Hapoalim and Discount each fined NIS 40 million by competition watchdog

Bank Hapoalim, one of the country’s two largest lenders, and Discount Bank will each pay a fine of NIS 40 million ($10.5 million) after the country’s competition watchdog raised concerns that the minority holdings they both owned in the Israeli fintech startup Neema will restrict fair competition.

The Israel Competition Authority announced on Wednesday that it has determined that the minority holdings allegedly amounted to restrictive arrangements or practices, which are prohibited under Israeli law.

Over the past two years, the regulator investigated whether the two banks’ minority holdings and involvement in the fintech startup would threaten and undermine competition. In the course of the investigation, Hapoalim and Discount both sold their minority holdings in Neema in August and June of last year, respectively.

Founded in 2015, Israeli fintech startup Neema provides digital banking services tailored for real-time, fast cross-border payments and transfers. It operates a digital wallet application and multi-currency digital account used by many foreign or migrant workers in Israel to send money home instantly for a lower fee than is charged by Israel’s commercial banks. Foreign workers face difficulties in opening an account at the country’s commercial banks.

Back in 2020 and 2021, the two commercial banks Hapoalim and Discount both bought minority stakes in Neema, which also entitled them to additional rights, such as appointing a director. While Neema is not a direct competitor of the commercial banks, the fintech startup offers services provided by the big lenders.

“The investigation found that Neema competed with banks in providing certain services in the area of retail banking (for example, a digital wallet that includes account management, international money transfers, currency conversion, a prepaid debit card linked to the account, and other transfers),” the Israel Competition Authority said. “Neema also had plans to offer additional services and expand its activities to new customer target groups, which would have increased its competition with the commercial banks.”

Israel’s concentrated banking system is controlled by the country’s five largest banks – Hapoalim, Bank Leumi, Discount Bank, Mizrahi Tefahot Bank and Bank of Jerusalem – which have allowed them to rake in record profits in recent years and charge excessive fees with little fear of blowback.

“Given the high concentration of the banking sector, the holdings of minority shares and related rights in Neema by Discount and Hapoalim, including the right to appoint a director, allegedly amounted to a prohibited restrictive arrangement,” the competition watchdog said.

Following the lengthy investigation, Competition Authority director-general Michal Cohen concluded that the rights granted to Discount and Hapoalim would create a conflict of interest and could affect the competitive conduct of Neema and the commercial banks in a way that would impact and reduce competition between them.

As both Hapoalim and Discount reached an agreement with the regulator to sell their holdings in Neema, the competition watchdog imposed a fine of NIS 40 million on each of them versus the maximum fine of NIS 118 million in such cases.

Hapoalim said that the agreed decree does not include an admission of the bank’s liability and was reached even though the lender believes its actions were lawful.

In response, Discount stated that the investment in Neema is a “minority holding worth $1.5 million made in 2020 as part of fintech investments and was in line with the Bank of Israel’s rules regarding minority investments by banks.”

“The scope of Neema’s activity is negligible,” Discount said in a statement.

The bank noted that the regulator’s decision to take enforcement measures regarding a passive financial minority investment sets a precedent.

“Given that this is a precedent-setting case and weighing the risks and proper allocation of the bank’s resources, Discount chose to reach an agreement with the authority without agreeing to or admitting any violation,” Discount said.