Turkey’s budding e-commerce industry has been making the headlines for all the wrong reasons this year as concerns grow that stricter government regulations are pushing companies out of the market. But there are many reasons to be optimistic about e-commerce’s prospects in Turkey, Barbaros Ozbugutu, co-founder and CEO of Turkish online payment company iyzico, tells bne IntelliNews in an interview at the company’s headquarters in Istanbul. While regulation is indeed very strict, the low penetration rate for e-payments in Turkey and the widespread use of credit, debit and closed-loop cards in the country – and the wider region – makes it a very attractive market for financial technology companies, he believes.

In less than four years, iyzico has become the market leader in processing e-payments for Turkish merchants, and is now eyeing international expansion starting in neighbouring Iran. In so doing, it has convinced funds from Europe and Turkey, but also the World Bank’s International Finance Corporation (IFC) that there is ample room for growth in these markets.

An idea and the first million

That iyzico is a technology company is evident from the moment you set foot in the Istanbul headquarters, where this correspondent sits waiting for the interview in an orange-coloured lounge that doubles as a kitchen, together with a couple of young programmers in jeans who are discussing code over coffee.

A friendly Ozbugutu welcomes me shortly afterwards; he and his team appear as efficient and professional as they are image-conscious and hungry to grow iyzico. That a company of only 54 employees has become the largest e-payment platform in Turkey is already an accomplishment.

“But we want to become the e-payment champion in the region,” Ozbugutu says right off the bat. “E-payments are not a global business, they are a regional business. PayPal, the largest e-payments company in the world, might be present almost everywhere, but it is not strong everywhere. Instead, companies with a regional focus can become strong in their respective regions, and we want to become that company in Turkey and other surrounding countries.”

That Turkey is not like other European markets when it came to e-payments is something that Ozbugutu discovered early on, when he was working for Swedish payments company Klarna in Germany and planning to move back to Turkey to open a business. At Klarna, he met iyzico co-founder Tahsin Isin.

“In 2011, when Tahsin and I were market researching the Turkish market, there was a lot of buzz around e-commerce in Turkey. That was the year when eBay bought [online store] GittiGidiyor and Amazon bought [online flower and gift shop] CicekSepeti. So we looked at the market, and realized that banks covered very well the customer part of e-transactions through numerous rewards, bonus and closed-loop cards. But there were a lot of problems with the merchant side of transactions, and that is where we decided to position ourselves,” he says.

Because of the high penetration rate for closed-loop cards, which are connected to specific banks that finance those purchases, companies that want to sell their goods online in Turkey have to apply for a virtual point of sale (VPOS) from every single bank whose card it wants to be able to process. The application itself is quite bureaucratic, Ozbugutu explains. “Merchants have to submit print applications [for VPOS] in person at banks’ branches, which are evaluated by people who do not understand how e-payments work.” Furthermore, some 80% of the applications are denied, resulting in a loss of business for banks and blocking merchants, particularly small ones, from the e-commerce business.

Having come to this realisation, in early 2012 the two co-founders prepared a six-slide PowerPoint presentation and headed to Vienna to meet with the management of technology fund Speedinvest. Two weeks and another PowerPoint presentation later, they had raised their first million dollars.   

The potential to grow such a business was evident from the very beginning to German-raised Ozugutu. “We looked at the populations of Germany and Turkey, and they were similar at around 80mn. The number of small and medium-sized enterprises (SMEs) was also similar – 2.7mn versus 2.5mn. But whereas 850,000 German SMEs were selling their products online, only 30,000 did so in Turkey.”

Attracting offline merchants to the internet has not been easy – currently, there are some 65,000 Turkish companies active in e-commerce – and Ozugutu says he would like for there to be more local e-payment companies to help educate merchants. “At the moment, we are the market leader in Turkey. And now that PayPal lost its license, our closest competitor is probably the local subsidiary of PayU, a Poland-based e-payments company. We want more local companies to enter the market to help us educate Turkish merchants about e-commerce,” he says.

