Fintech – The Israeli Experience
Zvi Gabbay, Andrey Yanai
Outside the USA, Israel is probably one of the leading, if not the leading, jurisdictions globally for fintech startup companies that successfully raise funds and develop viable products that change the way financial services are delivered and managed.
Some Numbers on Israeli Fintech
Global financial services companies are taking an increasing interest in Israel’s fintech sector. In 2019 to date, according to Start Up Nation Central, a body that monitors the development of the Israeli startup sector, Israeli fintech startups raised a record USD1.54 billion in equity, surpassing the previous annual record of USD386 million. Drawing in on the end of 2019, there are nearly 570 active fintech startups in Israel, compared to 159 in 2012. Preliminary data suggest the median equity-financing round more than doubled, from USD3.5 million in 2018 to USD10 million in 2019. Several fintech companies have also raised over USD100 million in 2019.
Reasons for Israeli Strength
Leading figures in the Israeli fintech and VC industry have noted a number of reasons why Israel has become so strong in this area.
Employees in Israel as a group have, on a relative basis compared to their global peer group, a very high level of fundamental experience and knowledge in areas such as real time analytics, algorithmics, big data, risk management, anti-fraud, and security. The country also has one of the highest usages of mobile electronic devices globally. Israeli entrepreneurs have amassed significant experience in recent decades in online marketing and are now able to apply this experience to the fintech marketplace.
Fintech is still an emerging industry, and as such is still very much open to new initiatives and groundbreaking ventures, as the regulatory landscape remains open to discussion and has yet to be incorporated into a set of lengthy laws and regulations. If one combines this with the fact that the conventional financial services industry is ripe for disruptive efforts, one finds that this industry is right up Israeli entrepreneurs’ alley, as it allows them, and almost beckons them, to use their out-of-the-box modes of thinking to take the industry forward.
Indeed, the blockchain and cryptocurrency sector proves this exact point. This new and innovative technology is being used to attempt to provide a new manner of doing business. A large number of Israelis have sought to use and exploit this technology to create and disseminate various ventures, products, and services.
A legacy of successful companies in the field has created a pool of experienced employees and entrepreneurs, a number of whom are now on their second or third startups. The sector is so successful that many of the higher-education institutions in Israel have begun incorporating fintech courses into their curricula.
Many Israelis are also working abroad inside financial institutions or fintech businesses. Some return to Israel and bring their insight and experience to bear on the local market. The strength of the sector may be encouraging this phenomenon.
Israeli banks and insurers are also involved in the sector, and over the years have supported the development of fintech businesses through investments and joint ventures, or by running accelerators and funds.
One of the key issues any fintech venture needs to face is regulation. As many fintech ventures are disruptive and seek to turn upside down the existing financial industries, they often face regulatory uncertainties. Nevertheless, in 2019, one of the key regulators in the Israeli market, the Bank of Israel, approved the establishment of the first digital bank in Israel. The Israeli market has witnessed a favourable regulatory turn of events in terms of the fintech industry, and for the first time in four decades a digital bank was granted a licence in Israel.
Further indication of the favourable regulatory turnaround that occurred in 2019 is the proposal of a team led by the Ministries of Treasury and Justice to establish, for the first time in Israel, a regulatory sandbox environment for fintech companies. This programme is dedicated to early-stage fintech companies, and includes close regulatory support alongside regulatory easements for a limited period.
The Israel Securities Authority (ISA) was one of the first authorities to embrace the fintech industry in Israel. The ISA championed a legislative process that regulated and licensed online financial trading conducted via an own account trading ring. While such legislation and regulation introduced rather lengthy and burdensome regulatory requirements, it has allowed several entities to obtain licences and to offer their products and services in the Israeli market.
Another example of the ISA’s willingness to embrace the fintech industry relates to two of its publications: (a) the formal guidance it published for licensed investment advisors and portfolio managers seeking to provide services via technological platforms, and (b) the final report of the crypto committee regarding the issuance of cryptocurrencies.
The ISA also promoted legislation that regulates crowdfunding, in which it sought to allow startups to be able to receive funding without running afoul of securities legislation. In 2019, another crowdfunding platform was granted a licence from the Israeli Securities Authority.
Further indication of the ISA’s willingness to embrace fintech is the formation of the "Innovation Hub". This initiative aims to promote discourse between the ISA and relevant actors in the fintech field, in order to fulfil the sector’s potential and its contribution to the capital market and the Israeli economy.
Another regulator considered pro-fintech is the Capital, Insurance and Savings Authority, which very recently issued a law memorandum draft for the government’s comment regarding promoting the use of innovative payment services. The law memorandum encourages competition in the field by allowing non-bank entities in the payments sector to develop alongside banks.
Virtual currencies are regulated via the Financial Services Supervision Act, which, albeit very briefly, notes that virtual currencies are to be treated, for the purposes of the act, as a financial asset. This, in turn, may require a person that trades or holds virtual currencies to obtain a regulatory licence.
Naturally, the fintech industry faces "regular" regulatory issues like other industries as well. One of them relates to the issue of privacy and data protection, which has become an increasingly hot topic with regulators in recent years. In Europe, we have seen the implementation of GDPR, an EU-wide law that imposes strict rules on how to handle personal data. This has had an impact on Israeli startups as well, in cases where the GDPR applies to them, too. For a small startup business, it can be a challenge to keep up with these detailed laws and implement them properly.
All of the above has prevented some Israeli fintech ventures from offering their products and services in Israel, and has spurred the ventures to offer them in other jurisdictions. Thus, the modus operandi of quite a few Israeli fintech ventures is that while the entrepreneurs are located in Israel and the development of the products and services is performed (at least partially) from Israel, the ventures aim for world (and not for Israeli) markets. Israel could be a hotbed for their experiments, but it is the world these ventures wish to conquer. With the proper funding and regulatory acceptance, there is no doubt this aim will be achieved.