July 18, 2022 | Micky Tesfaye
Money20/20 is the place where fintech communities love to do business. Earlier this month, we had the privilege of visiting one of the emerging hubs of fintech innovation – Israel. We attended the Future of Payments conference held in Jerusalem, organized by the Bank of Israel (BOI). The conference was filled with fantastic fintech content covering everything from open banking to central bank digital currency (CBDC). Here’s what we saw and heard.
Often, when it comes to financial services the narrative around regulation and the industry tends to be adversarial: Industry participants driving innovation against the backdrop of regulators more concerned with stability and security. One of the most interesting takeaways from the conference flipped this narrative on its head. Oded Salomy, Director of Payments Systems and Settlement at BOI, spoke precisely about the work BOI is doing to foster and drive innovation in Israel’s financial system.
When we spoke to Mr. Salomy, he explained the challenges facing the country’s financial system. Despite being home to a flourishing startup ecosystem, typically Israel fintechs avoid entering their domestic markets in favor of Europe or the US, with regulatory challenges often cited as the main driving force behind this. To stem this tide, Mr Salmoy explained numerous policy initiatives undertaken by BOI. These include driving contactless payments adoption, implementation of account-to-account payments, and efforts to streamline regulatory red tape styming innovation.
While it’ll take time to see the impacts of these results, we’ve seen the success of these hands-on and forward looking initiatives when it comes to driving innovation in financial markets. The UK’s Financial Conduct Authority and the Monetary Authority of Singapore have often been held up as examples of regulatory authorities that have been particularly successful in fostering innovation in their markets owing to their startup friendly approach.
In recent years, cryptocurrencies and more broadly blockchain technology have had a meteoric rise. From the niche interest of ardent technophiles and government fearing anarchists, they’ve now catapulted into the mainstream. The growing interest in issuing digital currencies among central banks and authorities around the world is perhaps the best example of this popularity. To date, more than 100 countries are now exploring CBDCs, with 50 of these countries in an advanced phase of exploration.
BOI is among the countries that’s at the forefront of this effort to explore the feasibility of CBDCs and during the conference we were given insights into the pace of development. Having first considered the feasibility of a CBDC back in 2017, the BOI had made substantive strides in recent years.
One of the most important developments in this regard, and one we heard in detail, was Project Sela. The project, which brings together BOI as well as the Hong Kong Monetary Authority (HKMA) and the Bank of International Settlements’ (BIS) Innovation Lab, is aimed at testing the feasibility of CBDCs for retail use.
The project is an attempt to test the feasibility of a two-tier retail CBDC. Via this model CBDCs would be transferred to intermediaries like commercial banks, with those intermediaries then distributing the CBDCs to end-users, i.e. consumers and businesses. And the project aims to study how this process can take place minus the risk exposure that intermediaries face in this chain, such as on-boarding customers for KYC and holding CBDC prior to end transfers. The project is anticipated to kick off in the third quarter of this year with findings to be published by the end of the year.
“Israel is a small country with enormous potential.” Those are the words of Anat Guetta, the chair of the Israel Securities Authority. And for Ms. Guetta, a key driver in realizing the country’s enormous potential is open banking.
For Ms Guetta open banking can help Israel become “a [more] competitive, advanced, and digital payments market that will allow the public in Israel to enjoy the fruits of Fintech and improve its financial health.” Part of the approach for making this a reality is to take lessons from jurisdictions like the UK and the European Union, which have long become leaders in open banking.
As Israel takes “the path paved by countries with experiences” in open banking, however, it’s vital that it also narrows in on the issues that have seen this effort stymied. Despite its early success the UK, for example, has increasingly struggled to move the needle when it comes to innovation and competition, with only a limited set of open banking use cases emerging.
The long term consequences of these financial reforms driven by BOI are up in the air. But one thing is certain: These reforms have the potential to shake up Israel’s banking and payments scene. In the process, they could foster greater innovation in the startup nation.