Israel has been lagging behind the world in implementing open banking but has now completed many of the required regulatory changes in the financial sector. The changing landscape provides interesting opportunities for Fintech companies to develop their business in Israel.
Israel has been slow to implement the regulatory changes introduced elsewhere[1] to enhance competition in financial services by allowing bank customers to share their financial information with third parties. Such sharing increases customers’ control over their information and facilitates the creation of a competitive ecosystem of alternative, diverse, and highly personalized financial services.
Initially, open banking only applied to a few financial institutions that were regulated by the Bank of Israel (BOI), by way of a BOI directive[2]. These institutions included mostly credit card issuers and deposit and credit associations. Then, in 2021, the Israeli parliament enacted a comprehensive statute[3] which extended open banking to other providers of consumer financial services. The statute entered into force in June 2022 and requires financial entities to let their competitors automated access to customers’ financial information (with consent) automatically. Such financial information includes account balance and transactions, loans and credit, deposits, savings, fees, interest, etc.
Providers of financial services that have thus far evaded regulation became subject to supervision by the Israel Securities Authority (ISA) and will generally have to seek a licence and become subject to regulatory requirements such as risk management, information security and consumer protection. Foreign service providers should consider corporate and tax aspects, as they will have to register in Israel.
So far, the ISA issued some eight open banking licences, including several to Fintech companies. Of these, four were issued in February 2023, and also included for the first time a licence to provide payment initiation services, which form part of the second phase of the regulation, which entered into force in January 2023. According to an ISA press release, it is reviewing more applications which it expects to approve quickly. February 2023 also saw for the first time a licence for a social lending platform based on the open banking framework. It was granted by the Capital Market, Insurance and Savings Authority, which regulates the insurance sector (including long-term savings, i.e., provident funds).
The open banking framework still has a way to go, and some phases have yet to enter into force. Later this year, more financial information would become subject to open banking, including information on securities that bank customers hold. Now that Fintech companies have finally entered the fray, we expect faster and more significant developments in the financial services market in Israel.
[1] E.g., European PSD2 – Payment Services Directive 2 and EBA’s RTS – Regulatory Technical Standards.