Digital-bank Plan by Israel's Bank Hapoalim Raises Concerns

Regulators taking a look as critics warn expansion of its Bit app may violate competition laws

Michael Rochvarger
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Bank Hapoalim offices in Tel Aviv in October, 2020.
Bank Hapoalim offices in Tel Aviv in October, 2020.Credit: Meged Gozani
Michael Rochvarger

Bank Hapoalim is exploring the establishment of a digital bank based on its Bit banking app, but critics warn it will reverse years of government policy aimed at bringing more competition to consumer banking.

The plan is to expand Bit’s basic service, which today is limited mainly to transferring money to private individuals and businesses, to include lending and long-term savings. More controversially, Hapoalim is also mulling the offer of a Bit credit card.

The Bit Card would be issued by credit card company CAL, which is controlled by Israel Discount Bank. The card would operate like club cards issued jointly by CAL with El Al Airlines and with supermarket chain Shufersal, in which the latter collects fees.

Banking sources told TheMarker that Hapoalim’s strategy, in particular the credit card operation, threatens to undo the government’s drive to force the big banks out of the credit card business. Hapoalim and its No. 2 rival, Bank Leumi, were both forced to spin off their credit card units to create more competition in consumer banking.

“Bit began life as an open and free digital wallet, but now [Hapoalim CEO Dov] Kotler is trying to have his cake and eat it, too. The bank needs to decide whether, in terms of regulation and its business model, it’s going to operate as an open digital wallet, or whether it is setting up a neobank [digital bank] that provides credit and financial products,” said one source.

Dror Strum, who chaired the government committee that recommended the divestments and the reform measures, agrees.

“It’s clearly an anti-competitive act intended to prevent future competition from the credit card companies, whose legally mandated separation from the banks was only completed a year ago,” he said recently.

Hapoalim aims to skirt the letter of the law by not being an actual issuer of credit cards or processing payments. But the aim of the plan was hinted at in a letter that Kolter sent to Hapoalim staff last week. “In the field of new banking, neobanking, we will continue to develop Bit, begin initiatives in open banking and product innovation, and create collaborations and investments in fintech (financial technology).”

Today, Bit is the most popular payment app for consumers in Israel. Banking sources estimate it has 80% of the market by value of transactions and it counts 2.5 million users. Bit usage has been growing quickly, and last year about 14 billion shekels ($4.4 billion) worth of transactions were done over the app.

But neither the money-transfer business nor Bit’s e-commerce functions have produced much revenue. Leumi, by comparison, has succeeded in reducing the subsidies it provides on its Pepper app.

As a result, Hapoalim has burned through at least 250 million shekels with the app. Users don’t have to pay for the service, leaving the bank to subsidize it, in particular the cost of clearing payments, which are done through users’ credit cards.

Over the last few months, Kotler and his team have been holding discussions about reducing Bit’s losses and came to the conclusion that the solution was to expand the app’s services. Beyond trying to make Bit profitable, Kotler and his team were also looking ahead to the competitive threats it faces. Apple Pay, for instance, is expected to launch in Israel sometime in the next few months while the digital bank controlled by Amnon Shushua, a Mobileye founder, is due to launch soon.

One reason Kotler is seeking to expand Bit is that users who are not Hapoalim customers can’t use it to pay businesses, unless the transaction is approved by their credit card issuer. Thus, to turn Bit into more of a digital wallet, Hapoalim in recent months has tried to get all the banks and credit card companies to cooperate with it.

But Isracard and Max, the credit card companies formerly owned by Hapoalim and Leumi, respectively, are trying to develop their own payment operations and turned Hapoalim down.

Only CAL agreed to issue a Bit credit card and talks are underway toward a final agreement. Among the banks, only Mizrahi Tefahot has to date not developed an app for its clients and is prepared to use Bit.

Whether or not the plans to turn Bit into a digital bank move forward, plans for a Bit Card and the agreement between Hapoalim and Mizrahi Tefahot have already caught the attention of regulators and committee chairman Strum.

Strum has sent a warning letter to various regulators demanding they order Hapoalim to freeze its plans while they are investigated thoroughly. He wants to make sure that they don’t violate the banking reform legislation, popularly known as the Strum Law, by using Bit to win back some of the credit card revenues Hapoalim lost through divestment.

The Competition Authority has formed a special team to look into the matter jointly with the Bank of Israel’s supervisor of banks, Strum himself and other government bodies. But Kotler has made clear the bank is moving ahead with the organizational changes needed to expand Bit.

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