Fintech

FOLLOW THE MONEY

With the help of new technologies being hatched in Israel, financial transactions are getting smoother and smarter

Do you pay bills online? Use Paypal? Move money around from your mobile? If you do, youre part of the fintech revolution, a fast-growing industry in which PCs, smartphones and tablets are replacing paper money, human interaction and long lines at the bank. 

Fintech

Fintech uses technology to make financial services more efficient — reinventing wealth management and monetary transactions, making better use of data and providing seamless customer experience. It has spawned some 5,000 to 6,000 startups worldwide, with global investment increasing from $930 million in 2008 to over $12 billion in 2014 — and reaching $9.4 billion in the first half of 2016 alone. 

At the juncture where finance meets startups, Israel is becoming a key player. If the last few decades saw the leading technology companies like IBM, Microsoft, Apple and Google set up R&D centers in Israel, now its the turn of global banks to do the same.

The first to take that step was Citibank, the financial services consumer division of the multinational giant Citigroup, which set up shop in Israel in 2011.Citi came to Israel and built its most advanced lab here to bring together its well-established position in global financial markets with Israels entrepreneurial spirit, fast-paced culture and thriving tech ecosystem, says its Israel CEO, British-born Neil Corney. The lab creates, identifies and exploits opportunities for fintech innovation, allowing Citi to bring cutting-edge tools to financial markets.  

Citi operates only two other innovation labs outside the U.S., in Dublin and Singapore, but the Israeli center constitutes its largest, most advanced innovation lab.

Citi Velocity
Citi Velocity’s award-winning trading platform is underpinned by the work of its Israeli innovation labSivan Farag

 Israel is an incredible hub, says Corney. Its the place for financial technology. He regards Israel as an ideal setting for Citi which he describes as a technology company with a banking license.

Since its establishment five years ago, Citis high-end lab has grown exponentially.  Citi Velocity, the companys award-winning trading platform unveiled in 2013, is underpinned by the work of the lab. The platform gives clients unprecedented access to the banks research and liquidity across rates, credits and currency markets via mobile device. Another major project underway is machine-learning to match clients to bonds. 

Other multinationals and banks have followed in Citis wake. Other global banking conglomerates —  Barclays Bank Plc., HSBC and Banco Santander — have joined forces with semiconductor giant Intel and Israeli entrepreneurs to establish a fintech hub in the heart of Tel Aviv.  

These developments are perhaps surprising given that Israel got off to a late start in fintech. In 2009, when the new industry claimed a full quarter of global investment, it stood at just two percent ($13 million) in Israel. Then-Finance Ministry director-general Haim Shani took note. Israel, after all, was a high-tech nation with much of the essential infrastructure: high smartphone penetration; a pool of human capital across math, technology and physics; big deep-data IDF intelligence and cybersecurity units (sturdy security underlies every successful financial technology); a flexible financial system; and openness to new technology.  Shani began addressing the needs of the emerging industry and enticing international investors to Israel.   Today, Israel has 430 fintech companies and 14 multinational R&D centers. Fintech investment is heading toward 15 percent, and four Israelis were listed among HotTopics 100 Most Influential Fintech Leaders last year.

Israels leading banks have also hopped on the fintech train. Bank Leumi, together with startup investment fund Elevation, set up an accelerator program in 2014 to develop promising financial technology. 

The Leumi Group is also behind what is touted as Israels first totally mobile bank, Pepper, due to begin business at the end of the year. It will have no physical branches and is targeting millennials, who prefer banking on mobile devices to going to a bank in a building. 

Meanwhile, this past June Hapoalim signed a fintech agreement with international networking giant Cisco Systems designed to speed up the digital revolution in Israel, announced the bank. That came four years after Hapoalims first foray into the field when it launched a fintech program to link banks and startups, in what it described as a win-win program for both parties.  The bank is exposed to innovation and new technologies which can benefit its customers, while the tech companies gain early-stage access to a platform for building a product. 

Israels banks were among the few worldwide to emerge relatively unscathed from the 2008 financial meltdown, notes entrepreneur and venture capitalist Jonathan Medved.  When you add to that Israeli entrepreneurship and the experience of many Israelis in U.S., European and now Asian markets, everything was in place for the development of a robust Israeli fintech sector, he says. 

Medveds own venture, OurCrowd, was a pioneer in a different aspect of fintech: Funding. 

Launched in Israel in October 2012, OurCrowd was the worlds first equity-based crowdfunding startup investment platform, opening to the smaller investor opportunities once limited to multimillion-dollar players.  

 Through OurCrowd, people can co-invest for as little as $10,000 alongside heavyweight major capital funds, buying the same stock on the same terms, says Medved, OurCrowd CEO and co-founder. Crowdfunding opens up financial business, makes it accessible, improves it.  I firmly believe it will become a fourth leg of innovation finance, alongside venture capital, corporate backing and angel investors.

Testament to OurCrowds business plan are its 100 portfolio companies (three valued at over $100 million), among them Walk Robotics, ElMindA, Consumer Physics and BriefCam.  OurCrowd investments have reached some $300 million, a lot of it new money, says the U.S.-born Medved.  Its bringing new blood and new energy to the industry. People want to be part of startup Israel, but:  Get me some startups!  isnt easily doable. Crowdfunding lets people in on the ground floor before companies go public — currently, there are almost 15,000 investors from over 110 countries.

One of them is Geoff Levy, chairman of Monash Private Capital in Sydney, Australia. The world of finance, especially the way companies are funded, was due for disruption, he says. The distribution base was a cozy club, with big investment names needed to get anything moving, built around large deals, making it difficult for smaller investors to get started. OurCrowd is an outstanding opportunity to democratize funding, disrupt the old model and give smaller businesses access to global money and deeper pockets, says Levy.

Crowdfunding, says Medved, also functions as a social force. An example: one of our companys is Sight Diagnostics, which is developing cheaper, faster, fully-automated blood diagnostics.  Its first application will be 300 million annual tests worldwide for malaria. It needed hospitals for trials.  We put out the word among our investors. The hospitals were found!

Citibank, too, plays a social role. Last month, through PresenTense Israel, it contributed NIS 1.5 million ($400,000) to make startup Israel more accessible to the Arab population. Weve worked with Arab and Haredi startups, and mentored members of these communities in accelerators, says Corney. Investing in these groups will uncover otherwise lost talent and promote Israel in global tech markets.

With the old financial institutions seeking to innovate, and pioneering prototypes flooding the field, financial services are riding a giant entrepreneurial wave. To survive and prosper, banks are letting down their drawbridges and startups are taking up the challenge of re-defining how banks do business. As investor Levy says:  Itll take five years until we know how clever were being — but all the indications are that this is the right path at the right time.