How your smartphone can undermine banking monopoly in Israel
Bezeq’s communications monopoly was cracked wide open by mobile technology over the past two decades; exactly the same can happen in banking.
Thirty years ago, two formidable monopolies operated in Israel – one with uncontested control over communications, through which every phone call was placed, and the other with uncontested control over the electricity market, offering the only means to connect to the power grid. These two monopolies constituted the economy's lifeline; a labor strike at either could close down the country.
Thirty years have passed and Bezeq's communications monopoly is still going strong, but it's easy to manage without it. There are Cellcom, Pelephone, Partner, Golan Telecom, HOT, and of course Internet services like Skype and Tango – just connect. And the electricity monopoly? Nothing has changed: Try disconnecting and switching to a competitor – just try.
What has actually happened here? Has the electric company's management over the decades been smarter in maintaining their monopoly? Did Bezeq's union fall asleep and allow new players to enter the field without charging outrageous entry fees? Were the communications ministers more successful than the energy ministers? Did Bezeq's privatization deliver the goods? The answer to all these questions is no. There is one key reason that the telecom market is loaded with players and more competitive than electricity: technological developments.
The main development was obviously the cellphone, which penetrated the Israeli market in the mid 1980s, quickly spreading in the 1990s and finding its way into the pocket of every child at the beginning of the millennium. The ability to make a phone call using a portable pocketable device changed the communications market from end to end. Other technological advancements followed – connecting to the Internet with the device and turning it into a portable mini-computer. The central role assumed by the cellphone in our lives obviously necessitated speedy regulation adapted to the industry's quick pace of development, and this reached its peak when Moshe Kahlon served as Communications Minister. The revolution was completed: an open telecom market replete with competitors and more attractive than ever for the consumer.
The revolution in the telecom market falls under the category of "disruptive technology," a term coined by Prof. Clayton Christensen of Harvard University. The electricity market, in contrast, hasn't been subject to disruptive technological developments in recent decades. There may have been natural gas discoveries, resulting in cheaper and cleaner energy, but the consumer remains captive to the same company. There is no "portable electricity" alternative; nobody can threaten, "lower my electric bill or I'll switch suppliers."
Many conclusions may be reached from the developments in both these fields, but we'll make do at this point with just one: One of the most effective ways to break up a monopoly, introduce competition, increase the benefit to the consumer and broaden his options is by means of new technologies that destabilize the industry's traditional operational base. Technology often undermines entire industries, like the Internet did to the markets for books, music and newspapers. Sometimes a small change, like a different distribution channel, is enough to rock the industry: That's what happened when direct insurance penetrated the insurance market and pioneered the sale of policies without agents.
And this brings us to the banking system, mainly the part dealing with households and small clients – the less competitive banking segment today. Consumer credit is a very expensive product and the banks control it through checking accounts and the credit card companies they own. The Bank of Israel has never succeeded – and truthfully didn't try too hard – in improving the situation for consumers. The importance of stability won out over the importance of competition. Technology rocks the boat? Regulation stabilizes it.
There have been hopes of change over the years, like when foreign banks began entering Israel, when a new credit card company was established and when a law was passed permitting the transfer between banks of credit information about customers. The central bank also tried contributing, with consumer comparisons to spotlight the most expensive and cheapest banks.
None of this helped. Consumer banking services are still expensive, fees and commissions are steep and the interest rate spreads are wide. There are real economic reasons for this: The banks maintain very expensive networks of manpower, branches and computerization – but mainly manpower. They find it hard to streamline, given that they're tied into rigid labor agreements, and in fact there's nobody to push them into becoming competitive and efficient. The supervisor of banks wants them to maintain stability and consumers are hostage, paying what they're charged.
So where will salvation come from? Until now, all attempts at establishing an Internet bank have failed. The Bank of Israel is very tough in its demands of Internet bank initiatives, out of concern for depositors – and perhaps rightly so. Foreign banks? No such bank has seen fit so far to enter the Israeli consumer market. The postal bank? This has been under discussion for over a decade with nothing to show for it.
Apparently here, too, the answer lies in technology. If there's one field that can disrupt and undermine the absolute hegemony of banks in consumer banking, it is probably the cellphone. Smartphones are small computers that are now found in every pocket, and they allow quick and easy performance of monetary transactions. There are now many initiatives throughout the world, in Israel too, for developing ways to transfer funds quickly from smartphone to smartphone and from smartphone to businesses and financial institutions. The technological solutions are relatively simple, and even banks are already using them and permitting transactions to be executed by phone. The slightly more complicated matter is gaining the customers' trust in allowing this device to serve as a small, portable bank that can replace the credit card.
Credit card activity in Israel now reaches NIS 214.6 billion per year. Most of the activity doesn't really involve actual credit, but debit charges that are paid up within a month. And if all that's at stake is a debit, why can't it be done using a cellphone? After all, transferring money using the cellphone is much simpler than through a credit card.
Cellphone-based banking services is something that's been discussed for over a decade, during which time both the number of users and the uses of the device have vastly increased. We perform banking transactions by mobile phone, use it to pay for parking, buy products and services with it and receive information in real time, wherever we are.
Some $10.6 billion in transactions was enabled via smartphones and tablets in the first half of 2013, according to an estimate by ComScore which was quoted on the AllThingsD website recently. This figure will only grow – in Israel as well as globally. If there's anything that can undermine the monopolistic model of the banks and credit card companies in the consumer arena, it's the smartphone. But someone needs to help it along.