About 550 fintech companies operate in Israel, employing some 20,000 people in Israel. The number of companies and the number of people employed in them is relatively high in comparison to international counterparts.

In 2021, the industry's contribution to Israel's GDP amounted to approximately NIS 8.2 billion, which is approximately 0.5% of the total GDP - a high rate in comparison to other countries' leading the adoption of fintech technologies such as Great Britain, Australia, and Sweden. It is estimated that the promotion of these company's activities in Israel will result in an even greater contribution to the GDP in the coming years.

Since some fintech companies choose not to offer their services in Israel, the potential contained in their activity is not fully realized in the Israeli consumer.

The Chairwoman of the Israel Securities Authority, Ms. Anat Guetta, said of the report: "The report published today testifies to the great importance that the fintech industry already has in the economy and for consumers in Israel. Moreover, the report emphasizes the importance of the development of the industry for the benefit of the financial market and the country's economy. The fintech companies break our deep dependency on bank accounts to perform elementary operations and enable a better dismantling and democratization of the banking and financial services we consume. The key to maximizing value for the consumer public, who are the customers of the financial institutions, is as many alternatives as possible, available for use and activated at the touch of a finger. The main conclusions that emerge from the findings are the necessity of implementing regulatory reforms to encourage the activity of the fintech industry in Israel. We must continue to remove barriers and allow direct access to the payment systems in order to reduce dependency on banks and allow fintech companies to offer advanced services for the benefit of the consumers, including the Ultra-Orthodox and Arab sectors, who do not fully participate in the traditional economy, in relation to their share of the population. Only if we are able to introduce technological players into the market that will enable the realization of the vision of an open financial world will the financial market be able to benefit from the adoption of innovation, from growth and improvement of the services provided to the public."

Among the recommendations published in the report: 

Completion of the licensing arrangement for non-bank payment service providers; promotion of a regulation adjusted for the prevention of money laundering and terror financing; reduction of fintech companies' dependence on operating with the banking system; determination of exemptions and relief for companies operating abroad under a foreign license; enabling the provision of credit during payment transactions; and the establishment of an entity subordinate to the Ministry of Finance to examine the manner of implementing the reforms in Israel.

Today the Israel Securities Authority, headed by Ms. Anat Guetta, is publishing a report that presents the situation regarding the activity and influence of fintech companies from the perspective of consumers and other players in the financial sector, along with recommendations on how to continue to develop the industry for the benefit of the economy.

According to the findings of the report, as of July 2022, there are about 550 fintech companies in Israel, employing some 20,000 employees, which constitute approximately 0.5% of all employees in the economy. The number of Israeli companies operating in fintech is high compared to the sector internationally, especially in relation to the size of the population. Israel is situated next to other developed countries such as Switzerland and Hong Kong and is even placed higher than Great Britain.

In terms of the gross added value index, the data detailed in the report indicates that the contribution rate of the fintech industry in Israel to the total GDP for 2021 was approximately NIS 8.2 billion, which is approximately 0.5% of the GDP in 2021. This rate is higher than in the comparable countries internationally (Great Britain, Australia and Sweden). This is in view of the strong Israeli high-tech sector and the fact that high-quality fintech companies employing tens of thousands of Israelis are flourishing in Israel. 

However, most of the fintech companies, even if they operate from within Israel, do not sell their services and products to Israeli consumers and therefore their contribution to the GDP is reflected in the data described above. If these companies had been operating in Israel, their contribution to the GDP would have been greater, among other reasons, due to their potential contribution to the streamlining of the financial system and for the benefit of local consumers.

Therefore, the report deals with the questions that arise as a result of this data, especially in view of the analysis of the fintech industry's contribution to the local economy and the Israeli consumer.

