Embedded Finance and Its Regulation in Turkey
The digital revolution continues unabated. In the post-Covid world, it has become almost mandatory to combine consumers’ financial and shopping experiences in a single app or platform. Instant credit evaluation, purchasing an insurance plan with the product, and benefiting from loyalty programs are possible only in a few seconds. Directing the customer to a different platform or application for these transactions can cause customer loss. Completing the work on a single platform can ensure that both revenue and customers remain with the parent company. Creating a versatile, end-to-end, fully integrated and seamless experience for users and ultimately expanding the revenue base for fintech companies has become the new trend. Embedded finance applications have become widespread in certain countries around the world, and we probably expect the same in Turkey soon. In this article, we have both explained embedded finance and compiled its status in the face of national regulation.
What is embedded finance really?
Companies operating in non-financial sectors need to offer financial services to their consumers. For example, a marketplace (trendyol, hepsiburada, etc.) may offer insurance or BNPL (buy now, pay later) services to those who shop online on the website, a B2B transportation company may offer financial services to its customers to access trade finance, a digital store owner may offer insurance or BNPL services to those who shop on its website. Thus, a business model is emerging in which more and more layers of value are being added to customers. Simply, embedded finance is the use of financial tools or services — such as lending or payment processing — by a non-financial provider.
Embedded finance is an important opportunity; trends show that small businesses need such applications more than their larger competitors, especially in markets where competition is fierce. We know that in Turkey, large traditional banks and insurance organizations want to offer their services to fintech or non-fintech providers to get a share of their revenues. The important thing here is that transactions can be done easily and quickly. Millennials in particular are so eager to adopt embedded finance that they want to be served quickly and easily from a single platform. For this reason, we expect a great potential.
What are Embedded Finance Applications?
We should share some of the examples that have emerged in the world in recent years so that this concept can more easily penetrate our minds:
Banking – Service banking – Service banking, which enables customers to deposit, send, pay, and perform all services that the bank can provide without having a license by using the bank’s license and services. Although we still do not see an actual example of this practice in Turkey, we can count global examples such as Solaris and Clearbank. For example, UBER competitor Lyft’s offering debit cards to its drivers can be presented as an example. Platform banking can also be considered a kind of service banking.
Payment – In this segment, we see many innovative ideas such as Paystack, Flutterwave, etc., which make the payment process with or without a debit card, one-click payment or transactions with mobile apps or QR codes, help small businesses offer convenience, discounts and rewards to their customers, and generally increase customer loyalty. In Turkey, under the umbrella of fintech as a service, companies such as SiPay, Ozan, Birleşik Ödeme show us partial examples of this.
Credit – In particular, we see the proliferation of Buy Now, Pay Later (BNPL) and other lending offers offered by non-financial companies in partnership with banks. Customers are using this service at the time of purchase, allowing them to pay at maturity. We see this business model in a few companies in Turkey (HASO, Hepsiburada, Kredim). The aim is to ease the financial burden of direct payment and bring the consumer to the finish line.
Insurance – Quickly preparing insurance policies on the platform without the need to interact with an agent and integrating them into the purchasing process facilitates the sale of insurance products.
Portfolio management – Artificial intelligence-supported applications can be gathered on a single platform for both budget management and investment management of consumers.
The Future of Embedded Finance and Regulatory Infrastructure in Turkey
Embedded finance primarily takes the form of a partner/partnership. If a non-financial company wants to provide a regulated financial service to its customers, it has 3 alternatives. The first one is to obtain a new license. In Turkey, the payment service or wallet service is licensed by the TCMB under Law No. 6493. The electronic money license requires TL 25 million in equity, while the payment services license requires TL 9 million in. In addition, obligations such as the establishment of a corporate structure, auditing of information systems, and employment of relevant critical personnel are mandatory to obtain a license. Banking services are licensed under Law No. 5411. Insurance services are licensed under Law No. 5684. Portfolio management and intermediary institution companies are under the supervision and licensing of the Capital Markets Board.
As can be seen, the first alternative requires high capital investment. Establishing corporate governance also takes a long time. In addition, the process of obtaining authorization from the regulator takes quite a long time in Turkey. The second alternative is the acquisition of existing licensed companies. Although this alternative saves time, it is usually more costly than establishing a company from scratch.
The best alternative, in this case, is for financial providers and brands to form permanent (and highly beneficial) partnerships in cooperation with traditional banks, payment institutions, insurance companies, pension funds, etc. This trend creates a more efficient business model for companies that do not have the high capital capacity and allocate scarce resources to technology development. This business model is not unregulated, but it is relatively easier. For example, in service banking, it is necessary to apply to the BRSA together with the licenced bank. In payment services and electronic money services, there are regulatory models in which one operates as a distributor or agent of the relevant licensed company.
Embedded finance provides new revenue streams. By integrating financial services into established buyer journeys, many new revenue streams are already emerging. However, regulators in Turkey, which claim to be open to fintech as a service and banking as a service business models, are too cautious about collaborations. As embedded financial services become more widespread and more non-financial companies start to enter these partnerships, they will be more eager. This is because these regulated financial institutions will need to rethink their business models as they compete in hard competition. We expect to see more embedded finance as more companies collaborate with financial institutions.