Insights

Introduction

We would like to inform you about a significant development concerning changes in the credit and bank card regulations of Turkey. On 28 October 2022, Banking Regulation and Supervision Authority (“BRSA”) published a “Draft Regulation on Amending the Regulation on Bank Cards and Credit Cards” (“Draft Regulation”) on its website.

The changes suggested by the Draft Regulation aims three main purposes, one of which closely concern all businesses that are providing goods/services to Turkish cardholders on a cross-border basis:

• Aim 1: Oblige foreign businesses that target Turkish market to obtain a POS from locally licensed acquirers.
• Aim 2: Transpose co-badging and choice of payment brand rules provided under Article 8 of the Regulation EU 2015/751 (“Interchange Fees Regulation”)
• Aim 3: Compel card system institutions that have not yet obtained an operation license in Turkey to obtain one, by providing certain advantages to those that have a license in Turkey

Obligation to Obtain a Local POS for Foreign Businesses Targeting Turkish Consumers:

The Draft Regulation foresees following provision to be added to the Regulation on Bank Cards and Credit Cards (“Current Regulation”):

“In the event that businesses established abroad carry out activities targeted at people residing in Turkey, card issuing institutions can only approve transaction confirmation requests made via POS allocated to the businesses established abroad, on the condition that such requests come through the POS of an institution that has obtained a license to operate as an acquirer in Turkey.

In case of existence of any of the following operations are carried out by businesses established abroad, it will be considered that the activities are targeted at persons residing in Turkey:

- establishing a workplace in Turkey,

- creation of a Turkish website,

- engaging in promotional and marketing activities for the goods and services offered directly and/or through persons or institutions residing in Turkey.

The Board is authorized to determine the additional criteria regarding the determination that the activities are aimed at persons residing in Turkey and the procedures and principles regarding the implementation of this paragraph.”

This additional provision essentially means, if a foreign business targets customers residing in Turkey, they are obliged to use a POS provided by a locally established bank or a payment service provider (i.e. a local acquirer) to process transactions done via locally issued credit or bank cards. Otherwise, such transactions will be blocked by the local card issuers.

The criterion for deciding whether a foreign business targets Turkish customers are:

• Having a workplace in Turkey,
• Offering a Turkish website or,
• conducting promotional or marketing activities in Turkey.

We believe this additional provision will have a significant impact on the operations of online services (e.g. video-on-demand, software, online gaming service providers) and electronic commerce websites since, currently, a large percent of such service providers use POSs provided by acquirers that are not licensed in Turkey to acquire Turkish cardholders’ locally issued cards.

With the enaction of this obligation, local card issuers will be required to check:

• whether such foreign business is meeting any of the “targeting Turkish market” criteria listed above and
• whether transaction confirmation request is coming from a locally licensed acquirer’s POS and accept/reject the request accordingly.

The biggest practical problem we observe with this suggested obligation is, currently the card issuers have no definite way to assess “targeting Turkish market” criteria is met in a given transaction. To illustrate, in order to fully comply with this requirement, card issuing institutions would need to conduct an extensive research for each transaction and assess any of the “workplace”, “Turkish website” or “marketing in Turkey” criteria is met by the foreign business; which is something practically impossible. Regardless, the same provision provides an authority to BRSA to determine procedures and principles regarding the implementation of this requirement, so it is possible that the practical difficulties could be addressed with the guidance to be prepared by BRSA.

Co-Badging and Choice of Payment Brand Rules:

According to the definition provided in the Interchange Fees Regulation, ‘co-badging’ means the inclusion of two or more payment brands or payment applications of the same brand on the same card-based payment instrument. In other words, a co-badged card can carry brands of multiple card schemes at the same time.

With the changes suggested in the Draft Regulation, rules concerning co-badging will be introduced into the Current Regulation for the first time, but in manner heavily favoring card system institutions that have obtained a local license to operate. Also, a ‘choice of payment brand’ principle is to be introduced that will grant consumers a freedom of choice in the branding of the card instrument they are being issued with. The co-badging rules suggested are as follows:

Rule 1: Exclusive badging prohibition for non-licensed card institutions

• Card issuing institutions cannot issue cards that exclusively carry a card institution’s card scheme brand unless this card system institution has obtained a license to operate in Turkey.
• It is only possible to issue cards that carry such non-licensed card institution’s card scheme brand only if they are paired (“co-badged”) with a locally licensed card institution’s card scheme brand.
• Furthermore, it is mandatory to display all card schemes applied to the card-based payment instrument, over the instrument.

Rule 2: Customer shall have a freedom of choice in the branding of its card-based payment instrument

• Card issuing institutions will be obliged to provide their customers with the option to choose which card system institution’s card scheme the card will be issued with, during the card application.
• Before the application, card issuing institutions will be required to inform the customer clearly and objectively about the functions, costs, customer rights and security features of all card scheme options available, including the domestic and international use of the card.
• Card issuing institutions will not be able to force the customer to prefer more than one card scheme brand at the same time.
• If the customer prefers to use more than one card scheme at the same time, card issuing institution will have to ensure that the customer can determine which scheme will have priority during the use of the card. If the customer requests that the priority card scheme to be changed, the request must be fulfilled by the card issuer within fifteen days at the latest.
• Lastly, in order to ensure that consumers preferences are honored, acquirers will be required to ensure that the card schemes of all card system institutions that have been authorized to operate in Turkey are able to be acquired by the POS devices they will provide to their merchants. Furthermore, they will be obliged to establish automated systems over their POS devices that will automatically make use of the card scheme prioritized by the cardholder, if the card being accepted by the POS is co-badged (or to override such prioritization where instructed by the cardholder).