This country-specific Q&A provides an overview to Fintech law in Israel.
It will cover open banking, regulation of data, cryptocurrencies, blockchain, AI and insurtech.
This Q&A is part of the global guide to Fintech. For a full list of jurisdictional Q&As visit http://www.inhouselawyer.co.uk/index.php/practice-areas/fintech/
What are the sources of payments law in your jurisdiction?
The main laws regulating payment solutions and payments in Israel are: the Debit Cards Law, 5746-1986, the Notes Ordinance (New Version); and the Supervision of Financial Services Law (Regulated Financial Services), 5776-2016 (the “Supervision Law”).
In addition, several reports have been published over the past few years by various committees, such as the committee headed by the Bank of Israel (“BOI”) on the subject of the Transaction Chain in Debit Card Transactions (July 2016) and the report of the Inter-Ministerial Committee to Promote the Use of Advanced Payment Solutions in Israel (June 2017) , which serve as a basis for regulators positions, interpretation of current law as well as for future legislation.
There is also new proposed legislation – namely, the Payment Services Law, 5778-2018 (which is partially based on the principles of the European Payment Services Directive II, as well as the current Debit Cards Law, which it is intended to replace) (the “Draft Payment Services Law”) that is to regulate a variety of existing and future payment services, mainly with respect to customer protections related thereto, which recently received the initial approval of Israeli parliament, and a draft of the Supervision of Financial Services Law (Regulated Financial Services) (Providing Payment Services) (the “Supervision Law Amendment”), which deals with licensing and registration aspects. This proposed legislation, if and when adopted, will expand the current definitions of payment providers and payment methods which will subject additional entities and services to the new legislation, while they are not currently regulated by payment solution and payment legislation.
Can payment services be provided by non-banks, and if so on what conditions?
Yes. The Supervision Law regulates certain activities in this sector that are performed by non-banking entities. Future legislation (the Draft Payment Services Law and the Supervision Law Amendment) will expand the regulation in this sector, and thus not banking payment service providers will need to receive licenses and will be required to abide by other regulations that will be promulgated following the adoption of the legislation.
What are the most popular payment methods and payment instruments in your jurisdiction?
Debit cards, bank transfers, checks and cash (note recently legislation was enacted that will limit the amount of cash that can be used in transactions). In Israel the most common debit card used is a deferred debit card, with the merchant bearing the cost of delay in payment. In addition, there has been a recent increase in the use of payment applications (P2P) operated, inter alia, by banks and non-bank entities, which will reportedly expand into the merchant payments sector.
What is the status of open banking in your jurisdiction (i.e. access to banks’ transaction data and push-payment functionality by third party service providers)? Is it mandated by law, if so to which entities, and what is state of implementation in practice?
As part of the implementation of the Increasing Competition and Reducing Concentration in the Banking Sector in Israel Law (Legislative Amendments), 5777-2017 (the “Shtrom Law”), an open API interface will be launched by the BOI, allowing access to the customer’s checking account. This is currently in the process of being implemented via the Supervisor of Banks at the BOI. Similarly, under the Shtrom Law, a mechanism will be introduced for comparing costs among banks for various services, which will allow service provider license-holders to receive information regarding the tariffs and prices offered by the various banks to their clients. In addition, the Minister of Finance and the Governor of the BOI have publicly stated their intention to introduce a centralized computer system to service new banks. To the best of our knowledge, the aforesaid systems are still in their preliminary development stages.
Additionally, under the provisions of the Credit Information Law, 5776-2016, the BOI is working to create a central database that will include credit data (both “negative” and “positive” credit scores of private customers) for the use of the various market entities. The BOI is currently working to establish the technological infrastructure for this database, concurrently with receiving data from the various entities that are already required to transfer data for use in the database.
How does the regulation of data in your jurisdiction impact on the provision of financial services to consumers and businesses?
Privacy laws apply to the provision of financial services. The applicable legislation protects private individuals and requires obtaining the informed consent of the applicable subject before it can be collected, saved or used. A person’s financial situation constitutes “sensitive information” under Israeli legislation, which is subject to a higher degree of protection, but neither the legislator nor the state agency charged with its interpretation and implementation have provided any specific instructions or directives with respect to the provision of financial services.
