The Israeli economy has been vibrant and dynamic for the last 20 years, but the financial sector has remained remarkably static. A small number of large banks and financial institutions .dominate the entire financial and credit sector.

It is a little over ten years since the recommendations of the Bachar Committee were implemented. The recommendations had a profound effect on the Israeli capital markets. Until the time of the Committee, the capital markets were totally dominated by the Israeli banks and in particular by Bank Hapoalim and Bank Leumi.

The possibilities for conflicts of interest between the banks and their customers were everywhere. As a result of the recommendations of the Committee, pension funds and provident funds were removed from the banks. For the first time, there was competition in the management of the savings of the public.

Another fundamental change was the increase in availability of alternative financing for the corporate sector, breaking the monopoly of the banks. But the competition was not widely spread. Much of the power of the banks moved to the insurance companies and to two major investment houses, so that the financial sector is now dominated by no more than ten players (admittedly a higher number than the two big banks alone).

And although the Bachar Committee recommendations opened up new sources of finance for large corporate customers, this benefit did not filter down to small and medium corporate borrowers and individual borrowers. HFN was deeply involved in all of the major transactions resulting from the Bachar Committee recommendations.

The Committee appointed in 2015 by Finance Minister Kahlon (chaired by former Antitrust Director Dror Strum) to suggest ways to increase competition in banking and financial services has published its interim recommendations.

The Minister of Finance has already announced that he does not see himself committed to implementing all of the recommendations. The Bank of Israel is in a dilemma. The policy of the Bank of Israel with regard to competition in the banking and finance sector has always been conservative. The Bank of Israel sees its primary responsibility as ensuring the stability of the financial system, even if this comes at the cost of the possibility of cheaper or more flexible credit for the Israeli consumer. There are indications however that the Bank of Israel has at last acknowledged the need for increasing competition in the consumer credit space.

A good starting point will be the forced sale of credit card companies by the major Israeli banks Bank Hapoalim and Bank Leumi will sell their credit card companies. The future of CAL (owned by Bank Discount and First International Bank) has yet to be settled. The banks will not be able , to issue their own credit cards for at least four years (the situation will be reviewed at that time) but will be allowed to issue “debit cards”, a welcome development.

In a surprise announcement, the Supervisor of Banks announced that credit card companies .(would be able to apply for a full banking licence (including a licence to act as a digital bank This would be a major revolution in the Israeli banking world, where no new banks have entered the arena for decades. Cynics will say that this is simply at attempt on the part of the .Bank of Israel to ensure that supervision over credit card companies remains under its roof.  Nevertheless, this may well be a revolution in the banking sector.

Since the Bachar Committee a decade ago, the financial institutions in Israel have played a more significant role in corporate finance. The next stage will be to enable the financial institutions to move into the consumer credit space, even though this is less attractive for the financial institutions. The Strum Committee has indicated that it will encourage this development. For example, provident fund members will be able to borrow from the funds based on accumulated pension savings, but subject to limits that will protect minimum pension arrangements.

One of the major obstacles for those seeking to offer or obtain credit is lack of availability of information regarding an applicant’s credit history. For some time, discussions have been taking place regarding the establishment of a national credit bureau, which would allow a financial institution to access the credit history of a person applying for credit. The Strum Committee has made a small recommendation in this direction. The Committee recommends that a bank should be required to provide details to a non-banking credit provider of the overdraft of its, customers, provided that the customers agree to the release of this information. In this way non-banking providers will be able to compete with banks to cover existing overdrafts.

The regulators are trying to open up the credit sector in Israel, but it is possible that technical advances will do the job more effectively. The monopoly of banks and financial institutions in the credit sector will come under increasing challenge in the coming years from peer-to-peer online lending platforms. Traditional payment mechanisms may be challenged by digital currencies and even the most advanced contactless cards will be replaced by developments in biometric and other technologies. Imagine wheeling your shopping cart out of the supermarket, as its contents are scanned automatically and your bank account is instantaneously debited. This is much closer to fact that to science-fiction.

Israeli companies are at the cutting edge of FinTech, and HFN is ideally placed, in light of its deep understanding of the regulation of the banking and finance sector combined with its expertise in corporate and commercial developments in the technology sector, to advise investors, financial institutions and start-up ventures in this exciting area.