The local payments market in Israel has evolved differently from the international market due to Israelis’ expectations for payment solutions that also incorporate financing options. Now, as regulators are promoting a set of reforms to adopt the next generation of payment methods in Israel, it is essential to consider the unique needs of the local market.
Israelis have always been innovative, and there is no better place to witness this than in the payments industry. Over the years, unique payment methods tailored to the local market have emerged, gradually shaping a structure for the Israeli payment system that differs from global standards in many ways. Furthermore, a non-banking credit market has evolved in Israel, influenced by specific regulatory guidelines in the sector, macroeconomic processes (such as growing inflation rates and interest rate hikes by the Bank of Israel), and constant changes in the business environment.
Israel’s payment and lending markets are closely linked. Specific payment methods often become popular due to their practical applications, such as financing and credit products. Historically, some payment methods have dominated others due to their convenience and contribution to the financing industry.
After years of anticipation and stagnation, various Israeli regulators are advancing significant reforms in the payments sector. These reforms are expected to create challenges and lead to new equilibrium points between the payments and lending sectors. As consumers and businesses are likely to adopt payment methods based on their financing and lending functionality, decision-makers must consider the habits and unique needs of the local market.
Thus, it seems that all new payment products introduced to Israel should be evaluated and adjusted for their utility in the financing industry in order for them to compete with existing payment methods.
The Israeli Payment Model – Free Credit
The Israeli payment market has evolved differently from its counterparts in Europe, the US, and the Far East. Consequently, many technologies widely adopted worldwide either did not find their way to Israel or arrived considerably late. In many respects, the Israeli market lags behind technologically compared to its global peers, resulting in more limited diversity.
However, Israel has developed unique payment and financing solutions that cater well to consumers in terms of credit. In practice, these solutions seem to be the preferred choice for the Israeli customer. It’s challenging to pinpoint the exact reasons for the creation of these payment models. Still, it is evident that they are closely related to the market’s limited number of players, its concentration, and the local regulatory structure.
Here are some examples of payment services in Israel, fundamentally built on embedded credit mechanisms, which often provide the customer with a balanced and superior value proposition compared to international alternatives:
Deferred Debit Card with a Free Monthly Settlement – The most common credit card in Israel is the Deferred Debit card, which accounts for over 90% of all active credit cards in the country. Cardholders’ bank accounts are charged for all their monthly transactions on a chosen date at the end of the month without incurring any charges for deferring the payment from the transaction date to the fixed monthly settlement date (essentially providing credit). Historically, the cost of providing this funding was borne by the merchants, who received the monthly settlement payment at the end of the month. However, in recent years, following interventions by the Bank of Israel, merchants requesting immediate (daily) settlement are credited accordingly, with the card issuer bearing the credit cost.
Installment Transactions via Credit Cards – Offering up to 36 interest-free installments is a perk almost exclusive to Israel. In this model, the merchant provides the credit line and receives the installment payments monthly until the full amount is paid. These installment transactions also have inherent advantages over recurring payment transactions, providing certainty to cardholders and merchants regarding the payment’s completion, reducing the risk of transaction disputes, and allowing tracking of the cardholder. Given the popularity of installment transactions, services like “Buy Now, Pay Later” (BNPL) capture a relatively low market share compared to the global market. Their added value in Israel mainly lies in large transactions exceeding credit card limits.
Advancement and Discounting of Credit Card Transactions – The Israeli legal requirements and the structure of the global payment system with global giants like Visa and Mastercard ensure the sustainability of the payment ecosystem. In Israel, installment-based credit card transaction is final and will be covered by the card issuer if the transaction is not fraudulent and the cardholder receives the promised merchandise or services. Hence, the payment system and regulatory environment allow payment advancement and discounting products backed up by future payments that serve as collateral. In Israel, Acquirers (via subsidiaries) and many Payment Service Providers offer merchant payment advancement and discounting services. Since these collaterals are backed by issuers, even if the merchant defaults, the payments will go through once the cardholders have received the merchandise or service. The settlement process takes place via the payment system without additional legal processes. Due to the high quality of collateral, payment advancing and discounting products are relatively inexpensive. Due to their relatively low interest rates, many companies choose advancing and discounting services over loans or other lending products.