Moreover, the banking sector is subject to additional requirements (including with respect to information security and banking confidentiality) on account of banking legislation and applicable regulation. Similarly, legislation also imposes various obligations on credit providers when checking the central credit database managed by the BOI, such as obtaining the explicit consent of the data’s subject.
What are regulators in your jurisdiction doing to encourage innovation in the financial sector? Are there any initiatives such as sandboxes, or special regulatory conditions for fintechs?
- Legislation was enacted establishing a regulator to regulate non-banking financial service providers. In addition, the law sets forth that one of the considerations of this regulator is to be the “promotion of technological and commercial innovation in the field of financial services.”
- The Shtrom Law included provisions relating to the creation of an Open API mechanism, price comparing mechanism and more.
- In accordance with the government decision of January 2018 regarding the creation of a testing environment for financial technology companies, an inter-ministerial team was created to examine the creation of a regulatory environment that would facilitate and be adapted to companies using new technology to provide financial services and products in a variety of fields such as credit, payment, clearing and payment solutions, financial management, banking services and more. Accordingly, the Ministry of Finance is currently examining the possibility of creating a ‘regulatory sandbox’ for the fintech industry in Israel.
- See below in answer to question 14 with respect to the Interim Report in connection with the regulation of the issuance of coins and tokens.
- The Anti-Money Laundering Authority has recently been working to enact the Anti-Money Laundering and Terror Financing Order, which will apply, among others, to entities engaged in providing services relating to cryptocurrencies and advanced payment solutions, as part of the new regulation of this field under the Supervision Law.
Do you foresee any imminent risks to the growth of the fintech market in your jurisdiction?
We do not foresee any imminent risks to the growth of the fintech market in Israel.
What tax incentives exist in your jurisdiction to encourage fintech investment?
Although there are no specific tax incentives to encourage investment in fintech specifically, Israel does have certain tax incentives to encourage investment by non-residents. These include:
- An exemption from capital gains tax for foreign residents on the sale of securities of an Israeli company, subject to complying with certain pre-requisites (including the company’s assets not being mainly real estate). This exemption will only apply if the non-resident individual or corporation not operate through a permanent establishment in Israel.
- Certain venture capital funds will be exempt from tax on all capital gains and dividends from Israeli domestic corporations, even if they have a permanent establishment in Israel (such as a representative office or a local entity for making the investments). This exemption will only apply if the fund receives a pre-ruling in advance from the Israel Tax Authority and meets certain conditions including having at least ten investors and investing a minimum of USD ten million in Israeli related investments.
- Dividends from Israeli corporations are subject to withholding tax of 25% to a non-resident investor or 20% if the target entity qualifies for certain tax benefits under the Law of Encouragement of Capital Investments, 1959. This rate may be reduced if the beneficial owner of the investment is a resident of a country which has a tax treaty with Israel.
- Interest from loans provided or bonds acquired in Israeli resident companies will be subject generally to a 25% withholding rate. This rate may be reduced if the beneficial owner of the investment is a resident of a country which has a tax treaty with Israel.
Which areas of fintech are attracting investment in your jurisdiction, and at what level (Series A, Series B etc)?
The main areas of fintech attracting investments in Israel are payments (this sector accounted for approximately 30% of fintech funding in 2018), trading and investing, anti-fraud, personal finance, lending and financing, insurtech, trading, investments and blockchain. The majority of companies that raised funds were either bootstrapped or seed companies.
If a fintech entrepreneur was looking for a jurisdiction in which to begin operations, why would it choose yours?
