An Overview of the Payment Systems in Turkey

Systems always attract my interest. Especially the ones that have concrete presence in our life unlike theoretical systems we explore throughout our undergraduate years. It is because those concrete, yet most often invisible systems represent one of the most peculiar and complex thinking ways humans have created over years. This article develops around one such system that matters the most to seamlessly maintain our everyday life.

I will introduce you to the Payment Systems in Turkey and the key actors that regulate these sectors. I will do my best to help you understand what goes behind the doors when you tap a card onto a POS device and it beeps, suggesting the transaction is successful. What does the Visa and Mastercard logos signify? Why is TROY treated as such a huge deal? Why do some merchants not accept card payments?

Let’s first begin with two of the overarching terminology: issuer and acquirer. If you are an institution (Bank A, an e-money company) that issues a card, you are the card issuer. If you have a license to give physical POS devices to merchants, you are the acquirer. You have probably noticed that some physical POS devices carry different bank names on them and some merchants have a couple of them from different banks. Those merchants may even ask which bank’s card you are using to determine which POS device to use to process the transaction.

With this brief introduction in mind, here comes two other concepts interlinked with the concepts of issuer and acquirer: ON US transactions and NOT-ON-US transactions. Suppose you have a card issued from the Bank A. That Bank A also gives its own physical POS devices to merchants. When you enter a store, shop, and want to pay using the card issued by the Bank A and the store has a physical POS device from the Bank A, that transaction is considered as an ON US transaction. In this case, the issuer and the acquirer are the same: it is the Bank A. When the issuer and the acquirer is different, say the physical POS device belongs to another bank called the Bank B, it is considered as a NOT-ON-US transaction.

What lies under these two concepts? Once you are in the payments industry, the word you will most often here are clearing and settlement (‘mutabakat’ in Turkish). These are the key words that define the ON-US and NOT-ON-US terms. When you pay with your card on a POS device, there must be a clearing and settlement process whereby the cardholder’s bank confirms the cardholder has enough fund in its account and the transfer of funds must be completed from the issuer (the cardholder’s bank) to the acquirer (the merchant’s POS bank). 

When a transaction is ON US, it means the issuer and the acquirer are the same bank. In this case, the same bank handles the clearing and settlement process within itself. The cardholder’s bank is the Bank A and the merchant is also using a physical POS device from the Bank A (meaning the merchant has a business account with the Bank A). This is a relatively easy process since there are no external actors in play. Everything happens within the same system that belongs to the Bank A.  

It gets a bit more interesting when a transaction is NOT-ON-US. When you tap your card from the Bank A on a physical POS device that belongs to the Bank B, neither the Bank A nor the Bank B can handle the clearing and settlement process within themselves. They need an interface that can provide the communication both banks need. This is where the Interbank Card Center (‘Bankalararası Kart Merkezi’, abb. ‘BKM’) comes in. 

The Interbank Card Center (ICC) is a company established in the 1990s to regulate the standards for debit and credit cards by the largest banks in Turkey. Its majority shareholder is the Central Bank of the Republic of Turkey (‘Türkiye Cumhuriyeti Merkez Bankası’, abb. ‘TCMB’) since 2019. The ICC provides the system through which domestic transactions can be processed and their clearing and settlement processes can be neatly completed. Every card issuer is part of their system. They may either participate directly or by means of third-party technology companies that connect card issuers to the system.

When you pay for a service or product at a store, restaurant, etc. and it is a NOT-ON-US transaction, the acquirer bank sends a message to the ICC through their system, saying that they received a payment order at a certain amount from a specific card issuer, which can be the Bank A. The ICC then transmits the piece of information it receives from the acquirer to the issuer bank. The issuer bank runs some fraud controls to ensure the cardholder is really the person that they know, and it is not a fraudulent transaction. When the transaction is cleared off fraud controls, the card issuer bank then sends a message to the ICC confirming the transaction. The ICC then relays the authorization message to the acquirer. The acquirer accepts the payment, and the issuer deducts the transaction amount from the cardholder customer’s balance. However, the funds are not directly transferred from the cardholder’s account at the Bank A to the merchant’s account at the Bank B. Once the payment is accepted, it enters a process of clearing and settlement processes where both parties compare and confirm the amount of transaction. Card transactions are built on this essential system.

