The Israeli payments arena has gone through a fundamental
change in recent years. Among other things, new players have
entered the market, ownership structures have changed, pricing
rules have been recalibrated and volumes have increased. The
coming years will determine the outcome of these changes and
will set a new equilibrium between industry, users and
Rapid technological development, which is as dramatic as the
industrial revolution, has created new methods of payments,
such as dedicated payment applications with slick interfaces,
near-field communication (NFC) technology, social media
features for money transfers and electronic wallets. In
addition, technology giants such as Google and Apple offer
payment services and include them in their products. Another
aspect of the technological revolution is the rise of the
e-commerce giants, led by Alibaba, Amazon and eBay. These
mega-retailers offer their clients an end-to-end service which
includes payments and credit.
Aiming to enhance competitiveness in the retail and
small business banking sector, a series of reforms were
introduced in 2015
Millennials, born into the technological era, embrace new
technologies and use the internet and their mobile phones for
virtually everything, from buying clothes to registering onto
academic courses. They expect financial services to be
available, user-friendly and cheap, just like streaming music
or buying shoes online.
These technological developments and social changes have
coincided with post-financial crisis reforms and are in line
with the dominant framework of competitiveness and fairness.
Politicians and regulators around the globe have introduced
various initiatives, such as the EU Payment Services Directive
(PSD 2) and open API initiatives, that aim to enable new
technologies and open payment systems to new players.
The Israeli case: global trends with local adjustments
Israel is also experiencing a technological and social
revolution, which has been further accelerated by its young
population and its 'start-up nation' characteristics. However,
substantive efforts had to be invested in to enable the
payments system to be prepared to absorb those trends.
The main payments systems in Israel are the following:
- Zahav – a real time gross
settlement (RTGS) system. Its name, Zahav, is the Hebrew
acronym for real time credits and transfer, and it is
operated by the central bank, the Bank of Israel (BOI). It is
used for transferring relatively large amounts, including
cash settlements of the stock exchange clearing house.
- Banks' Clearing House. The commercial
banks, the postal bank and BOI are members of Bank's Clearing
House, which primarily provides two services. The first is
inter-bank credit and debit movement clearing, operated by a
designated corporation: Masav. This system is used for money
transfers which are not executed through Zahav, with
designated modules that enable the withdrawing of money from
one bank account and its distribution to multiple payees such
as employees, tax authorities, provident funds or suppliers.
The second service is paper-based clearing, mostly cheques,
which are still a popular means of payment.
- Continuous linked settlements (CLS). This
is the global foreign currency clearing system used for
- Credit card purchases. All credit card
transactions are operated through Shva, a company that
provides a communication service between merchants and
acquirers and that operates the acquiring process.
The Israeli banking sector remains highly concentrated,
dominated by two banking groups whose combined market share is
about 60% in terms of asset size and profit. Two other banking
groups share another 30% of the market, while the remaining 10%
is shared by three other banks and four global bank
representatives. Three credit card companies operate in Israel,
and until recently they were owned by the three largest banks.
Masav and Shva were established by the banks and were owned and
controlled by them.
Aiming to enhance competitiveness in the retail and small
business banking sector, a series of reforms were introduced in
2015 by the Ministry of Finance and the BOI. A major component
of the reforms was directed to the payments system and in
particular to the credit card market and the clearing systems
operated by Shva and Masav.
The amendments included the forced sale of two of the
three credit card companies owned by the two largest
The amendments included the forced sale of two of the three
credit card companies owned by the two largest banks. In an
unprecedented step, the two largest banks were required to sell
their credit card companies. The stand-alone companies would
compete with their previous owners, mainly in the retail
sector. In addition to the forced sales, the banks were
prohibited from issuing their own credit cards directly and
obliged to use at least two credit card companies to issue
As part of the reforms, the banks were not allowed to hold
more than 10% of either Shva or Masav, and therefore had to
sell their excessive holdings. The reforms also enabled the
granting of licences to new players and the BOI has since
granted licences to two new acquirers, though they were still
not operational by mid-2019. The licensing was accompanied by
regulations that eased the capital requirements on small
acquirers and that will force the current credit card companies
to provide processing services to the new players.
