The momentum of direct and immediate payment transfers between accounts (Account to Account or A2A) is growing globally, but an infrastructure for instant payments without using credit cards hasn’t been established yet in Israel. However, financial regulators are now actively working to bridge this gap. So, what does the future hold for the payment market in Israel?
For years, the international landscape has witnessed the increasing dominance of direct A2A payments. These are diverse solutions known as Fast Payments, designed to enable payers to make transactions instantly, 24/7. Naturally, these payment methods compete with traditional credit card transactions. Even global payment giants like Visa and Mastercard have been working for a considerable time on their A2A payment solutions. In Israel, this market is still in its infancy. It’s crucial to emphasize that the legislation in Israel that is currently taking shape, as well as the surrounding regulations, are still in their early stages. Nonetheless, it’s already time to delve deeper and try to understand what direction the Israeli payment market is heading towards.
The change: payment initiation service is coming to Israel
As part of the open banking reform, financial regulators are advancing a comprehensive reform that will allow for the initiation of payments through two mechanisms: “Basic Payment Initiation Service” and “Advanced Payment Initiation Service.”
- Basic Payment Initiation Service – Within this framework, the service provider writes the payment order details and the payer identifies and confirms the order details directly with their payment account manager. In this basic service, the payer must approve the payment order (or the charge authorization request or its cancellation) directly with their payment account manager after identifying themself. This ensures a mechanism to verify the payer’s identity and their consent to execute the requested order by their payment account manager.
- Advanced Payment Initiation Service – This service enables a customer to initiate a payment transfer from their payment account to another individual or business’s payment account efficiently, simply, and conveniently. Under the advanced service, the payer allows the service provider access to their account so that all payment orders that the service provider writes on their behalf will be executed. Identification and consent to the order details or requests are made directly to the service provider.
Essentially, this sets up a mechanism that allows a third party, not the account owner, to operate the customer’s account, similar to granting power of attorney or appointing a guardian for the account. In the advanced initiation service, the payer grants the service provider access to their payment account via an access authorization.
Unlike the basic initiator, the advanced initiator bears more responsibility, as it provides a payment method (with a charge authorization similar to a credit card) that commits to transferring the payment order details to the payer’s payment account manager without the need for direct renewed approval from the payer.
It is essential to emphasize that payment initiation service providers don’t necessarily “conduct payment settlement” They are responsible for executing the payment order according to the access authorization granted by the customer, ensuring the money is transferred directly from the customer’s account to the destination account. In practice, there might be service providers that ” conduct payment settlement”, like payment facilitators or payment service providers, who will consolidate payment orders from various sources into the aggregator account, from which it will then be distributed.
The legal structure :
The two aforementioned services are regulated under the “Payment Services and Payment Initiation Regulation Act of 2023.” This legislation establishes the legal and regulatory foundation for the development of payment initiation mechanisms. The law creates a legal infrastructure and sets the standards for interparticipant authentication within the payment market, thereby enabling various financial entities to offer a range of services based on the established infrastructure. This authentication is indispensable for facilitating payments between several market players.
Furthermore, one of the primary goals of the legislation is to enable advanced initiation services in a manner that enhances the customer experience, streamlines the payment instruction transfer process, and promotes competition in the Israeli payment methods market.
Such services are expected to make money transfers simpler, more convenient, and more affordable. The objective of the law is not just to simplify the process of writing payment instructions for customers, but also to offer a genuine alternative to the prevailing payment methods commonly used in the market, such as debit cards and checks. By doing so, the law aims to diversify payment methods and foster competition among individuals and businesses in this sector in Israel.
Next Steps
We are in the early stages of the reform, and it’s still challenging to predict what the market will look like in the future. However, we can anticipate that basic payment initiation services will be suitable for entities providing services to businesses (as vendors), such as payment gateways, payment facilitators, or payment service providers, and will serve as a payment method during the execution of transactions. Advanced initiation services will be used by businesses like those providing payment methods or electronic wallets.
- Infrastructure for Implementing Payment Initiation Services:
At this preliminary stage, it’s vital to ensure that the secure technological mechanism through which different payment account managers’ access payment initiators is implemented uniformly. This will prevent a situation where each payment account manager creates a unique technological interface for transferring payment instructions, making it difficult for payment initiators to draft or transfer payment instructions to various payment account managers.
To standardize communication between the different players in payment initiation activities, the Bank of Israel is setting up, through an open banking system, an interface for providing payment orders. Through this, a payment initiator can write the necessary details in the payer’s payment account. This system will facilitate communication between payment account managers and payment initiators. Payment account managers will be required to provide the technological infrastructure for the connection of payment initiators. It should be noted that although payment account managers will be required to provide payment initiators with connection capability based on “open banking” infrastructure, payment providers can establish other arrangements for their operations with payment initiators.
- Legal Infrastructure for Implementing Payment Initiation Services:
This is expected to be implemented gradually. For basic initiation, anyone holding a license from the Capital Market, Insurance, and Savings Authority can already apply for a license. Those who don’t, can turn to the Securities Authority to obtain approval to operate under an Information Services Provider License. The Securities Authority’s licensing of companies providing advanced payment initiation services is expected to begin in June 2024. The obligation to provide access to the payer’s payment account, which will require financial institutions managing customer accounts to provide infrastructure for initiating payment activities from their accounts and will unlock the full potential of the reform, will come into effect gradually over 12 to 36 months. It’s hard to believe there will be a significant market change before this obligation takes effect, especially considering the long adaptation periods of large financial bodies in Europe.
- What You Need to Know About the Upcoming Changes in Payment Initiation
At this stage, the most well positioned entities to provide payment initiation services are fintech companies and financial services companies engaged in payment activities, providing payment solutions for individuals and businesses, such as payment aggregators, money transfer companies, and electronic wallets. These entities can already prepare to meet the requirements for obtaining the appropriate license from the Capital Market, Insurance, and Savings Authority using the “Guidelines for Financial Information Service Providers and Payment Initiation Service Providers,” which are relevant for entities that “provide financial settlement.”
Entities that do not “conduct financial settlement ” can apply for an Information Services license from the Securities Authority. This license also allows for the activity of payment initiation, as mentioned, without ” conduct financial settlement” Natural candidates to provide this service are entities that already offer financial services to many businesses today, such as POS (Point of Sale) services and payment gateways.
Additional steps that can be taken include strengthening evaluations in the field of information security, cyber, and business continuity, in accordance with the standards published within the open banking licensing framework by the Securities Authority. Moreover, technological assessments for the implementation of payment initiation protocols in open banking according to the standard of the Berlin Group, have been published by, among others, by the Bank of Israel.
It’s important to emphasize that the Bank of Israel is promoting another reform that will enable the execution of Fast Payments on the infrastructure of the MASAV system. It can be assumed that the quality of the technological and legal infrastructures, as well as operating costs, will determine which infrastructure will be widely adopted by the various players and which services it will support.
