Dreaming about the day you can forget your wallet at home and go out with just a smartphone? Here are some solutions worldwide: transferring funds instantly through social networks and instant messaging; transferring funds between customers of different banks on the basis of a telephone number or email account, without needing the details of the account or branch; paying rent with digital checks; owning a virtual bank account in the United States to receive funds from international customers; rechargeable credit cards available at the corner grocer; buying chips and drinks by holding your phone to the vending machine; and selling or trading store credit or gift cards between individuals and using them in stores with a cellphone.
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This whole revolution seems to be bypassing Israel. True, many of us order taxis through Gett, pay for bus rides with HopOn, scan the barcode at the bottom of their municipal tax bill to pay it and save typing in superfluous details, or skip the payment stand in the parking lot by paying with Cellopark or Pango.
And yet, attempts to complete the digital revolution in this area and a complete merger between smartphone and wallet in Israel have resulted in only partial success, even though in recent years the field of fintech (financial technology), which independent entrepreneurs outside the institutional system have been developing, has been considered a flourishing sector of Israeli high-tech. The field received $408 million in investments in 2015 (12% of all Israeli high-tech fundraising that year), 2.5 times the amount in 2013.
Moreover, the regulator has good reasons to promote the field, as using advanced payment methods positively impacts the local economy. They reduce the use of cash and the black market in Israel – which controls about a fifth of economic activity in the country, according to some estimates. Israel Tax Authority officials estimate that wiping out the black market could bring the state another 40-50 billion shekels ($10.6-$13.3 billion), equivalent to the amount all wage earners in Israel pay into the economy. In addition, digital payment means increased competition by introducing new players, who lower transaction costs and allow easy documentation and monitoring of transactions.
When it comes to identity verification, such solutions are likely to be safer – instead of examining the similarity between you and the picture from when you were 16 in your Israeli ID card, you are identified via your digital fingerprint, comprised of activity on social networks, your cellular number and your GPS trail. Finally, digital payment methods are simply easier and more accessible. So why has the cellular wallet revolution stopped at Ben-Gurion Airport?
Entry requires connections
Yuval Tal is one of the veteran fintech entrepreneurs in Israel. He founded 16 years ago Borderfree, which developed a system enabling users to surf American retail sites, see prices in their local currency and pay at the checkout through it. In 2005 he founded Payoneer, which provides a platform for transferring payments between businesses in different countries and currencies. The company employs 650 workers, and its clients include Google, Amazon and Airbnb. In recent years Tal has also invested in local fintech companies, among them the startups Zooz and TravelersBox.
“Regulation in every country follows innovation, but in Israel there are regulatory restrictions that delay every radical change in payment methods,” says Tal. “In Israel, anyone who wants to deal with money and is not a bank works under a money-changer’s license, or under its official name – a foreign currency provider.”
Tal says that foreign currency providers cannot work independently because they have no access to the clearing system in order to transfer funds, and have to open a bank account. “When this is the situation, the foreign currency provider depends on the banks’ good will. The bank is in no rush to open accounts for foreign currency providers because many of them have a dubious reputation. When something goes wrong in cases of illegal activity, like money laundering, funding terror or anything else, the bank itself will be exposed to lawsuits and criticism.
“When we wanted to offer payments via Facebook in 2008, the banks told us it looked like fraud, because why would people pay through social networks?” he recalls. “If you now want to offer a solution for migrant workers to send money cheaply to the Philippines, why should the bank be involved?”
Tal says that Neema, a financial services application for migrant workers that works with Bank Leumi, was able to pull it off but called it a unique case. “These permits are given in measure, and if they are given, it’s mostly after a lot of time, fights, raising millions and using a lot of connections,” he says.
“There is a solution for companies abroad called Payment Services Directive, or PSD – the suspect companies answer directly to the regulator. They can own accounts, but they do not lend them to others like banks do and do not provide credit that isn’t theirs, such that they do not endanger the economy’s financial stability.”
He says companies under PSD regulation are connected directly to financial clearing companies like Shva and Masav in Israel and major concerns like Visa and Mastercard, so that they do not rely on the good graces of the banks, nor do they impose upon them responsibility for their actions but rather take responsibility themselves.
Banks suppressing innovation
“Israel turned the banks into enforcement bodies, similar to in other countries but more extreme,” says Tal. “If a business wants to transfer money, the bank asked the business what goal the transfer is serving, and it decides if the reason is sufficient. Our company makes billions of dollars of transfers internationally, but it can’t provide service in Israel because every transfer requires a form on at-source tax deduction. The banks became the country’s gatekeepers, making it impossible to advance innovation.”
According to Tal, the key is the Bank of Israel. “Let them tell the banks, ‘Take certain companies with a defensible risk model, and go for it. We won’t do anything bad to you if you used reasonable judgment.’”
“Regulation of foreign currency providers in Israel and regulation in the United Kingdom are light years apart,” says Doron Cohen, one of the founders of the startup Covercy. “The conditions in Britain are tough but very organized – there is a checklist you have to pass to implement the deal. The situation is less clear in Israel. For example, legislators did not determine how you have to treat customer funds and didn’t define a required level of protection that protects the customer in the case of ceasing payment. There are also no requirements like a minimal level of liquidity. In our Israeli activity, we voluntarily adopted the British model.
“We hear a lot in Israel about the banks’ openness to startups and innovation. It perhaps touches on the support network around, like cyber-security and risk management, but we have yet to see Israeli banks allowing fintech companies to draw near their main businesses. The German bank WireCard, for example, let the [Berlin-based] startup Number26 use its banking and financial infrastructure license to operate an Internet bank almost fully.”
According to Elad Wieder, a financial lawyer for the Herzog, Fox and Neeman law office, the market is not developing at the desired rate for technological, regulatory and commercial reasons. “At the technological level, the system in Israel is based on Shva’s unique protocol, and it still does not support advanced international standards (like EMV), which delays implementing advanced payment technologies like a smart card and contactless payment,” he says.
“At the regulatory level, the market is brimming with old regulations that do not suit advancing the industry and innovation. The Europeans had PSD solutions in 2007 and EMD (E-money Directive) in 2009. In Israel, until today there is no regulatory infrastructure supporting the multiplicity of players in the payment systems market. We have the banking licensing law from 1981, last amended in 2013, which formulated conditions for accepting a clearing license on debit cards. On the practical level, since it was amended not one new license has been issued.”
Wieder says that the Bank of Israel is working hard, meeting with industry, and that the documents they issue are full of rhetoric about encouraging innovation, but progress is slow. “For example, a few weeks ago the Bank of Israel published access conditions to payment and clearing systems for new players, but allocating the licenses is subject to legislating a payment services law,” he says.
“There hasn’t even been a memorandum published for this law, such that the process is liable to take a long time. And as if that weren’t enough, in order to make this possible, first you have to implement a technological update within the existing systems. Some of the players will be forced to wait for the establishment of the new regulator in the treasury, which is expected to issue licenses only starting June 2018.”
Wieder concluded: “At the commercial level, in the existing situation, without the regulator in Israel adapting to what has happened in other big markets, startups have no incentive to invest that much in efforts to adapt themselves to a small market like Israel, such that they from the outset skip abroad.”
The Bank of Israel declined to comment.