But it might be difficult for other e-payment companies to enter the market at this time. When it first started, iyzico benefited from a more lax regulatory framework for e-payments. Shortly after, in 2013, the Turkish parliament passed a new law increasing oversight over fintech companies, demanding that they meet the same standards as other financial institutions. But few if any tech startups have the capital and knowledge to match large lenders when it comes to their IT infrastructure. The law, enforced in 2015, even took down larger competitors like PayPal, which from June 6 ceased operations in the country.

Ozugutu acknowledges that the legal framework is a barrier to entry for small companies, but is hopeful that the Banking Regulation and Supervision Agency (BDDK) will relax its requirements in the future. “BDDK has been open to feedback from e-payment companies so far; we need to work on regulation if we want to be more competitive against foreign companies,” he believes.

A legacy of the Turkish financial crisis of 2001, the strict regulatory oversight of financial companies has been a recurring issue in the financial sector; and e-payments are no longer an exception to the rules that apply to everybody else.

Payments for Persia 

In Turkey, iyzico boasts some 32,000 users, a fifth of whom are active, giving it a market share of almost 50% among e-merchants. But taking on the 78mn-strong Turkish consumer market was not enough for the company.

In February, it signed an agreement with Iran-based Parsian E-Commerce Company (PECCO) to service Iranian merchants and international e-businesses looking to attract Iranian online customers.

As US-based companies like Visa, MasterCard and PayPal remain banned from doing business in Iran, and Iran’s Shetab e-payments system remains disconnected from international platforms, iyzico can grant foreign companies access to 80mn customers, Ozbugutu explains. Unlike in Turkey, the focus in Iran is not only on attracting e-merchants, but connecting Iranian consumers to international e-vendors like booking.com.

“Since signing the deal, we have connected our platform to Iranian banks and ran tests on it. And it works. We need to obtain a financial license and open our branch in Iran, which we will do in the next couple of weeks. We will then launch pilot tests with three merchants, and expect to become fully operational by September,” he says.

Turkish retailers like fast fashion chain LC Waikiki are vying for the Iranian market, so the CEO is confident that iyzico will prove a hit with online businesses interested in Iran. “Between Turkey and Iran, we can provide international retailers access to some 400mn cards,” he says. 

To drive the message home about just how much of a difference iyzico can make to online sales, Ozbugutu ventures the example of sports retailer Nike, which used to only accept Visa and MasterCard from its Turkish customers prior to its collaboration with iyzico. “[Visa and MasterCard] gave them access to about 45% of the market. In a few weeks of working with us – and accepting a wider range of cards – their online sales increased by 70%.”

Flying high

Looking ahead, iyzico’s next move will be to attract more European partners that want to sell goods and services in Iran and Turkey. A prime target are foreign airlines, which have a hard time competing against Turkish Airlines in the country due to its strong air miles programme and partnership with local banks that allow customers to pay for flights in instalments.

But while big clients are good for revenue generation, SMEs and startups will remain close to iyzico’s scope – and Ozbugutu’s heart. “We see ourselves as an enabler that allows SMEs to digitalise their services. A couple of weeks ago, we launched a programme to work with accelerators and incubators for tech startups. We will support them at every stage of their development, from the idea phase to building their products,” he vows. 

In a more distant future, Ozbugutu does not discard the possibility of developing an e-wallet service for retail customers – a service which PayPal excels at worldwide. But at the moment there is strong competition from closed-loop credit cards offered by banks, rendering the service unviable. Some 90% of online purchases in Turkey are done via credit cards, half of which are closed loop cards.

As for profitability, Ozbugutu says that iyzico’s focus right now is to grow the business and become established in Iran and Turkey. “We are not profitable yet. This is always a dilemma for technology companies – whether to keep growing or focus on profitability. We could become profitable in three to four months, but it would take us longer to grow. Thankfully, our investors have guaranteed their backing for our expansion plans, so we will concentrate on them for the time being,” he concludes.