Back in June 2022, Israel began the process of open banking reform in an attempt to bring its outdated regulatory framework into line with the needs of the nation’s booming fintech sector. The road map for the reforms is set to conclude by November 2023 and although this could represent a real boon for both the financial and technological sectors, the benefits are at real risk of being overshadowed by the growing political drama’s currently unfolding in the nation.
Let’s take a closer look.
What Is Open Banking?
Open banking (or open bank data) is a banking and financial services practice that allows third party financial service providers open access to consumer and transaction data from financial services institutions. Put simply, open banking allows chosen service providers (such as banking apps) access to our bank account and credit data through the use of Application Programming Interfaces (API’s).
The goal of open banking is to enhance and improve the financial services customer experience through use of data sharing and technology. For example, open banking could make the process of switching bank accounts easier (by allowing Bank A ‘to talk directly’ to Bank B) or could even facilitate tailor made, AI powered mortgage advice that is both better and cheaper than the advice available via brokers.
Of course, open banking could also potentially assist banks in combating fraud, and assist governmental agencies in addressing tax evasion.
What This Means For Israel
While major financial service markets like the US, the EU and the UK long since embraced open banking, Israel did not. Commentators long criticised that this was anomalous to Israel’s stature as a nation of innovation, and was holding back the middle eastern nations’ otherwise buoyant and booming fintech sector by essentially tying its hands.
However the transition towards open banking began last June and in February 2023, the Bank of Israel issued a framework granting international payment providers access to the country’s regulated payment systems.
In terms of what this latest actually means for the Israeli populace, payment service providers from recognised nations will now be allowed access to Israeli payments and access into the Israeli marketplace.
The wider impact of open banking will allow Israeli fintech providers to offer better, more efficient products to Israeli’s as well as allowing the government greater powers in detecting tax dodgers. It will also pave the way in allowing Israelis highly innovative fin-tech providers access to some huge global markets.
The Fly in the Ointment
As we said in the intro though these changes and the exciting opportunities they bring are at risk of being overshadowed by the proposed judicial reforms that the Benjamin Nethanyahu led coalition government is currently trying to force through the Knesset.
The proposed reforms would remove the Supreme Court’s power to overturn laws, give the government greater power in appointing judges and allow ministers the right to ignore advisors. Critics of the reforms allege that the Israeli premier is attempting to use them to influence the outcome of his own corruption trial, and is risking throwing the country towards authoritarianism. Since the beginning of the year, protests against the reforms have intensified and crucially, a number of army reservists have spoken out against them and refused military service.
Looping back to Israel’s entrance into open banking, a lurch away from democracy is only likely to undermine any benefits. The fact is that an open market can only work in a democratic nation where trust in regulation is high. Furthermore, even a precursory glance at the global economy makes it plain that authoritarian regimes have a tendency to stifle innovation rather than encourage it.
Indeed, Alon Rajic from moneytransfercomparison.com, a Fintech expert residing in Israel says this: “Israel is on the verge of turning from a tech powerhouse into a very dark place. While the open banking initiative is highly welcomed and can make our lives better, none of this would matter if the so-called “reform” bill passes and Israel loses the independence of its courts. This will prevent global companies from setting up shop here and moreover will probably drive the high-tech industry, Fintech included, outside of Israel.“
Final Thoughts
Right now Israel’s future as a democracy, and maybe even as a functional nation, is hanging in the balance and the entire world is watching to see what happens next. While a lot is uncertain, what does seem clear is that should the nation descend into either authorizations or civil war, the subsequent disruption and brain drain will severely impact Israel’s financial and tech sectors.
