of Digital Banks and Service Model Banking, which entered into force on January 1, 2022 in Turkey, FinTechs with e-money licenses, which aim to become the main bank of their customers, entered the market.
Customer Oriented E-Transformation
We can count many factors in the abandonment of classical and traditional banking operations and procedures in the world and the spread of FinTech banking models. Providing financial services with consumer and user-friendly applications much easier and less costly, providing 24/7 banking service to customers, making contactless card payments without the hassle of carrying cash, from invoice issuing to return processes, contactless payments are also integrated with NFC systems from mobile. There are many examples where data matrix applications become widespread in transactions such as deposit/withdrawal, money transfer, bill payment, instant loan opportunities are offered by banks without going to the branch during shopping, and many more. We can say that there is only one motivation for the emergence of these services; The expectations of the customers are that they develop more speed and convenience, less cost and they always want more innovative applications to be included in the system. For this reason, we can say that the digitalization phenomenon in the banking sector has emerged as a result of the merger of customer expectations and technology. Let's take a closer look at FinTech-based innovations and the challenges of systems in the market.
FinTech has functions such as radically changing the way products and services are presented and revolutionizing existing business models, rather than improving the products and services offered in the banking sector. This function is most evident in the transition from using valuable documents such as cash, checks, policies and bonds to credit cards in payments made for commercial affairs and personal expenses in the past, and today, in the transition from credit cards to digital wallets via QR code and SMS verification system with the development of technology and it has shown itself in becoming the preferred payment tool by individuals. In this process, customers have become able to use the cash they load into their digital wallets, both in stores and in online payments, just like the wallets they carry physically. In fact, some digital wallets can quickly withdraw the missing amount from the defined bank or credit card if the balance is insufficient during shopping. With the digital wallet, which is one of the most successful FinTech applications in the payment services pioneered by PayPal, users can make instant and contactless shopping. Another important factor in the use of digital wallets is sustainability. Consumers can view their receipts and invoices electronically on their wallet, thus avoiding wastage of paper. In terms of companies, this situation is seen in the reduction of input costs.
Digital Battle and FinTech Regulations
It is an undeniable fact that FinTech's innovative applications on the banking sector, explained with examples above, provide many advantages for customers and users. However, this situation has deeply affected the dynamics of competition between established players in markets such as banking and insurance and new players in the market. In fact, it has become a priority for banks to offer their customers the services they need through digital channels such as the Web, Whatsapp and portal, and to allocate large-scale investments in order to move their financial processes to digital. At this point, it would be appropriate to say that there is/will be fierce competition between the digital-based FinTech companies that have recently entered the market and will operate in the field of payment services and the existing financial institutions. In particular, technology giant companies such as Google and Amazon, which mediate banks and payment services, initially dominated due to their market power and customer portfolios, which inevitably had exclusionary effects for FinTek-based Startups. In order for FinTech companies to gain a foothold in the market and maintain their position, in addition to being creative and customer-oriented in line with the dynamics of the market, they also need and still need regulatory protections.
Until 2022, we witnessed the practices of incumbent financial institutions to unilaterally or collectively exclude new players who want to enter the market by using their infrastructure and customer portfolio power. The best example of this is undoubtedly seen clearly in the Bonus decision of the Competition Board dated 07.09.2017 and numbered 17-28/462-201. FinTech-based payment service providers, which have been subject to anti-competitive actions such as the ban on sub-licensing for payment service providers, now have the opportunity to expand their merchant network with their own virtual POS products. Therefore, it can be said that the concept of finance has been transformed in the axis of "growth by sharing" rather than the monopoly of banks. The regulations that reveal the infrastructure and cornerstones of this growth are Electronic Banking Communiqué, Remote Customer Act Communiqué and Payment Systems Communiqué in our country.
In such a competitive environment, a series of directives, regulations, laws have been published and certain uniform rules have been introduced by both local authorities and European Union authorities. In the beginning, there were enforcements to exclude payment service providers and electronic money institutions from the ecosystem by abusing the dominant position of established financial actors. In particular, the Payment Services Directive 2 (PSD2) of the European Union and the Law on Payment Services and Electronic Money Institutions in Turkish Law have established the foundations and rules for FinTek-based third party service providers to enter the banking markets. With the said directive, banks assumed a platform role and the concept of Account Information Service Providers emerged. The concept in question enabled bank customers to move their accounts to another bank, without renewing the contract, just like carrying a number. At this point, the other most efficient convenience offered to bank customers is that the account number (IBAN) and financial history will not change. At this point, bank account ownership is no longer seen as a product but as both a service and a right. On the other hand, we can say that the directive created the phenomenon of "Open Banking", the most game-changing application of FinTech in the financial sector. Accordingly, customers can access all their bank accounts on a platform screen, share the customer's transfer and account information under certain conditions with the permission of third-party service providers, manage cryptocurrencies with a digital wallet, create a common customer pool, receive investment advice from a digital consultant. It paved the way for customer-based transactions such as online payments. With these aforementioned services, it has been simplified for customers to make their payments with identification and to benefit from loan financing, especially during this period when they are at home due to the pandemic.
Target: Maximum Digitalization
Although it is possible to say that FinTech companies have a large share of the cake for now, we can say that the banks have no intention of losing their dominance in the sector. In our next article, we will examine the parameters that show that this acceleration of competition will increase even more in open banking and neobanking services. It is useful to point out, as the competition heats up, it is inevitable that the winners will be customers. We'll wait and see.
By Ezgi Anasiz, Associate, KP Law