I know, the Internet is exciting. Where finance and Internet meet, it's a brave new world where the Mark Zuckerbergs and the Sergey Brins will reduce the banking dinosaurs to their knees. Soon we'll be rid of that duopoly, the Israeli banks Hapoalim and Leumi, and have a cooperative bank, Ofek, and startups that connect between small investors and small lenders. Right?
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Don't hold your breath. Not right.
Yes, technology is here and it's big, and it gets friendlier and more affordable by the day. It's also hard to think of an industry more in need of fresh blood and new technologies, to lower prices and cost, than banking.
But it isn't going to happen, because there's a huge, hidden moat surrounding the banks, and it’s full of piranhas and regulators.
The financial system in Israel, Hapoalim-Leumi and the smaller fry Discount, Mizrahi and Beinleumi, the investment banks, and the five big insurance companies, charge the public roughly 100 billion shekels a year (that's nearly $30 billion) and manage 2 trillion shekels in long- and shorter-term investment funds. As the economy grows, so do the banks, which face no competition.
The insurers manage about 200 billion shekels in plans without exits, and are also growing like weeds: The public has to save for retirement through one of the insurance companies, in order to be eligible for tax breaks from the state.
The biggest robbers of the lot
But the worst robbery of the public is at the banks. The simplest demonstration is salaries. Some 7,000 veteran bank workers have tenure for life and each cost 50,000 shekels to 100,000 shekels a month. Each year, this crew costs the banks between 5 billion to 7 billion shekels more than they're worth.
If Hapoalim and Leumi managed to achieve returns on equity above 10% – as they have, despite this towering expenditure on wages – that's due to their duopolistic status, with the price being paid by households and small businesses.
Ostensibly the conditions would beg for the entry of competition, especially in the Internet age. But this is the financial system, an area based on the heaviest of regulation and where the barriers preventing customers from switching allegiance are extremely high. Most households and businesses are chained to their banks and can't get free. They pay sky-high fees and interest on overdrafts and loans and can't shake off the gorilla embrace.
The only way to release the Israeli consumer from the serpentine chokehold of the banking duopoly and cartels is through massive regulatory intervention. Only a decision by the prime minister himself, with the governor of the Bank of Israel and finance minister, can force competition onto this industry.
Halve the share of Hapoalim and Leumi
In the banking system, the goal should be to halve the market share enjoyed by Hapoalim and Leumi within, say, a decade, including through Internet banking, new rules on credit and severing the credit-card companies from the banks. The fact that some 800 billion shekels in financial assets is concentrated at Hapoalim and Leumi stifles business and prevents competition in many industries.
The Israeli economy is short of tens of billions of shekels a year that's sucked into the real estate and financial bubble instead of going to industry, high-tech and small and medium businesses.
The Supervisor of Banks should create nurturing conditions for Internet banks and a cooperative bank. The Finance Ministry should help boost newcomers to banking as well.
Twenty five ago, the Israeli government founded the Israeli venture capital industry through a fund it set up called Yozma ("Initiative"), which provided subsidized capital to new venture capital funds. Today, the state should provide a hefty subsidy to new financial bodies that will compete with the banks.
Banks are critical infrastructure for economic development. Concentration in the financial system threatens not only democracy but competition in the economy as a whole.
The commissioner of insurance needs to lay down rules and standards that constrain management fees on veteran "executive" investment funds (bituach minahalim) or that enable the money to be moved to a different vehicle. While the client can lower the fees charged by provident funds, that's not so for bituach minahalim plans, in which some 200 billion shekels are locked up – and they charge double the management fees compared with the provident funds.
The social protest, the collapse of the tycoons, the economic concentration committee, the Bachar committee (which reformed the capital market) and the cellular revolution have laid the groundwork for the mother of all financial reforms – dismantling the duopoly of Hapoalim and Leumi, and lowering management fees on bituach minahalim plans. The cellular reform involved slashing costs to consumer to a fraction of their former height. The same needs to happen to finance.
Finance Minister Yair Lapid has a window of opportunity that won't return. Most of the voters who put him in power are disappointed with him, and are eyeing the advent of Moshe Kahlon, who as communications minister was behind the cellular reform and who is now talking about setting up a whole new political party.
A historic reform of the financial system is the only way Lapid could prove he's more Kahlon than Kahlon. If he doesn't, we may assume that financial reform – together with a roughly 30% drop in property prices – will be the platform on which Kahlon climbs to the top with Israel's next "social" party.