Starting this month this year, thanks to a new law, fintech companies will be able to get licenses allowing them to access and work with consumer data held by Israel’s big banks. The law in question, the Financial Information Services Law of 2021, clarifies the obligations of the big banks to share consumer data with third party applications and establishes the Israel Securities Authority (ISA) as the regulator for financial information services.
Israel’s high market concentration
Ironically, while living in a country that is home to a booming fintech sector, Israelis have until now largely missed out on the fruits of that innovation. Due to the small size of the Israeli market relative to major markets in the U.S., Europe and Asia and the slow pace of regulatory change, few Israeli fintechs focused on providing services to their local consumer market.
The new law is built on the assumption that new players will enter the market and obtain online access to information about customers, with their consent, to provide competition to the handful of major players today. At present, Israel’s banking system is highly concentrated with two main banks, Leumi and Hapoalim, dominating the industry. These two have a combined share of nearly 60% of the market in terms of total assets and close to 70% of total consumer credit.
The desire to improve consumer well-being was the rationale for the designation of the ISA as the relevant regulator for the new licensing process for financial information service providers. As the domestic regulatory authority for securities, the ISA already at its core is focused on protecting consumer interests, said Inbal Polak, Director of the Investment Department at the ISA, at the Calcalist conference.
The influence of PSD2
In the first phase of the law’s implementation, similar to the principles of the second European Directive on Payment Services (PSD2), there is an obligation to enable the providers of financial information services with online access to financial information from credit card issuers and from deposit and credit associations. At a later stage, the same obligations may be extended to other financial service providers, such as insurance companies, investment houses and provident funds.
The goal of the law is to enable customers to diversify financial services and products among various providers, instead of concentrating their financial portfolio in one place. Financial service providers are expected to improve to become more competitive because of the law and the new fintechs that are expected to enter the market. It is hoped that this will lead to more personalized solutions specific to customers’ unique needs and circumstances.
Providers of financial services that are already licensed to provide various services, such as banks and pension funds, are exempted from the new licensing requirement, according to an article on the legal site Lexology. Instead, these existing service providers must receive authorization from the regulatory authority that granted their license to also act as information service providers in addition to the activities that they are already permitted to undertake under their current license.
The idea is that once financial service providers are required to supply all information regarding the activities of their customer, including the services provided and the fees charged, customers will be better equipped to:
- Search for alternative service providers
- Consider the proposals they receive on a more informed basis
- Negotiate better terms
Future changes due to the reform
A potential second wave of reform, based on Europe’s PSD2, is also being discussed that would open up Israel’s payment systems.
While the success of the financial reform is not a foregone conclusion, it has the potential to shakeup the Israeli banking and payments scene.
One area where increased competition might help consumers is among credit card issuers. There are three in Israel today: Isracard, Cal (Israel Credit Cards), and Max (formerly LeumiCard). Because of the limited number of issuers, these financial institutions make it much more difficult for cardholders to file for chargebacks on domestic issued credit cards. The potential opening up of this market niche to additional issuers may lead to something closer to the American approach of favoring the customer and greater credit card chargebacks in the Israeli market. This would entail a rising cost of chargebacks to merchants.