The Bank of Israel recently led several important developments in the Israeli payments market. These developments are designed to encourage competition in the payment services market and to advance the implementation of innovative technologies.
Publication of a Roadmap for Expediting the Embedding of the EMV Standard In Israel
On November 27, 2019, amendments 470 and 472 to the Proper Conduct of Banking Business Directives, concerning the issues of “charge cards” and “acquirers and acquiring of charge card transactions” were published. These amendments aim to accelerating the embedding of EMV technology in businesses. The EMV standard is necessary for the use of digital wallets and advanced payment technologies. Nevertheless, there is a delay in the spread of these technologies in Israel, despite their widespread use around the world.
The Bank of Israel has taken a number of steps in recent years to create an infrastructure that would enable the transition to the use of stable and advanced payment technologies while also increasing competition in the market. Now the time has come for a comprehensive transition to the EMV standard, which will allow for the making of non-touch payments using cellular phones and payment apps. Such a transition will strengthen competition in the areas of issuing and defraying by removing new players’ barriers to entering the market and will minimize, through an upgrade of security mechanisms, counterfeiting and abuse of charge cards.
As a result, following the extensive consultation process the Bank of Israel conducted with the various entities in the charge card payment industry (acquirers, issuers, manufacturers of interfaces, and others), and with representatives of the supervising authority over banks, it was decided to establish a clear timeline providing certainty for all the different players in the market. In addition, a draft was published of a directive requiring acquirers to end acquiring transactions with the old technology (magnetic strip) in favor of the full implementation of the EMV standard across the entire market by mid-2022.
Publication of a Draft of a Proper Conduct of Banking Business Directive on Implementing Open Banking in Israel
On December 4, 2019, a draft for public comments of Proper Conduct of Banking Business Directive No. 368 was published. This directive would require banks and credit card companies to grant third parties, supervised license holders, access to a customer’s account, with the explicit consent of the customer, for the purpose of receiving information or performing transactions.
With this step, the Bank of Israel joins international regulation in the area of open banking, including the European directive regarding payment services (PSD2 – Payment Services Directive 2) and the European Banking Authority regulatory standard (RTS – Regulatory Technical Standards.)
Such regulation strengthens the customer’s control over his financial information and the manner in which transactions in his bank account are made. It commits banks to share the customer’s banking information, with his consent, with authorized third-party suppliers and to permit the making of payments in his account through an authorized third party.
The issue of open banking was already reflected in the conclusions of the “Committee to Increase Competition in Common Banking and Financial Services” (Strum Committee). The committee called, inter alia, for the addition of supervised financial, non-bank players and the creation of conditions that would allow them to compete with banks and enable consumers in Israel choice in receiving financial services from a variety of entities without needing to transfer their checking accounts. Accordingly, provisions that facilitate the advancement of open banking were also weaved into the Law for Increasing Competition and Reducing Concentration in the Banking Market, 5777-2017.
The published draft reflects a European standard that sets rules for central aspects in the triangular relationship between financial institution, customer, and third party: (1) identifying the third party reaching out to the bank or the credit card company in order to receive information or make a transaction; (2) identifying the customer, securing his consent for the transfer of the information or the making of the transaction, and managing such authorizations; (3) a standardized language for the request of information from the bank or the credit card company and for its transfer to a fourth party or the initiator of the transaction; (4) securing the information and transfer of data; and (5) the services and date that may be received through open banking in Israel.
The directive, which would apply to banks and credit card companies in their operations in Israel, would allow third parties to develop new services and products in the area of payments and to analyze customers’ financial information. This will help increase competition in financial services and will lead to both lower prices and the offering of innovative services and products to customers. Financial entities that adopt and embed open banking standards are expected to create high-income sources and new growth engines and to enjoy a competitive advantage.