Israel is well known as the “Start-Up Nation” and the fintech sector is just one of the many sectors that helps Israel maintain its status as a world leader in this space. With around 600 companies, the Israeli fintech sector is recognized globally, attracts investors from around the world and servs hundreds of global financial institutions. The success and pristine reputation of the Israeli fintech ecosystem is credited to many factors, some of which are the technology strength of many entrepreneurs acquired during their mandatory military service with the Israeli Defense Force and studying in top ranked universities and research institutes, the governmental support available to Israeli start-up companies, many foreign financial institutions setting up bases and sandboxes for fintech companies in Israel as well as a strong investor base and dynamic community. Israel is also a prime testing ground for products in light of the early adoption patterns of the Israeli consumer and the centralized finance sector and thus enables fintech companies to easily test their product before scaling it abroad. Tel Aviv is also regularly ranked as one of the top cities to live and work in tech.
Access to talent is often cited as a key issue for fintechs – are there any immigration rules in your jurisdiction which would help or hinder that access, whether in force now or imminently? For instance, are quotas systems/immigration caps in place in your jurisdiction and how are they determined?
As with any country a non-citizen wishing to work in Israel requires a specific visa. However, Israeli immigration laws are unique in that any person who is Jewish can automatically become a citizen. This allows many individuals who would otherwise need to obtain work visas, the ability to easily become citizens instead. In order to obtain a work visa for a non-citizen, the employer makes an application and submits documents to various governmental authorities on behalf of the potential employee, and if successful obtains a visa for a maximum of 1 year, which can be renewed until a total period of 5 years. If it can be demonstrated that the individual has specific, valuable knowledge in his or her specific line of work, then the chances are high that the visa will be granted after overcoming the bureaucratic hurdles.
If there are gaps in access to talent, are regulators looking to fill these and if so how? How much impact does the fintech industry have on influencing immigration policy in your jurisdiction?
In light of the success of Israeli entrepreneurs, it is hard to say that there is a gap in talent in the Israeli market and therefore the Israeli regulators are not looking to fill any such gap. The hi-tech industry does have some influence on policy in light of its importance to the Israeli economy, but we do not see it currently influencing Israel’s immigration policy.
What protections can a fintech use in your jurisdiction to protect its intellectual property?
Israel is very similar to other countries in the legal regime for intellectual property protection. This includes patents, trademarks, trade secrets, copyrights and more. In addition, most companies sign non-disclosure agreements with those who will have access to their confidential information.
How are cryptocurrencies treated under the regulatory framework in your jurisdiction?
The regulatory regime in Israel in respect to cryptocurrencies is expected to change dramatically in the near future. According to the Supervision Law, “Virtual Currency” is included in the definition of a “financial asset” for which providing services requires a license of the Supervisor on Financial Services.
In addition, a few relevant legislation initiatives are currently under discussion:
- The Interdepartmental Committee to Examine the Regulation of Initial Coin Offerings (ICOs) established by the Israeli Securities Authority published an interim report on March 19, 2018 (the “Interim Report”). The ISA’s position, as reflected from the Interim Report, is that the total circumstances and features of each cryptocurrency should be specifically examined in order to determine whether it should be deemed as a security. The Interim Report also examines certain lenient regulation schemes that will be adjusted to the unique features of cryptocurrencies that were deemed as securities. See also answer to question 6 above for actions of the Anti-Money Laundering Authority.
- The Draft Payment Services Law may also apply to payment services that deal with virtual currencies.
How are initial coin offerings treated in your jurisdiction? Do you foresee any change in this over the next 12-24 months?
As of today, ICOs are yet to be regulated pursuant to the local regulations. As detailed in the previous section, the Interim Report proposes the required regulations for ICOs and it is reasonable to assume that within the next 12-24 months the final report of the committee will be published and the respective legislation proceedings will be finalized.
Are you aware of any live blockchain projects (beyond proof of concept) in your jurisdiction and if so in what areas?
As expected from the “Start-Up Nation”, also in the Blockchain Industry Israel is one of leading hubs with hundreds of different blockchain companies operating in its eco-system. The main live blockchain projects in Israel are in the areas of Decentralized Medium of Exchange (MoE) Platforms, Decentralized Exchange/Liquidity Providers and Privacy focused Smart-Contract Networks.
To what extent are you aware of artificial intelligence already being used in the financial sector in your jurisdiction, and do you think regulation will impede or encourage its further use?
