Turkey’s Fintech Industry Muscles Up

There certainly are challenges, regional imbalances and pressures of capital flight. But, Turkey secured a 4% GDP growth in Q3 2015. Robust domestic consumption and government spending have both ushered to achieve such eye-catching number.

For its growth prospects, Turkey clearly relies on its young and demanding demographics with an increased level of purchasing power. This is a country with median age 29 for its 79 million residents. Industry surveys indicate there are 46 million active Internet users, 42 million social media accounts, 71 million mobile connections and 36 million mobile social users. Numbers narrate the story eloquently.

To many accounts, Turkey is experiencing a digital boom. Informatics sector grows in double digits every year and has now reached a volume of $34 billion. According to TEPAV, a research think tank, there are more than 2,300 software development companies approximately half of which are located in techno parks. The country has become a place of presence for global service providers that have either established new businesses or acquired local firms. Intel, Microsoft, Yandex, IBM, Qualcomm, PayPal and others are all involved heavily for a piece in the cake.

Take e-commerce which registered 35% growth rate on sales in 2014 reaching to €6.5 billion. Online shopping represents 1.6% of retail turnover whereas this number is above 5% in most of the EU markets. Only this implies the gap to be filled soon by digital stores. The potential has been signaled by an acquisition of gittigidiyor.com by Ebay in 2011 for $217 million and a more notorious one of yemeksepeti.com by Berlin-based Delivery Hero for $589 million in 2015. Korea’s SK Holding co-invested with Dogus Group a few years ago in n11.com, now a premier meeting point for buyers and sellers. It has reported €300 million sales, 400 million visits, and 6 million member accounts in 2015.

Online marketplaces have proven to be ground breaking for Turkish retailers who are strict in placing trust in digital tools. Internet banking platforms, for instance, are still underused in against for massive investments by the banks. Mobile has turned out to be different. Every other purchase on e-commerce portals is conducted via mobile devices. An ING survey highlights the number of mobile owners that use mobile banking in Turkey as 65%. This is higher than the US, the UK and the rest of Europe. Some researchers contend that millennials are shifting the paradigm of conventional shopping and payment in the country.

Financial services are not lagging behind in this ever-changing landscape. The banking crisis almost fifteen years ago seems to have taught lessons to the Turkish bankers as they have scrambled into innovation—a distinct feature from some other markets. One indicator is mobile banking which accounts for 18% of total banking transactions. Corporate and retail banking is of high quality thanks to integrated technologies in data management and operations. Banks’ total assets to GDP has surpassed the threshold of 100% which is a straight answer to innovation in conventional banking. Disruptive innovation has also been pioneered by banks. Finansbank’s enpara.com and BNP Paribas’ cepteteb applications offer low-cost and less hassle services in P2P payments, card-less ATM cash withdrawals and online payment functionality. Garanti’s payment operations are now maintained by BBVA Global Payments to spread its technology across where the Spanish giant has presence. Denizbank became the world’s first when it introduced a Facebook banking application in 2012.

The number of credit cards has doubled over the last 10 years to 58 million, and debit cards have grown by an even greater margin to 112 million. A few years back, Turkey overtook the UK as Visa Europe’s largest card market. Contactless card payments were launched in 2004; and today its network is nearing 200.000 POS terminals representing 8% of the total in the country.

BKM (Turkey’s interbank switch & clearing agency owned by a consortium of local banks) embarked on a new domestic payment scheme called TROY which will provide Turkey with greater control of its payments. Pozitron, Monitise and Cardtek are gaining ground with banking infrastructures. Wallets became popular in the sideways. BKM Express, 3Pay, ininal, Moka and others are tackling the customer appetite for digital wallets. Some of the fintechers are even crossing the borders. iYzico, an Istanbul-based payment startup, has recently signed an agreement with Tehran-based Pecco to become the first of its kind introduced into Iran’s $400 billion economy.

Capital market, though belated a little, has resonated well to the demand of local and global markets for diversified product portfolio. New capital market legislation signals openness and competition even though the industry watchdog promises a cautious transition. Financial and commodity derivatives have boosted the turnover by registering triple digit growth per annum. BIST’s recent switch to Nasdaq-powered technology paves the way for sophistication in trading. Algorithmic and high frequency trading are set to galvanize liquidity in the equity market. Domestic institutional investors are more prevalent in the trading than before. Pension funds, shored up by government’s cash incentives, have grown to 6 million subscribers with €15 billion AUM. Matriks, Tradesoft and Rasyonet are only a few of the local disrupters crowding-out competitors thanks to product quality and cost efficiencies. Matriks only captures around 65% of market data services where Bloomberg and Reuters are trailing way behind. It is nothing erroneous to anticipate more startups entering into the trading and asset management landscape in the years to come.

The government has been an enabler in technology development by liberalizing the market place, leveling the playing field, easing regulatory burdens and incentivizing startups. There are now 48 techno parks across the country offering cluster services for around 3500 technology providers. Those companies located in such centers enjoy tax incentives, lower statutory fees and substantial cash grants. A brand new regulation has expanded the incentives framework. Angels and venture capitals will pay no taxes once investing in startups. Restraints on foreign workers have been relieved. At a separate note, the Treasury struck a deal with Chambers of Commerce towards a joint funding platform which will execute direct investments in startups towards an initial commitment of $50 million. A broader investor landscape for fintechs with the inclusion of government is not necessarily a prophecy.

Back to the prologue! Yes, there are challenges in and around the country. Pressures are eminent. Some risks are gauged downwardly. Let us, however, make no mistake. Turkey has a peculiar potential to build up further. Fintech is and will be one of the pivots in this process.