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A first stage in Israel’s open banking reform took effect this week, directing banks to share information regarding their customers’ checking accounts, when requested to by the customer.
This initial step is expected to be followed by the ability to share all customer data, including loans and stock holdings, with the customer’s approval. The reform, its supporters hope, will enable greater competition among suppliers of financial services. This is because, with customers’ financial information readily available, financial bodies will be able to offer suitable products to potential customers, and those looking for a financial service will have an easier time shopping.
The reform also is critical for the development of financial technology, or finetech, companies – high-tech companies that focus on financial services, since it allows them to access necessary information held by banks and to perform financial activities.
Israel’s banking sector suffers from a chronic lack of competition, but recent efforts are showing some results. A new bank called The First Digital Bank launched in March, becoming Israel’s first new bank in more than 40 years. The new bank comes on the heels of a bill passed in 2017 intended to increase competition in the country’s banking industry. A significant barrier to getting into the banking business is the high cost of building the necessary computer infrastructure. The law importantly directed the government to build such an infrastructure that will then be available to entrepreneurs to rent, thus helping new players enter the market. This infrastructure was built and it began to operate last month alongside The First Digital Bank.
“There’s no competition in the banking market,” Linor Deutsch, CEO of Lobby 99, a non-profit organization that employs corporate lobbying methods to further public interests in Israel’s parliament, told The Media Line. Lobby 99 and Deutsch specifically were central to advancing the 2017 legislation and the current open banking reform, a belated result of the law. The banking sector, she said, “is basically a duopoly” of the Israeli banks Hapoalim and Leumi, “who together hold 61% of the banking market.”
Deutsch explained that the duopoly can be seen in “the very high interest rates, the difficult conditions for credit,” which lead to “terrible service, the customer is a captured client.” The rates of transference between banks in Israel, she said, is one of the lowest in the world, “and the reason for that is that there’s no real difference if I transfer from Hapoalim to Leumi.”
While Israel’s banks aren’t crying their objections from the rooftops – even going so far as to embrace the open banking reform – Deutsch says that they have been raising obstacles every step of the way. Right from the start, at every discussion about the reform in the Knesset committees, “50 lobbyists were present in the room,” she says. The reform, if successful, will cost the banks a lot of money, she adds.
“It’s been a persistent struggle,” which is still ongoing, to ensure that the Israeli banking sector opens to competition, she says, “but I believe that – all the delays notwithstanding – this ship has sailed.” In other words, competition is on the way.
The Media Line contacted Bank Leumi for comment, but did not receive a response by the time of publication.
Another important aspect of opening up the banking sector and enabling the free flow of financial information is that it will enable fintech services to flourish. Many of these services demand access to their users’ financial information, which is held by the banks and credit card companies and, until now, unreachable.
Israel's new banking infrastructure gathers the user's entire financial information in one place, and is intended to generate clarity regarding a person’s financial status, thus enabling better financial management. However, getting this information is a bit complicated.
Avner Israel, an Israeli software engineer, has been working on a fintech platform in recent years called Inlightme Financials. “I need the full username and password of the users to get it from financial bodies,” he told The Media Line. This requirement means that he must build an extremely robust security system to function, and “this makes a simple product 10 times as hard [to develop] security-wise.” And this is before convincing potential customers to trust him with their sensitive details.
This next step, which will allow the fintech sector to enjoy the reform, first requires regulating legislation, currently stuck due to Israel’s political paralysis. The country had its fourth round of elections in March, and is still waiting for a government to be formed. However, once the legislation is in place, it can be expected to give a big boost to the operation of fintech companies in the country. Israel said that “knowing that such a process was progressing caused me to decide to invest in such a platform, because I knew that it would be possible to interest more customers in the future in a much easier way, without people being wary.”
This future of a thriving local fintech sector may prove doubly beneficial to the country. Deutsch says that with the open banking reform in place, fintech companies or a new bank will be able to access a person’s information and offer a potential customer a better deal, saving Israelis money and enabling easier financial activity.
Meanwhile, Israel already has a fintech sector that produces global success stories. eToro, an Israeli company that developed an investment platform, recently merged with a special purpose acquisition company, or SPAC, at a value of $10.4 billion. Many, however, choose not to act locally. Yet an encouraging local environment, with another barrier down, may push innovation in the industry.