Remember, the ICC only provides clearing and settlement for domestic transactions. In international transactions, there are different players with which you are acquainted. We’ll get to them shortly but first, let’s discuss ON-US and NOT-ON-US transactions in the light of ICC card interchange commissions.

In ON-US transactions, the card issuer and the acquirer are the same bank, so the ICC is not involved. There are no commission fees involved except for what the bank may charge to the merchant for facilitating the transaction. As for NOT-ON-US, however, the ICC-determined card interchange commission fees are in effect. The rule is simple. If a card issued by the Bank A is used on a physical POS device provided by the Bank B, the Bank A is entitled to receive commission fees from the Bank B per transaction according to the card interchange commission rates determined by the ICC. The ICC differentiates debit and credit card commission rates. The commission rate for debit card transactions is significantly lower compared to credit card rates. As of the date of the publishing of this article, the ICC applies 0,67 commission rate on the amount of the transaction for debit card transactions and 3,36 commission rate for credit card transactions. Banks in turn reflects those commission rates and plus their own profits on top of these rates, which is why some merchants use cash and do not accept card payments. Or this is why they have several physical POS devices on the counter – to make sure the transaction is ON US so as to avoid such fees. Banks can sometimes offer to deduct no fees from the payments the merchants accept. In turn, they usually request the merchant to keep money in a time deposit account for a certain duration to make use of that money.

We have shortly discussed what happens when you swipe or tap a card onto a POS device in domestic transactions. But when it comes to international transactions, we said the ICC is not involved. So, who are the main actors in the international arena? 

Companies like Mastercard, VISA, Diners Club, JCB, Union Pay, and few others provide card BIN numbers and card schemes. When you want to make a purchase abroad with your card issued from a Turkish bank, someone needs to handle the currency exchange and provide clearing and settlement. Card scheme providers like Mastercard and VISA are essential in this respect. They run the communication on a global scale. They integrate with the local payment systems all around the world and thanks to them, you can pay for a meal at a café in Germany with your card issued in Turkey and linked to your debit account in Turkish lira. They also issue card BIN numbers, the 16-digit numbers imprinted in the front or back of your card. Banks request card BIN numbers to be reserved for them when they want to print new cards. For instance, Mastercard BINs usually start with 5 and VISA BIN numbers start with 4. The next several digits are reserved for banks. They help us understand to which bank a card BIN number belongs. And the last digits are reserved for cardholding customers. 

Card scheme providers also charge fees per transaction. In order to increase their presence and circulate more cards that carry their BIN number, they offer incentives to card issuers. They simply put goals for card issuers, such as based on the amount of card transactions or total card payment volume, and if card issuers fulfill those goals, they have a chance to earn back a certain amount of what they pay to those companies for card payments. In essence, however, card business is not profitable. It would be truly a challenge to run a profitable card business. 

Now I want to take you back to a couple of steps back. Let’s imagine ourselves in a moment where a customer taps its card on the acquirer’s POS device. To accept the payment, the acquirer first needs to know if the card number is valid. When banks or financial establishments with a license to issue cards purchase card BINs from companies like VISA, Mastercard, American Express, etc. they need to inform the ICC that they have reserved a 16-digit card BIN. The ICC then declares it to all the participants in the systems (other banks and financial establishments that are issuers and acquirers) so that they save it in their own systems and recognize the BIN number when the customer uses a new card with the new BIN number.

This is the system that hides behind our everyday transactions, transactions that occur within just a couple of seconds. I hope the text has provided some insight and stirred your interest in what goes on behind the closed doors, far away from the public’s eyes.

Take care,