In June 2023, a reform was finalized to establish a dedicated regulatory framework for payment companies in Israel. The aim is to align with global standards in this sector. As part of this framework, the “Payment Services and Payment Initiation Act of 2023” designates the Israeli Securities Authority (ISA) as the primary regulator of payment companies’ activities.

This reform is expected to revolutionize the payment services market, enabling a regulatory regime tailored to foster a competitive, sophisticated, and advanced payment market rooted in technology to allow for diversification in payment methods and solutions tailored to customer needs.

The law provides the legal foundation for establishing a supervisory system led by the ISA. Its purpose is to allow the ISA broad authority in setting regulations that will govern the implementation of the reform.

This article discusses the timelines for the reform and its implications for companies operating in the payment sector.

According to the law, companies who are required to obtain a license as a “Payment Company” are those providing one of the “Payment Services” detailed below, not currently overseen by the Bank of Israel (with the exception of new acquirers), and not exempted in the law as an infrastructural payment provider. The provision of the following services in Israel requires the receipt of a Payment Service Provider license from the ISA:

• Management of payment account
• Issuance of payment methods
• Acquiring payment transactions
• Advanced payment initiation

The definition of services that require licensing is broad. Many companies that do not consider payment activities to be their core business might fall under this definition and thus be required to obtain licenses and be subject to supervision in this area. The law endows specific powers to the Finance Minister to determine regulations that provide exemptions from licensing for entities that operate in this sector on a limited scale. This includes companies that offer payment services for restricted amounts, for a small number of clients, or with a limited number of transactions.

It is estimated that regulations regarding activity-based exemptions will be published in the coming months. In any case, even those entities exempt under the stipulations above will need to notify the ISA of their activities periodically.

The law applies only to traditional (FIAT) currency payment activities and does not apply to virtual or cryptocurrency operations.

Currently, many entities involved in the payment sector are supervised by the Capital Market, Insurance, and Savings Authority (CMISA) and hold financial service provider licenses. These entities, involved in payment activities, are expected to transition to the supervision of the ISA.

Given the distribution of supervisory responsibilities among the regulators and considering that many entities also provide additional financial services (like offering credit or currency conversion in addition to payment services), it has been determined that a payment company license also covers ATM services, currency conversion associated with a payment service, or credit provision as part a payment service, provided the credit is limited to 12 months from the time it’s offered and is an auxiliary service for executing the payment.

Many companies defined as payment companies in the Payment Services and Payment Initiation Act of 2023, and hence required to be licensed by the ISA, also provide credit and currency conversion services that aren’t directly connected to payment transactions. Without specific regulations on this topic, these companies will be supervised by two financial regulators simultaneously: CMISA and ISA. Each of these has its own respective supervision area: ISA payment services and CMISA lending and financial services.

The law specifies various guidelines and timelines for different types of companies that engage in activities requiring licensing, as outlined below:

• Companies providing payment services whose activity did not require licensing before the reform – companies actively providing payment services before the enactment of the reform do not hold a financial service or credit service license from CMISA and will be regulated for the first time. Such companies must submit an initial examination request to the ISA. Once approved to continue their operations, they can do so until the entire licensing process with the ISA is completed.
• Companies currently licensed by CMISA – Companies that provide payment services and hold licenses for credit or financial asset services from CMISA.
• Acquirers licensed by the Bank of Israel – Companies holding an acquiring license from the Bank of Israel’s Banking Supervision, which have less than 20% of the acquiring market share.
• Foreign companies with Payment Service Licenses from Another Country – Companies that hold payment licenses under a foreign law that governs such services. Until June 2024, companies regulated as providers of payment services in the EU, UK, and US enjoy full exemption from licensing in Israel. They can operate in Israel without local supervision. ISA has the power to grant numerous licensing exemptions to these companies if it is convinced that the oversight of the company abroad is sufficient.

License applications must be submitted by the following deadlines based on the types of entities that provide payment services:

In order to maintain continuous oversight, active companies currently supervised by CMISA or the Bank of Israel will continue to be overseen by these regulators until the licensing process is completed. 

The last date for new payment companies to submit licensing applications to the current regulator and start ISA submissions will be published soon.

The ISA has not yet published a specific licensing procedure. Still, in accordance with the law’s guidelines, it will assess whether an applicant has the appropriate technological means and expertise to provide the service. In addition to ensuring the reliability of the systems through which the services will be delivered, a comprehensive examination of information security infrastructure, cyber security, risk management, and business continuity will be conducted. The licensing process will also examine the financial means, equity capital, insurance coverage, and qualifications of the controlling shareholders and officeholders of the license applicant, among other requirements.

A minimum level of capital requirements, as well as other prudential regulation requirements, will be set by the ISA in its guidelines.