The Israeli ecosystem is playing host to an increasingly sophisticated and diverse relationship between local start-ups and financial service multinationals. A new report on Israeli Fintech by Start-Up Nation Central shows that global financial services corporations are ramping up their involvement with Israel’s vibrant financial technology sector in both type and volume.
The report reveals that:
- 73% of all VC-backed investment into Israeli Fintech in 2018 has involved foreign money.
- Multinationals participated in 38% of investment deals during 2018 so far, compared to 26% in 2017.
- Over the past 18 months, 16 global financial services firms have either opened a new presence in Israel or diversified their existing innovation activities.
- AmTrust, Bank of Montreal, and Munich Re have all recently hired local scouters.
A growing sector
Indeed, Israel’s Fintech sector continues to grow, with the first six months of 2018 showing record numbers for funding and investment deals: more than $400M raised in 45 deals, exceeding previous half-year investments by 33% and 45%, respectively. Moreover, the median deal size almost tripled, and median late stage deal size reached an all-time record of $30M. A sample of 277 Israeli Fintech companies shows an increase of 26% in revenues during 2017, equaling $1.68B, with 31 companies showing revenues in excess of $10M, compared to 26 in 2016.
Certain Fintech subsectors showed impressive results over the last twelve months. The Payments subsector grew and accounted for 30% of the total sector funding. Trading and Investing companies are also attracting more funding, reflecting the global trend of rising WealthTech solutions. Insurtech has doubled in the number of companies since 2015.
On the other hand, both the Enterprise Solutions, and the Anti-Fraud, Risk & Compliance subsectors experienced minor reductions in funding compared to the previous year. The Lending & Financing subsector saw a drop in equity funding that might be attributed to a trend of turning to debt rather than solely to equity investments for financing.
But the really big story is the global one: 73% of all venture capital-backed investment into Israeli Fintech since the beginning of 2018 has involved foreign money – a trend that’s been steadily increasing since 2016, when foreign investors participated in only 60% of Israeli Fintech deals. Multinationals participated in 38% of investment deals during 2018, compared to 26% in 2017.
Innovative models in Israel
Apart from the increase in funding – and its increasingly foreign origin – an even newer trend is emerging: Around 16 global financial services firms, including the likes of AXA insurance, Visa, AmTrust, Bank of Montreal, Fosun, Munich Re, Mastercard, and BNP Paribas, have over the past 18 months either opened a new presence or diversified their existing innovation activities with the Israeli Fintech sector, the SNC report shows.
There are now around 40 multinational financial services companies operating innovative models in Israel. Up until 2017, it was the norm for global financial services companies to open R&D centers in Israel. Citi, Barclays, and JP Morgan established their own R&D Centers from scratch. PayPal and Intuit set up R&D activity based on acquisitions of local Israeli start-ups.
Since 2017, financial services firms new to the Israeli ecosystem have set up some 16 different engagement models, none of which are R&D centers. These do include, however, things like accelerators/incubators (Mastercard and AXA), innovation labs (TD Bank and Sompo Insurance), hiring local scouters (AmTrust), and investing in local VCs (BNP Paribas), or opening their own corporate venture capital operation to invest in local Fintech start-ups (Visa). Almost 60% of the multinational corporations that invested in Israeli Fintech over the past 18 months are financial institutions making a strategic investment to tap into the local innovation scene.
This is happening for a variety of reasons, says May Nechushtan, SNC’s head of Fintech Sector and the report’s author. Multinationals with R&D Centers in Israel – there are now over 300 of them – are experiencing difficulty in recruiting top talent, she says. R&D Centers, according to Nechushtan, while allowing for deep tech and long-term research, often limit the multinationals’ ability to innovate on a wider range of products and services. “Some alternative models, such as innovation labs and accelerators, allow engagement with a wide range of solutions simultaneously,” she explains.
Developing alternative engagement models is important for global financial services organizations because it allows them to enjoy Israeli talent and spirit of innovation while spending less money than R&D Centers usually cost. Visa, which recently announced an investment and partnership with alternative finance start-up Behalf, has a three-person team that scouts for strategic investments and partnerships, connects start-ups to Visa’s API for proof-of-concept testing, and offers up engagement with Visa’s network.
Other well-known financial services companies like New York City-based multinational property and casualty insurance company AmTrust, Bank of Montreal, and Munich Re (one of the world’s leading reinsurers) have all recently hired local scouters.
“Multinationals are realizing that opening a local R&D center may not be the best or only way to tap into the Israeli ecosystem. Over the last few years we have seen a growing number of alternative ways in which multinationals operate within Israel – more than 60% of their operations in the Israeli ecosystem represent an alternative approach,” Nechushtan concludes.