Who Stands to Lose From Israel's Cashless Future?

Consumers and credit card issuers will gain under new rules the government plans to adopt.

Bloomberg

Israelis will face a more cashless future if the recommendations of a committee headed by the Director General of the Prime Minister’s Office, Harel Locker, are adopted.

The proposal, whose publication is expected within a couple of months, would bar cash transactions in excess of 5,000 shekels ($1,440), require checks to specify a recipient and facilitate the use of debit cards. Unlike credit cards, debit cards require the issuing bank to transfer payments immediately, making them a low-cost and simple substitute for cash.

The reforms can be traced to an initiative by the credit card company Visa Europe, which identified a common agenda with the Israeli government. For Visa, the changes will mean much greater use of electronic payments, while for the Israeli government it will facilitate a crackdown on the black market and its preference for anonymous cash payments.

A study by Visa, submitted to the government last June, estimated that the black market in Israel amounts to about 18.9% of the total economy, compared to an average of 15.3% for Organization for Economic Cooperation and Development member states.

“When people use cash for business it’s easier to hide income. But when you use other means of payments, in particularly Visa cards, the chances of being able to conceal income drops significantly,” Visa Israel CEO Oded Salomy said when he presented the report.

Visa estimated that increased use of “plastic” will shrink the black economy to 17% of gross domestic product by as soon as the end of 2015. Every 1% increase in credit card use will reduce the size of the black market by 0.5%, according to the company, enabling the Israel Tax Authority to increase collections by some 2 billion shekels annually.

Nevertheless, it is difficult to assess how effective the Locker committee recommendations will be in cracking down on the black economy. Experts say with more certainty that the proposal would effect big changes for business and other entities.

No. 1 on the list is Israeli banks, which today earn about 25% of their fee income, or about 3.6 billion shekels annually, from processing credit card payments. They collect money both from businesses and from their own customers.

As part of the reform, banks would be required to charge 60% less for processing debit card payments than for credit card payments. Credit card companies would be required to transfer payments to business immediately, rather than on the first of the month as they do now, which will improve cash flow for businesses, amounting to total savings of about 700 million shekels, estimates Antitrust Commissioner David Gilo.

On the other hand, consumer may suffer because many businesses will presumably limit credit-card use to large transactions and show favor to payment using debit cards. For the 21% of Israelis whose bank accounts are in perpetual overdraft, debit cards will only exacerbate the problem.

As a result, the banks can at least look forward to earning more revenue from interest on accounts in overdraft.

Taking aim 
at organized crime

The Locker committee is convinced that the restrictions on cash it is recommending will hurt organized crime, which operates almost exclusively on a cash basis.

For example, notes one source, there is no legal way to stop a member of a criminal organization from walking into a car dealership and putting down half a million shekels in cash for a luxury car and registering it under someone else’s name as a cover. The dealer is has every right to accept the cash and has no authority to verify its source. Barring large cash transactions will make harder for criminals to launder their ill-gotten gains, the source explains.

But the cash-transaction ceiling will only have a limited effect on organized crime, which uses money changers as its main conduit for laundering its money. And there, the new rules already face a loophole.

The Knesset Constitution, Law and Justice Committee, which is chaired by MK David Rotem (Likud Beiteinu), was supposed to approve measures in the framework of the Anti-Money Laundering Law that would have required money changers to verify the source of the money they exchange.

But after the committee approved the measures, in late March, ultra-Orthodox parties lobbied to amend it. As a result, the vote approving the measure was rescinded and a new one has yet to be scheduled.

Some of the other winners and losers from the expected changes:

Gama Management and Clearing, which offers factoring and other lending services based on business’ credit-card receivables, stands to lose as much as half its business, as merchants will no longer have to wait to receive their money.

Gama and others like the Postal Bank — which today issues Visa cards but does not engage in clearing — may enter the credit-card clearing business to make up for the loss, which would increase competition and lower costs for consumer and businesses. They do not clear card payments now because of the heavy capital requirements.

Brinks Israel also stands to lose if the reforms are introduced. With fewer cash transactions, there will be less need for its armored cars to move cash around from place to place. It may lose business and might have to cut its fees.

Brink’s other business – one that is less well known – is operating automated teller machines for the country’s banks. With fewer cash transactions, there will be fewer ATM transactions, denting the company’s revenues from that business, too.

One winner from the changes is ERN Israel, the company that provides guarantees for businesses when they receive payment by check. ERN does this by aggregating data from the 13,000 businesses it counts as customers to estimate the risk of a check bouncing.

CEO Shai Preminger says that with the 5,000-shekel cap on cash payments, businesses will be relying more on checks, booting demand for ERN’s services.