Fintech companies help improve and streamline the procedures carried out in the financial market, increase competition in this concentrated market, and expand the target audiences that benefit from it. As a result, the companies lower the costs passed on to consumers and improve the speed and quality of the services provided to them. Among other things, they provide technological developments for streamlining processes in the banking system and among financial institutions, improving risk management and preventing fraud in financial institutions, streamlining underwriting and insurance processes, streamlining payment services, improving the use of financial information and making it directly accessible to customers, streamlining investments and trading, using artificial intelligence in a variety of services, and more.

Fintech companies will be able to benefit the Israeli economy in dealing with its unique challenges. For example, the limited presence of the Ultra-Orthodox and Arab sectors who do not fully participate in the traditional economy, in relation to their share of the population. Fintech companies have the ability to appeal to diverse target audiences with specific characteristics and increase their accessibility, supply, and personal benefit of their users. Increasing financial inclusion as a national goal, with its power to contribute to the national strength, to benefit the consumer and to the democratization of money as a social value.

Existing regulation and promotion of an appropriate regulation

Israel is characterized by a reality where most financial services are provided by the same traditional financial institutions that hold significant market shares. In the last five years, several reforms have been advanced in Israel to improve the competitive situation in the financial and banking market, including: Creating access to the customer's financial information and making it directly accessible to the consumer, reducing costs and improving payment services, improving access to credit for businesses and customers.

While doing this, the Israel Securities Authority has been dedicated to the promotion of innovation and competition in the financial market for the benefit of all its participants, with an emphasis on the benefit of the consumer public. The ISA received the authorization to implement, regulate and supervise financial information service providers and payment service providers in addition to the areas it supervises. The integration of these areas together gives the ISA a broad and in-depth view of the barriers and opportunities required to increase competition in the fintech industry in Israel.

Fintech companies in Israel operate and are expected to operate in a highly complex regulatory environment. This is not only unique to Israel – in many financial systems around the world there is a complex regulatory environment that works to deal with market failures and the special risks to the financial world, in order to ensure the stability of financial institutions and the financial system for the benefit of the public. Due to a lacking in a regulatory system suitable for fintech companies, the diverse regulatory challenges cause a significant barrier to the commencement of their activities and to their business development, as well as to their ability to offer products and services to the Israeli market. Therefore, the Israeli economy does not take advantage of the potential of the fintech industry, both as a significant growth engine within the hi-tech industry, and as a means of bringing the financial system in Israel to another level.

According to the information presented in the report, the following are the Israel Securities Authority's recommendations for the development of the fintech industry's activity in Israel:

1

Regarding regulation

1.1 Completion of the licensing arrangement for non-bank payment service providers.

1.2 Promotion of a regulation adapted to the activity of fintech companies regarding the prevention of money laundering and financing terror.

1.3 Completion of the broker-dealer legislation to create regulatory certainty for the activities of global fintech companies operating in the area of investments in securities.

2

Regarding activity with the banking system

1.1 Reduction of fintech company's dependence on the banking system.

1.2 Simplicity and availability of the option to directly participate in the payment systems.

3

On an international level

1.1 Promotion of granting exemptions and relief to fintech companies operating abroad under a foreign license.

4

Regarding market development

1.1 Establishment of a regulatory Sand Box to encourage the entry of fintech activity in Israel.

1.2 Continuation of pilot programs funded and accompanied by the Israel Securities Authority and the Israel Innovation Authority.

1.3 Enabling fintech companies to provide credit during payment transactions, as an inherent part of their activity.

5

Reviewing Implementation of the Reforms

1.1 Establishment of an entity, subordinate to the Ministry of Finance, with the participation of representatives of the various financial regulators, representatives of the Israel Competition Authority as well as representatives of market entities, to examine the manner of which the reforms are being implemented to encourage the activity of the fintech industry in Israel and examine compliance with quantitative goals that will be established in order to examine whether and in what manner the goals of the reforms have been achieved.

The Israel Securities Authority thanks the entities that assisted in writing the report: the KPMG firm, the Startup Nation Policy Institute (SNPI), and the Chief Economist Division of the Ministry of Finance.