Turkey’s determination to control data flows has forced global online payments company PayPal to cease money transfers in the country, hurting the small technology businesses that the government is so keen to foster.

In a statement published on its website on May 31, PayPal said that it would continue to allow customers to access their accounts and withdraw funds, and would continue to seek to have its license renewed by Turkish financial regulator BDDK, but it would no longer be able to facilitate transfers to, from and within Turkey from June 6.

The same day, a spokesperson told TechCrunch that the move to suspend its license was the "result of new national regulations overseen by the BDDK that require PayPal to fully localize our information technology systems in Turkey” and that “PayPal utilizes a global payments platform that operates across more than 200 markets, rather than maintaining local payments platforms with dedicated technology infrastructure in any single country”.

Turkey passed a law in 2013 that required payment processing companies to host their data and backups locally, Igal Aciman, a Turkish tech entrepreneur based in London, explained to bne IntelliNews. "Despite relaxing the new regulations with an amendment in 2015, BDDK's core requirement still stands. Some other companies have complied with it, meaning that giving a free pass to PayPal would have caused unfair competition."

The underlining reason why the Turkish government wants databases to be located on its territory is that otherwise it would not have access to information about financial transactions, sources from a Turkish online payments company told bne IntelliNews.

"If the IT systems are abroad, the government has no legal way of ever accessing information about transactions. It can block the company's operations in the country, but its court orders are invalid outside its borders," they said, adding that the Turkish government would be unable to investigate any of PayPal's transactions suspected of links to terrorism, money laundering or tax evasion.

"The new regulations are about controlling financial risk and having more political power," sources have told bne IntelliNews.

In the EU PayPal’s sometimes overzealous compliance with anti-money laundering regulations has led it to flag and block accounts that transfer relatively small amounts of money – sometimes in the hundreds of euros. But even the best filters can fail, in which case the Turkish government wants the ability to investigate the transactions.

"PayPal was not singled out, it lost its license because it was not compliant; the government has been seeking to better regulate online transactions in general, and to better monitor online data after the huge leak of personal information from its systems earlier this year," the sources added.

The leak in question was a data breach in April in which the personal information of 50mn Turks, more than half the country's population, was released online as a downloadable 1.4 gigabyte (GB) BitTorrent. At the time, the government played down the breach, claiming that it was "old news". The leaked data was indeed from 2008, but it had not been released online in a decrypted form until this year.

Besides, the hacker or hackers behind the breach appeared to have strong motives in releasing the data - to prove how poor the Turkish government's handling of online information is.

“Who would have imagined that backward ideologies, cronyism and rising religious extremism in Turkey would lead to a crumbling and vulnerable technical infrastructure?” read a statement on the site hosting the leaked data, according to Wired. “Do something about [Turkish President Recep Tayyip] Erdogan! He is destroying your country beyond recognition.”

An elusive enemy

The Justice and Development Party (AKP) has had a chequered track record with technology. On the one hand, it has sought to silence social media by frequently blocking entire platforms - Twitter, YouTube and Facebook - to contain the spread of protests coordinated through social media and the leaking of information revealing corruption in the AKP's ranks.

Twitter's transparency report shows that Turkish courts filed 450 content removal orders with the company out of 486 such orders issued worldwide between July and December 2015, and that other government agencies sent 1,761 removal requests, a third of the total number worldwide.

The only other country that comes close to Turkey's content removal track record is Russia, with six court orders and 1,729 requests for content removal in July-December 2015.

"Almost invariably, Twitter has determined that the requests did not comply with its bylaws on user data protection, and this has resulted in frequent bans on social media," Aciman notes.

But the government has also supported the development of local technology companies through tax incentives, reducing operating costs and building a series of 59 tech hubs or Technology Development Zones (TDZs), 44 of which are already up and running. The most famous of them is Teknopark Istanbul, which already houses 85 companies and is expected to create 30,000 jobs and bring in revenues of $10bn a year when completed in 2023.

Ankara has also collaborated with foreign and domestic banks to provide financing for innovative small and medium entreprises (SMEs) and start-ups. In its most recent such effort, in May, it established a €200mn fund of funds in collaboration with the European Investment Fund (EIF) to provide lending for innovative SMEs. 

Aciman, who worked as a tech entrepreneur in Turkey until 2014, sees government support for the sector as being "generally good". However, "compared to developed markets, I find that business-to-consumer (B2C) platforms are more readily accepted than business-to-business (B2B) ones, which is important to note," he notes.

Boosted by a young and tech-savvy population, online B2C platforms have exploded in recent years, and now include large retailers such as Hepsiburada, valued at more than $400mn, as well as smaller companies such as online payments processor Iyzico. The latter secured a $6.2mn loan from the International Finance Corporation in 2015 to finance its expansion in Turkey and the Middle East, having beaten PayPal at becoming the first foreign e-transfer company in Iran earlier this year.

Seeking to bank on the growth in e-commerce in Turkey, foreign companies have made record-breaking acquisitions in the sector in recent years. The largest investors - Dubai's Abraaj Group, eBay and Germany's Delivery Hero have spent more than $1.5bn among them on acquiring Turkish e-commerce businesses. Delivery Hero's $589mn purchase of food ordering company Yemeksepeti last year was touted as the largest such acquisition in online food ordering in the world.

Just a drop in the ocean

But Turkey's tech boom and the presence of domestic online payments companies provide little consolation for Turkey-based freelancers and start-ups that worked with international clients and used PayPal to receive payments from them.

After the news about PayPal losing its license, users took to social media such as Twitter and Facebook, where they used hashtag #paypalturkey to complain about the effects on their work, to propose alternatives such as e-currency Bitcoin and even to share theories about local competitors that conspired to oust PayPal from the market.

"How am I going to get paid now through the numerous freelancing websites that I do my business on?" a graphic designer lamented on Facebook. "I am sure I will lose customers over this," another one complained.

Despite their large online presence, the professionals and companies that do online business with international clients using PayPal account for only a small percentage of the population. Turkey is the unquestionable domain of credit cards, which account for almost 90% of all online purchases, and PayPal and other e-wallets remain fringe services.

That said, BDDK's decision not to renew PayPal's license has hit exactly those segments of society that the government has vowed to support and finance: small tech businesses.