Key Takeaway: Israel’s traditional banks are lagging behind fintech startups. Can two tech billionaires turn things around with a new bank?

Israel brims with fintech startups that have produced key financial technologies like the RSA code used to encrypt most bank transfers.

Strangely, its own banks remain shackled by physical paperwork and still favor faxes for client communication.

In digital payments, for example, Israel “lags a large part of the world,” Hedva Ber, the country’s supervisor of banks, admitted in an interview with Bloomberg.

Now, with the blessing of regulators at the Bank of Israel, two Israeli tech billionaires are making a $120 million bet that they can modernize the country’s conservative banking system and create Israel’s first all-digital lender.

Last year, Israel approved its first two digital insurance companies. On Sep. 25, Ogen got the green light from Israel’s Capital Markets Authority to extend its credit offerings, part of the social loan fund’s plans to become a bank. It is likely to start operations before the digital project.

“The award of this new digital banking license and the recent approval of Ogen’s expanded credit license, as a first step to us setting up an additional social bank, are important developments, both for the creation of competition in the banking sector and to increase the availability of accessible credit and financial services to diverse population groups in Israel,” Sagi Balasha, Ogen’s CEO, told Karma.

Marius Nacht, co-founder of computer firewall pioneer Check Point Software Technologies Ltd., and Amnon Shashua, CEO of Mobileye, the automotive safety company bought by Intel for $15.3 billion, gained approval for the as-yet unnamed bank from the Bank of Israel, the country’s central bank, on Sep. 24. It was the first new banking license issued in Israel since 1978.

Bank of Israel Governor Amir Yaron said in a statement that he hoped the digital lender “will lead to increased competition and the advancement of innovation in banking in Israel.”

The new digital bank will have no branches and will focus on providing services to households, including loans, deposits, account management and securities transactions. Nacht and Shashua will each invest $30 million, and expect to raise another $60 million from investors. The project is headed by two experienced Israeli financial executives and the bank is unlikely to open for business before 2021.

“Israeli banks are rapidly embracing new technology by digitizing various services to defend their franchises and compete on the type and quality of services provided, often partnering with fintech companies.”

“We are in the initial establishment stages, and there remains a long path before us,” Nacht and Shashua said in a statement.

In the aftermath of a bank stock crisis in the 1980s that forced the government to rescue several major lenders, Israeli regulators have maintained an iron grip on Israel’s financial institutions – helping the country to sail through the 2008 crash.

So even though local inventors supplied the core technologies that enabled financial institutions around the world to encrypt transfers, build firewalls, store data and send instant messages, Israeli lenders remain mired in burdensome regulations that involve endless red tape, days of delay and forests of paperwork completed in triplicate.

Belated Modernization 

The approval for the digital bank suggests Israeli regulators have decided to adopt modernization in a market fiercely resistant to Blockchain and other innovations, where lenders still routinely demand faxed signatures from customers.

Israeli banks belatedly embraced digital services, led by Bank Leumi, the largest, which created its mobile-only Pepper platform in 2017. Customers haven’t rushed to embrace all-digital offerings. Leumi says it is now recruiting more new customers to Pepper each week than to its legacy banking. While Leumi’s mobile usage has leapt from 3% of all transactions in 2013 to 43% in 2019, non-mobile web usage has fallen from 68% to 40%, according to figures provided to Karma.

“Pepper was initially launched for the millennials but about 30% of Pepper customers are over the age of 34,” a Leumi spokesman told Karma.

Nacht and Shashua are urging the Bank of Israel to establish a system of deposit insurance, which doesn’t exist, and to allow the first outsourcing of computer services – until now tightly controlled – in a tender won by TCS of the TATA Group. The new bank’s founders are also pushing for the introduction of a new software standard designed to provide access to the banks’ closed databases to bolster competition.

“The approval is an important milestone in Israel’s concentrated banking system, which is currently dominated by five banks that account for 96% of total banking system assets,” said Roland Auquier, AVP-analyst at Moody’s Investors Service, told Karma. “Israeli banks are rapidly embracing new technology by digitizing various services to defend their franchises and compete on the type and quality of services provided, often partnering with fintech companies.”

But the new bank must still persuade Israeli regulators to revise many rules. One example: According to Bank of Israel directives, loans of more than $14,310 require the physical signature of the borrower and cannot be completed online. 

The digital bank will have to remove such obstacles before it can compete on equal terms with existing lenders.