Today, the use of artificial intelligence is prominent in the fintech sector, with over 15% of Israeli fintech companies using artificial intelligence, which percentage we expect to grow. As can be seen in other answers, the legislation environment in Israel is encouraging for the fintech sector and new technology and we therefore we do not believe regulation will be impeding the use of artificial intelligence but rather encourage its use within the permitted framework.
Insurtech is generally thought to be developing but some way behind other areas of fintech such as payments. Is there much insurtech business in your jurisdiction and if so what form does it generally take?
There are over 100 insurtech start-ups currently operating in Israel (which is more than double the number of insurtech companies since 2015) and the technology of a growing number of other Israeli start-ups can also be used in the insurance sector. Lemonade and Next Insurance are two leading Israeli companies in this field. In addition, two insurance companies that allow customers to receive all services digitally, recently received licenses from the local regulator. Finally, a US-UK US$100 million venture fund recently announced that it intends to invest in the Israeli insurtech sector and is expected to invest tens of millions in Israeli insurtech companies.The insurtech companies are focusing on technologies that assist insurance companies in providing more efficient, accessible and personalized services to customers as well as in their risk assessments when issuing insurance policies.
Are there any areas of fintech that are particularly strong in your jurisdiction?
The payments area is particularly currently strong in Israel and accounted for approximately 30% of fintech funding and over 20% of fintech companies. Payoneer, Zooz and Tipalti are two widely recognized companies that are examples of how the payment area is strong in Israel.
Trading and investing is also a strong area in Israel, with over 20% of fintech companies and as the Fintech’s subsector with the highest number of companies and raised significant funds in 2018, with the US$100 million eToro deal being the highlight.
What is the status of collaboration vs disruption in your jurisdiction as between fintechs and incumbent financial institutions?
On the one hand, the large banks in Israel have development, digital and high-tech divisions that both invest in existing high-tech and fintech companies (and even acquire them) and develop their own independent products and services in this field. As a consequence of the efforts of the Supervisor of Banks at the BOI to digitize the process of onboarding and providing banking services through digital means, various banking entities (as well as debit card companies) have, in recent years, been working to develop digital services. On the declarative level, Israeli banks have declared their interest in joint ventures with both Israeli and foreign fintech companies, and that they regularly consider such engagements. See also answer to question 21.
On the other hand, according to several reports, the large banks have made it difficult for several fintech companies (such as companies engaged in P2P loans or cryptocurrencies) to obtain banking services, such as opening accounts. In the course of adopting the Supervision Law Amendment and adding the chapter regulating the operations of P2P lenders, the Supervisor of Banks and the Supervisor of Financial Services were required to sign an MOU setting out terms that would allow for bank accounts to be opened for these entities.
To what extent are the banks and other incumbent financial institutions in your jurisdiction carrying out their own fintech development / innovation programmes?
See answer to question 20 – the large banks in Israel have development, digital and high-tech divisions that both invest in existing high-tech and fintech company and develop their own independent products and services in this field. In addition, some international financial institutions (such as Barclays and Citi) have opened accelerators in Israel in order to reach local start-up companies.
Are there any strong examples of disruption through fintech in your jurisdiction?
The Israeli insurtech company, Lemonade, is an excellent example of disruption in fintech. Lemonade, which has raised approximately US$180 million, uses AI and bots instead of brokers to provide property and casualty insurance and promises zero paperwork and an unbiased algorithm that decides which incidents are approved and are therefore paid immediately. This has changed the entire dynamic of the old fashioned insurance industry.
Another example is Behalf, an Israeli lending and payments company that raised approximately US$306 million, which provides an innovative platform targeting small and mid-sized businesses that offers short-term financing and can also be used for business purchases in place of nearly any other payment method, within a customizable payment schedule. Loan applicants undergo a one-time, hard personal credit inquiry to determine their eligibility, while the payment solution for merchants provides their business customers with more buying power and flexible payment option. Behalf created a linking factor between merchants and their business customers which allow the merchant to conduct their business without being subjected to fluidity (theirs or their customers) or to the interest of the banks, which increases sales and improves cash flow for both merchants and their business customers.