Tech, talent can turn Israel into a finance powerhouse, says expert

To many people, the idea of using an Israeli firm to handle investment accounts worth hundreds of thousands or millions of dollars is, to put it politely, laughable. But according to investment expert Tal Keinan, Israel has progressed enough in its development of financial technology and regulatory environment to compete with the Wall Street banks and investment firms.

“We have a lot of talent here, and a lot of technology, two things that could pave the way for financial leadership,” said Keinan, who heads investment services group KCPS Clarity. “There is no reason Israel cannot become a leader in asset management worldwide.”

Israel has until recently been a rather closed economy under the sway of strong government-affiliated institutions, like the Histadrut labor union – and still has a major oligopoly problem, with several large companies controlling key sectors, including banking and financial services.

It’s understandable why Israel hasn’t been seen as a financial center, but all the ingredients needed for it to happen are already here, said Keinan.

“The technology we have developed here is in great demand by banks and financial organizations around the world, and Israeli financial institutions have gathered a great deal of knowledge on markets and in deal-making,” he said.

An Israeli presence would also be good for the multinational investment firms that a financial technology infrastructure would inevitably attract.

“Like in information technology, international firms would come here for the talent, making small initial forays into the country, and Israeli financial industry workers, who constitute a pool of experienced workers, would inevitably impress them enough to open bigger operations here. Meanwhile, Israeli entrepreneurs would promote the industry as well, opening new firms that would concentrate on niche investment areas. All this would become part of an ecosystem that would make Israel a financial center.”

It’s a vision that has a long way to go, admits Keinan, who runs one of the few Israeli investment firms that manages deals from Tel Aviv for investors worldwide, using the talent and technology he so strongly believes in. The firm is one of the few in Israel licensed in the US (by the SEC) to give investment advice, and in 2007 was a member of the Ariav Commission, a Bank of Israel-Finance Ministry task force on creating a global financial center in Israel.

Keinan, an air force veteran, was raised in the US by Israeli emigrant parents and returned here on his own at age 15. He established KCPS Clarity in 2006, with the intention of promoting integration of Israel’s finance infrastructure with the world’s investment infrastructure.

If all the ingredients are here already, why hasn’t Israel taken off as a financial center? “Because Israel’s banking industry is a protected monopolistic system, and banks have no incentive to innovate or compete,” he said, adding that Israel is an “island economy” with a small local population and no regional market.

“The economies of scale require, for example, that there be a single large dairy concern,” said Keinan. “There just aren’t enough consumers to make it worthwhile for a second Tnuva, and expanding the market to neighboring countries where the milk trucks could deliver to is obviously not an option right now.”

So too for the banks. Government policies on how much they can charge for their services, a segmented market, and the domination of two big banks (Leumi and Hapoalim) on the financial sector have all gone towards making financial services an uncompetitive venture in Israel. That attitude “filters up” to the export sector as well, so the only services Israeli banks or investment firms usually offer are expensive and aimed at a very small market – the Jewish millionaires who, out of a sense of loyalty, want to do business with an Israeli institution.

“The way to build Israel into a country that can export financial services is to foster competition inside the country,” stressed Keinan.

“Once they get into the habit of competing, Israeli institutions will be in an excellent position to compete overseas and to nab customers. The combination of talent, technology, information resources and insight will bring the customers, and as the field burgeons, more entrepreneurs will open their own investment firms, feeding the growth further. That’s how you build an industry.”