Using Postdated Checks as Credit Line – When customers pay for a product or service with a postdated check, they are essentially receiving interest-free credit without using a credit line. This enables the customer to increase their purchasing budget, making higher business purchases. In practice, many businesses pay their suppliers with checks bearing a “rolling plus” payment date. Companies that allow their customers to pay with postdated checks often choose to discount these checks to receive immediate payment. In these transactions, the check becomes collateral.
In Israel, despite the decline in the use of checks among private customers, they are still widespread in businesses. According to Bank of Israel data, their use is more than twice as high as credit cards and three times more than cash. Post-dated checks are immensely popular among Israeli companies for obtaining additional credit. In addition, post-dated checks discounting is a popular credit service when a future check is used as collateral. A bounced check payment is enforced in Israel by the Law Enforcement and Collection System Authority. In contrast to enforcing a default on a loan or factoring payment through the legal system, which can take years, this is a much cheaper and faster collection method.
Regulatory Reforms RE-Shaping the Market
In recent years, the Bank of Israel and various financial regulators have promoted numerous reforms in the Israeli payment market. These reforms aim to advance modern technologies and align with the rapid global innovation trends. Below are the primary reforms introduced:
Instant Account-to-Account Payments – Based on the MASAV system for immediate reconciliations between bank accounts. Through this infrastructure, various payment options become available, such as the Proxy service, which allows customers to receive and send instant payments. Another such service is R2P (Request to Pay), in which, once the payer approves a payment request, an immediate charge is made from the payer’s account and instantly credited to the requestor’s account.
Digital Checks – A new digital payment alternative to the traditional paper-based check. This digital substitute for paper checks is aimed at addressing the existing needs of the Israeli payment market by providing a payment method capable of facilitating future debits. Reforms aim to preserve the positive aspects of existing checks and address issues such as bounced checks due to technical problems like a mismatched signature, an error in the date, etc. The new functionality will allow a more convenient alternative than dealing with paper and requiring the physical presentation of a check, reducing the number of days until settlement; documenting transfers, endorsements, and deposits; providing warnings before payment to allow for proper financial preparation; and more.
Account-to-Account Payment Initiation – A money transfer service from one account to another using open banking infrastructure. The transfer takes place directly between the accounts of the payer and the beneficiary without passing through the financial institution managing the transaction for the payer. Payment initiation is categorized into basic and advanced payment initiations.
In the basic payment initiation, a payer must approve the payment order or the ongoing debit authorization request directly with their payment account manager. After identification, the payer effectively approves the execution of specific subsequent payments.
With advanced payment initiation, a payer gives the service provider access to their account. Consequently, any payment instructions that the service provider records on their behalf will be executed by the financial body managing the payment account without the payer having to regularly approve them directly with their payment account manager.
The Digital Shekel as a Central Bank Digital Currency (CBDC) – Similar to other leading central banks, in recent years, the Bank of Israel set up a team to examine the issue of digital currencies issued by a central bank, Central Bank Digital Currency (CBDC). This digital means of payment constitutes a central bank liability toward the currency holder. Similar to other central banks, it has been decided that a plan of action will be prepared and ready to act on in the future if or when conditions warrant it. A future decision to issue a digital shekel will be based partly on an assessment that the benefit of issuing it exceeds the potential costs and risks involved in such an issuance.
Moving Towards a Local-International Solution
Contrary to prevalent practices in Israel, most internationally accepted payment methods do not have built-in features that allow them to be used as lending products. An analysis of emerging reforms indicates that, apart from the digital check, new payment products are leaning more towards the international model, emphasizing the speed of money transfers and not including inherent functions that enable financing activities. These financing capabilities are critically important to consumers and businesses in Israel. This raises concerns about the Israeli market failing to adopt these new products given the comparative lack of embedded financing options present in existing Israeli payment products.
When we examine the historical evolution of Israel’s payment market, it appears that what influenced the massive adoption of one payment method over another was the financing option it enabled. In adapting international products to the local market, it’s essential to address the unique characteristics of the Israeli market. These adaptations must be able to find their way into the new payment methods. Doing so will be critical to their penetration in the market and their adoption by Israeli consumers.
