What is a Payment Institution?

Payment institutions are banking organizations that provide payment services. Specifically, if we use the term “payment” in a narrower sense, they typically provide services for electronic payments, often involving credit card-based electronic payment methods.

The credit card form you encounter during the payment stage of online shopping may come to mind. A payment institution can be defined as the structure that receives the payment from the bank of the credit card in this form and informs you and the store about the transaction’s result.

Payment institutions are banking organizations in both their operations and structure. Since they only provide collection services to legal entities (with tax registration), they operate in the field of “commercial banking.”

The revenue model of payment institutions involves charging for the collection process between the buyer and seller. This revenue model can take the form of small transaction fees on collections, monthly/annual service charges, or a combination of these methods. Payment institutions cannot legally generate income from other activities. In other words, they cannot operate like commercial companies with names that extend into multiple unrelated fields, such as “logistics, construction, industrial.” Like banks, they are established solely to perform specific activities. Speaking of names, even the names of payment institutions are determined by law. For example, “XYZ Payment and Electronic Money Inc.”

In our country, there are supervision and accreditation processes concerning payment institutions. Not everyone can establish a payment company and begin providing collection services. The fundamental legal framework for payment institutions in our country is Law No. 6493. According to this law and its sub-regulations, a capital company must obtain a license to operate as a payment institution. To apply for this license, they must establish a comprehensive organizational structure and document that everything operates securely and efficiently. In practice, the most critical aspect of this process is the technical part known as the “Payment Institution IT System.” Almost everything revolves around this.
Until last year, the Banking Regulation and Supervision Agency (BRSA) oversaw the licensing and supervision process. However, as of 22.11.2019, this process was transferred to the Central Bank of Turkey (CBRT) through an official statement published in the Official Gazette. You can access our article titled How to Establish a Payment Company here.

Payment institutions operate transparently and under constant supervision, just like banks. They are also subject to similar rules, such as maintaining a relatively high minimum initial capital and safeguarding all financial assets under their management. We can address the frequently asked question, “Are payment institutions safe?” from this perspective. Payment institutions and banks receive their licenses from the same authority. Their audits are also quite similar. In other words, payment institutions have a reliability level comparable to banks. Moreover, the BRSA (now CBRT) has robust measures in place against risks in this sector.

In general, a payment institution performs the following activities:

• Providing online payment services (core activity)
• Web-based credit card payment services
• Mobile-based credit card payment services
• OTP/TOTP, authentication, authorization, cancellations, chargebacks
• B2B collection services (dealer/sub-dealer collection flow) (Example: https://onlineodemesistemi.com)
• Money transfers (EFT/Remittance) (depending on the scope of the license)
• Bill collection services (depending on the scope of the license)
• Establishing payment points (depending on the scope of the license)
• Providing fraud protection services
• Offering card storage services (subject to technical standards)
• Providing reporting and accounting tools
• Delivering easy integration tools (Example: https://www.slideshare.net/MahmutGLERCE/payment-facilitator-opensource-pitch-deck)

We anticipate that the activities list may expand slightly once a declaration similar to PSD-2 (Payment Service Directive) is finalized and published in our country. Incidentally, many payment institutions also have licenses for “electronic money institutions,” allowing them to provide almost all banking services, including personal demand deposit accounts and physical (plastic) cards.

The primary claim of payment institutions is to facilitate collections in electronic environments. Additionally, especially with very low or no setup costs, they differentiate themselves further. This strategy aims to encourage e-commerce businesses to choose these payment institutions over traditional banking services. Confirming the accuracy of this strategy, the number and total revenues of payment institutions are rapidly increasing. Most e-commerce stores now prefer working with payment institutions over banks. (Statistical sources: Payment and Electronic Money Association, BRSA data, Sanalpospro annual reports)

Speaking of facilitating collections, we discussed PF/PSP concepts in other articles. The term “PF” (Payment Facilitator) translates quite well as “Payment Facilitator” in Turkish. First, let me explain why “payment” needs to be facilitated: Around the world, there are numerous banks and credit card types. If a seller wants to collect payments electronically from all these cards, they would need to handle numerous integration methods and scenarios, signing contracts with many banks and card networks. For example, there are around 20 banks providing payment services in our country. Additionally, there are over a hundred different card types and four major card networks. Calculating the payment scenarios involves many additional variables, such as installment limits, promotions, and deferred installments. Payment institutions handle all of this through a single contract and integration.

Payment institutions generally enable installment payments for 6-7 card types. Simplified processes aren’t limited to this. The establishment process is often shorter and easier. Access to fraud protection services, recurring payments, and campaign services are also available.

Based on our professional experiences, the primary reasons businesses choose to work with payment institutions are as follows, in order of importance:

• Low (often zero) setup costs
• Low collection costs
• Easy integration
• Simple structure
• Short terms
• Payment tools (mobile applications, ready-to-use payment pages, payment links, etc.)

It’s worth emphasizing that this list reflects general trends. Not all payment institutions can provide these advantages all the time. Additionally, calculating costs can be somewhat complex. It requires factoring in parameters such as per-transaction fees, long-term repayments, total turnover, and average amounts. In one of my ventures, my team often calculates costs for numerous stores daily to direct them to the most suitable payment institution or bank. Speaking of costs, it’s worth noting that “cost” is not always the primary factor for businesses. Trust and security are critical factors.

Some payment institutions in our country have been established as initiatives of older, well-established corporate groups. These institutions often use the collections of their affiliated corporate groups as their primary source. There are also startups founded as part of a startup business model, waiting to increase their valuation. A few of the active payment institutions have become distinguishably popular.

You can easily access the revenue and expense figures of payment institutions. However, when calculating the total value of institutions, strategic value, customer base (traction), and the prestige of their license are also considered, in addition to profitability. Consequently, some institutions have received tens of millions of lira in investments, with valuations reaching billions.

Payment institutions must demonstrate that they have established a flawless structure before obtaining their initial operating license. This setup process, often lasting months, involves numerous inspections, examinations, and tests by various entities. From personal data protection to risk management, security tests, and accounting reports, everything must operate perfectly to secure this license.

Payment institutions undergo periodic audits. These audits are conducted by independent audit firms. Occasionally, the regulatory authority (BRSA/CBRT) may also conduct special audits. Reports from these audits are often partially made publicly available. Similar audit mechanisms are in place for banks.

Payment institutions transfer collected payments to a protection account. This money, belonging to the store, remains in the protected accounts for a specified period. These durations are determined by legal texts. When the institution needs to refund the store, the funds are withdrawn from this account. This ensures the protection of the store’s receivables.

In our country, payment institutions generally have a “local” and “world-isolated” market. Locality is a typical feature for the banking sector. However, fintech ventures typically aim to target the global market using the accessibility of technology. Despite being technically advanced in the fintech field, our country has yet to produce global brands in this domain. The reasons could be explored in another article, but factors like legislation and limited financial horizons might be contributing factors. Nevertheless, there are institutions in our country expanding their services across broader regions through international collaborations.

Payment institutions are fundamentally fintech organizations operating almost entirely through technology in a highly innovative field. For this reason, payment institutions usually employ a young, technically skilled team. Since they operate under regulations similar to those governing banks, the process awaiting businesses that decide to work with payment institutions is comparable. Known as