Israeli banking reforms to facilitate fintech growth

Israel took an important step in the fintech reform in June, opening the Israeli credit market to significant competition.

One of the problems facing the Israeli financial market is that only four or five banks control the entire system. The government has spent the last two decades trying to limit their control over the system. Fintech, which uses the latest technologies to transmit and synchronize data, is one reform goal.

The reform measure was approved by the Knesset in October last year, as part of the law on general schemes and the economic program of the Bennett-Lapid government for 2021-2022. By far the most important part of this legislation is the Financial Information Services Act, which is designed to increase competition in the Israeli financial market, a $ 60 billion industry.

During debates on the bill, representatives of the Ministry of Finance explained that the average household spends around 9,600 shekels ($ 2,700) per year on bank fees and interest. The proposed legislation will allow the customer to compare prices easily and possibly reduce these costs.

Under the new system, approved financial institutions will receive financial information about other banks’ customers so that they can apply directly for credit services and competitive financing. Customers will be able to compare banks and other financial services to find the best and least expensive services on the market to meet their needs.

Until now, bank customers were often tied to a single bank for most of their lives.

The first step in sharing information from standard checking accounts will take effect at the end of October. Banks will share information about customers’ credit rating and savings. Information on small incorporated businesses with a single owner generating up to 5 million shekels ($ 143,000) per year must be made available by January 30, 2023.

Debaters also discussed a conflict of interest clause that would limit banks to own 20% of fintech companies.

PayBox CEO Arik Frishman and Banking Supervisor Yair Avidan supported easing restrictions to allow banks to be partners. On the other hand, Anat Guetta, CEO of the Israeli Securities and Exchange Commission, and representatives of the Ministry of Finance opposed the changes in concerns about pricing cooperation..

In the end, the committee decided not to change that part of the bill, and denied the banks precedence among fintech companies competing over the banking system.

The reason for this opposition from the Ministry of Finance and the Norwegian Securities Authority was that the banks have tended to dominate institutions that enter the financial market and continued to control it, as happened with the introduction of credit cards and money transfer services such as PayBox and Bit in the Israeli market. They ended up being controlled by the major banks Leumi, HaPoalim and Discount.

The head of the Knesset’s finance committee, Michael Biton, summed up the situation and said: “The banking industry in Israel suffers from closures, lack of players, stagnation, lack of movement among their customers and lack of movement among the organizations themselves… Bank and Ofek Credit Union, which is designed to launch operations and have an impact, together with Israeli fintech companies.The Open Banking Law joins the mobility reform, which allows customers to change bank within a week with just one click . »

Biton added, “All these reforms will be judged by their results. Will they be fintech? Will the new banks establish themselves and thus create change? The committee will examine them all together with the Ministry of Finance, the Bank of Israel and the capital market and stock authorities for to assess whether we have achieved the desired results. “

The legislation accelerated the establishment of new digital financial institutions such as the digital bank One Zero. There are dozens, perhaps hundreds of fintech companies in Israel, that will now challenge the major banks’ control over the country’s financial market.

To date, 14 fintech companies have applied for licenses that will require them to provide such information services. These must be completely transparent, and give potential customers a complete financial picture of the company and what it can offer.

Israel Securities Authority CEO Anat Guetta recently said: “The implementation of the reform of information services is a consumer revolution. For the first time, we will be able to make a simple and easy comparison of the financial services we all receive, including deposits, credit and bank charges between banks and the various financial institutions, which was impossible until now. “

Guetta added that the reform would push for genuine competition, which would lead to improved financial health for the general public, and concluded: “The reform will help accelerate the transition from a concentrated financial market to a competitive market, for the benefit of the Israeli economy and people. . »