Israel's decision to grant a banking license to a fledgling digital bank is the latest step by the industry regulator to bolster competition and could lead to new foreign companies entering the market.
The country's banking sector is dominated by five big lenders — Bank Leumi le-Israel BM, Bank Hapoalim BM, Mizrahi Tefahot Bank Ltd., Israel Discount Bank Ltd. and F.I.B.I. Holdings Ltd., the parent company of First International Bank of Israel Ltd. It has suffered from a lack of competition, but the expected launch of the as-yet unnamed online bank by entrepreneurs Marius Nacht and Amnon Shashua could change that.
A steady set of changes in the financial sector followed the "social justice" protests against high living costs that took place in 2011. An estimated 250,000 took part in a demonstration in Tel Aviv in the largest socio-economic protests ever seen in the country, with similar rallies held in other Israeli cities, Reuters reported.
A government committee subsequently established to examine high living costs recommended a long list of measures to enhance competition among banks. Many were implemented, leading to lower bank fees, but they failed to invigorate the relatively sedate inter-bank competition.
"Consequently, it became widely understood that competition must come from outside — from non-bank entities and new banks," said Ruth Plato-Shinar, law professor and director of the Center for Banking Law at Netanya Academic College.
A new digital bank
Nacht, a co-founder of cybersecurity specialist firm Check Point Software Technologies, and Shushua, co-founder of the vehicle tech firm Mobileye, have each invested $30 million in the new bank. That gives them a combined 50.1% stake and they are seeking other investors to invest a further $60 million, Haaretz reported.
The central bank said it has finished its review process and is prepared to issue a banking license and control permit. It would be Israel's first new bank in four decades, according to Haaretz.
"Other entrepreneurs may now be encouraged to apply for a bank licence as well," said Plato-Shinar.
She said that, for many years, the Bank of Israel was very conservative and focused primarily on maintaining bank stability.
"The regulator was not keen to adopt any ideas that might have caused banks' profits to decline," Plato-Shinar said. "But now public perception has changed, and the Bank of Israel understands there are other goals that it must promote — consumer protection, competition, reduction of prices, improving customer service."
"The regulator wants more competition in banking and has taken various steps to enable this, lowering capital requirements and allowing new entrants to use third-party IT infrastructure in order to make it easier for them to compete," said Micha Goldberg, head of capital markets at Tel Aviv's Excellence Nessuah Investment House.
Numerous stumbling blocks remain before the digital bank can launch, which could happen in 2021.
"The roll-out will probably take at least two years — there's a lot that needs to be clarified and dealt with including major issues such as the IT infrastructure," Goldberg said.
"The new bank will probably need to get some deposit insurance, which doesn't currently exist in Israel. Assuming that these issues will be resolved, having a bank that can take deposits, and isn't one of the current big five, could be revolutionary."
When it launches, the bank is expected to cover the full spectrum of consumer banking activities, unlike Bank Leumi's digital bank, Pepper, which requires that someone with an investment account must remain a customer at a conventional bank.
"It won't be too different to Europe and the U.S. where digital banks have focused on people who have deposits, want pay less fees, do transactions for a cheaper price and have no need to visit a physical branch," Goldberg said.
He said competition could stimulate digitization at existing banks, and accelerate the incorporation of financial technology into the Israeli financial system.
Furthermore, low capital requirements mean other digital banks could enter Israel, he said. If the digital bank can provide proof of concept and sustainable profitability, foreign digital banks or online units of international banks may look to enter the country.
"A key reason why international banks haven't entered Israel is because it required too much investment to build bricks-and-mortar infrastructure in an effort to efficiently compete with the existing branch networks of local banking groups," he said.
"Digital banks obviate that need."