As a complementary measure, interchange fees were reduced
such that the maximum interchange fees will be gradually
reduced between 2019 to 2023. The maximum fee for deferred
debit transactions, which are the most credit card
transactions, was reduced from 0.7% to 0.5%, while the maximum
fee for immediate debit transactions was cut from 0.3% to
As part of the struggle against money laundering,
legislation for limiting cash transactions was also introduced.
Starting in January 2019, limits were set on the amounts that
could be paid in cash and with cheques. The new law is expected
to increase the use of electronic means of payment, either
through money transfers or credit card transactions. The key
challenge for the new law will be enforcement, due to the
nature of cash transactions. In a related effort, in January
2019, the Knesset enacted a new payments bill based on the EU
PSD 2. The bill sets a legal framework for new means of payment
and for future technological developments and it requires high
standards with regards to customer protection.
The reforms and their repercussions
The 2015 reforms were followed up but their outcomes have
not necessarily been as expected. As required by law, the two
largest banks sold their credit card companies. One company,
Leumi Card, was sold to US private equity firm Warburg Pincus.
The other company, Isracard, was sold by issuing shares to the
public via the stock exchange. The banks also sold their
excessive holdings of Shva and Masav. But it seems that the
overall results of the reform are more complex than
anticipated, due to several reasons.
The reforms changed the position of the credit card
companies. Under the banks, the credit card companies built
strong issuing brands. Under the new regime, the credit card
companies were sent backstage with regard to the issuance of
bank cards, which increased the importance of the non-bank
cards. As a result, competition from on large customer clubs
such as retail chains increased, strengthening the relative
position of the retailers.
As mentioned above, the interchange fees are on a gradual
tapering path, making the acquiring business less profitable
which may result in an increase in other sources of income.
Competition from large customer clubs such as retail
chains increased, strengthening the relative position
of the retailers
The banks also developed payment applications of their own,
with the three largest banks introducing payment applications
that were not only offered to their customers. These
applications enable payments between individuals. However,
their aim is to provide payment services to businesses, making
credit cards redundant. The BOI set some limits on these
activities, and it will consider them more in the future.
Global online retailers and technology giants may shuffle
the cards as in Israel, like in many other countries, online
shopping is increasing. In many cases, online transactions are
cleared through the retailer's accounts or via a service such
as PayPal, reducing the volume processed by credit card
companies. Technology giants such as Apple or Google have not
yet introduced their financial services in Israel, but when
they do that it will impact the payments industry.
The new credit card acquirers have not started their
operations. In addition, to finalise their operative readiness
and licensing requirements, the new acquirers will need to be
linked to Shva's credit card system. As it stands, Shva only
serves the three exiting credit card companies, so it will need
to make substantive investments to enable their systems serve
The EMV standard, a global standard for credit and debit
payment cards based on chip card technology, has not yet been
implemented. At the end of July 2019, only 26% of the point of
sale systems (POS) in Israel are EMV POSs (according to Shva's
CEO) that enable the use of new technology such as NFC and may
make services such as Apple Pay available in Israel. The cost
of replacing the existing POSs is the main obstacle for moving
to the EMV standard.
Only time will tell whether the reforms have achieved their
goal. The playground is now defined, and existing and new
players will have the opportunity to shape it and to leverage
The views in this article are the private views of the
undersigned writers, and do not necessarily reflect the
official views of KPMG in this particular area. The information
herein is of a general nature and is not intended to address
the circumstances of any particular individual or entity.
Although we endeavour to provide accurate and timely
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professional advice after a thorough examination of the
Senior banking partner, KPMG Somekh-Chaikin
T: +972 3 6848244
M: +972 52 8540027
Hila Keren-Erez is a senior banking partner at KPMG
Israel with over 20 years of experience in the
Hila has led complex engagements with leading banks,
credit card companies and investment houses, in
addition to her leadership roles in KPMG Israel
Financial Services practice (FS).
Hila is a member of the liaison committee between
the Bank of Israel and the Institute of CPAs in Israel
(ICPA), which deals with the complex accounting and
regulatory challenges of the industry.
Banking thought leadership manager, KPMG
T: +972 3 6848532
M: +972 52 6060659
Dan Gan-Zvi is a manager at the KPMG Israel
financial services (FS) practice, and heads knowledge
management and industry expertise for the banking
sector. In addition, Dan is involved in various audit
and advisory projects of banks and credit card
Prior to KPMG, Dan worked for the regulation unit of
the Supervision of Banks department at the Bank of