Moshe Kahlon is still not finance minister, but he looks to be heading for his first clash with the Bank of Israel and its governor, Karnit Flug, over his plan to divest the banks of their credit card units.
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Kahlon made an overhaul of the banking sector one of his key areas of reform, as part of the promise to lower the cost of living and introduce more competition that won his Kulanu party 10 Knesset seats in the March election. He envisions credit card issuers as competing with the banks to make loans.
The central bank is strongly opposed to separating the banks from their credit card businesses, arguing that consumers wouldn’t benefit and spinning off the business would simply move the credit card trade from a bank-controlled cartel to a standalone cartel.
Kahlon will likewise face opposition from the banks themselves, which say credit operations are an integral part of their business.
Signaling they are preparing to battle with the new finance minister, sources said the Association of Banks in Israel had retained PR man Zamir Dahbash, who represents Bank Hapoalim and its CEO Zion Kenan and once advised former Bank of Israel Governor Stanley Fischer. The association declined to comment, as did Dahbash.
Israel’s three credit card issuers – Isracard, which is controlled by Bank Hapoalim; CAL Israel Credit Cards, which is controlled by Israel Discount Bank; and Bank Leumi’s Leumi Card – have a lock hold on the market. They not only control the entire industry value chain, but also Shva, the joint venture company that provides automated banking services through which all traffic for credit card transactions is made.
When other groups have tried to enter the credit card segment, they have been met with barriers set up by Shva. The company insisted that its system is structured in such a way that new groups can’t join it. Only when Antitrust Commissioner David Gilo threatened to break up the firm did it find a way to allow new entrants. To date, however, the Bank of Israel has not approved any new credit card issuers.
The credit card issuers also are a major contributor to the banks’ income. Last year, they generated about 4 billion shekels ($1.03 billion) in revenues, accounting for about a quarter of all the banks’ fee income and 10% of their total income. In addition, they are a source of consistent double-digit returns for the banks.
Their control of the market enables the three issuers to charge high clearing fees from small businesses, which have no power to negotiate better rates.
Kahlon believes the credit card issuers are in a position to compete with the banks for making consumer loans, because their business gives them access to customer credit histories. To date, though, none of the credit card companies have sought to do so, limiting themselves to offering high-interest loans that don’t serve as real competition to bank loans.
A study by the Knesset Research and Information Center estimated that the average interest rate on a credit card company loan is more than twice a similar bank loan – higher than the rates on overdrafts and about equal with the cost of a loan on the gray market.
People who do borrow from the credit card companies usually do so because of the convenience: Loans can be arranged with a telephone call.
As a result, the credit card companies accounted for just 4% of the 130.4 billion shekels in outstanding consumer loans – or about 5.3 billion shekels in lending. The banks accounted for 89%, with the remainder coming from other financial service companies.
Sharon Shpurer contributed to this report.