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ISTANBUL—PayPal Holdings Inc. is suspending its operations in Turkey after the local banking regulator ordered it to cease payment transfers in a move that is likely to reverberate across the country's nascent but fast-growing online marketplace.

The San Jose, Calif., digital payments company said late Monday on its Turkey website that the Banking Regulation and Supervision Agency denied PayPal's payments license application eight years after the company first started operating in the country.

"We have no choice but to suspend processing payments in Turkey," a PayPal spokesman said Tuesday in emailed comments to The Wall Street Journal. "We have not encountered this situation before and we will continue to explore opportunities to gain the necessary approvals to recommence our services in Turkey."

PayPal will stop executing transactions starting June 6, and told Turkish users to withdraw any balance from their accounts with a week to the deadline. The company, whose Nasdaq-listed shares were down almost 1% at $37.79 on Tuesday, said ending its operations in Turkey "will not have a material impact on PayPal's business."

Turkey's banking regulator and government didn't respond to requests for comment.

The decision to prevent PayPal from operating in Turkey comes amid a tug of war between Turkish officials and Western technology firms led by social-media companies, which have emerged as leading platforms for opposition activists as President Recep Tayyip Erdogan pushes to consolidate power.

But unlike Twitter Inc., Facebook Inc. and Alphabet Inc.'s video-sharing site YouTube, where Turkish dissidents vent their anger at the government, PayPal played a key role in Turkey's economy: greasing the wheels of its burgeoning online market ranging from Airbnb bookings to soaring retail sales.

Turkish e-commerce expanded by 35% to 18.9 billion liras in 2014, or about $8 billion at the time, according to Turkey's Informatics Industry Association, TUBISAD. By 2020, revenue from online transactions is projected to reach $11.5 billion, according to German internet statistics firm Statista. Online purchases by international buyers from Turkey is already around $400 million annually and are forecast to soar to as much as $3 billion annually in the coming years, according to a Turkish website sponsored by PayPal.

After servicing hundreds of thousands of local customers, including tens of thousands of merchants since 2009, PayPal now is caught in the same quandary that bedevils social-media companies: localization of information technology systems, said a person familiar with the firm's license denial in Turkey.

Turkish authorities have been pressing Western companies to move data centers inside the country to facilitate more efficient compliance with government and court orders to block content, and to generate tax revenue.

Twitter, YouTube and Facebook, which grappled with blackouts in recent years as antigovernment protesters took to the platforms to criticize Mr. Erdogan and his administration, so far have refused to place their servers inside the country.

Turkey has been one of the most aggressive countries world-wide in requesting social-media sites to remove content, topping Twitter's list with 2,211 requests that accounted for almost half the company's total from July to December of 2015.

To be sure, PayPal's travails in Turkey aren't about free speech. But demands that it localize its infrastructure to continue operating highlight challenges and risks to doing business in Turkey, where the government has made controlling the web a policy priority.

PayPal didn't respond to a request for comment on whether Turkish demands for localized operations affected its license application. The company operates in more than 200 markets, executing transactions in more than 100 currencies, with revenue outside of the U.S. and the U.K. accounting for 37% of its total last year, according to PayPal's website and annual report.

Large retailers and e-commerce sites that can handle bank payments can overcome PayPal's shuttering in Turkey, industry insiders said. But the same may not hold for small online businesses that rely on PayPal's no-cost transactions to keep their trade alive.

"I have two shops at Etsy and this is my job," the owner of Kafika, an Istanbul-based jewelry store, posted on the Brooklyn-based website's message boards. "I haven't any other solution, I should put on vacation my shops."

Write to Emre Peker at emre.peker@wsj.com

(END) Dow Jones Newswires

May 31, 2016 15:15 ET (19:15 GMT)

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