It is not certain that Bit's success will benefit customers

The financial system as a concoction after the Bit application, owned by Bank Hapoalim, announced earlier this month that this November it will launch "a new service within the framework of which the funds will be transferred directly to the bank account, when users will be able to accumulate the remaining funds in the application and use it."

The meaning of the bank's announcement is that Shavit is upgrading itself from an application for money transfers between individuals to one that is conducted, in practice, similar to a bank checking account.

The application's announcement comes in the shadow of the entry into force of the "Regulating the Practice of Payment Services and Payment Initiation" law, which allows registered and supervised financial entities to compete with banks in managing the Israeli public's current accounts and deposits.

The law was enacted after the growing public criticism of the low interest rate passed on to the public on their bank deposits.

Moshe Kashi, director of the finance department at Lobby 99, told Walla Money that "the trend of rising interest rates has turned the spotlight on the interest that bank customers receive on their checking balances and deposits, compared to that charged by the banks. The public criticism led the legislator, among other things, to the open banking reform and opening the local financial market to new players.

"This is done in two stages, when in the first stage they equip the public with knowledge while the regulator examines the licensing of the new players, and in the second stage they allow the entry of the latter such as various fintechs to compete with the banks and offer the Israeli consumer current account services and deposits."

However, Bit's latest announcement raised doubts among the supporters of the legislation regarding the possibilities of implementing the law, since the essence of it is the introduction of new digital players that will compete with the banks, while Bit, as mentioned, is owned by one of the largest of them.

In addition, the Competition Authority's July 2021 "P2P transfer applications" market study found, among other things, that "the Bit application almost took over the field of transfers to individuals", and that "in 2020, Bit concentrated the vast majority of payment operations in terms of the number of operations and the scope the Caspian", and therefore "the market is converging on the structure of a single winner - Bit".

Kashi says that "In other words, the competition authority is pointing the finger at Bit as a single dominant player in the market of applications in the field, similar to the power of a monopoly. Since this is the case, the fear arises that other players will find it difficult to enter and benefit the Israeli financial consumer."

How hard will it be? The Authority's research indicates that even applications that are already operating in the market and are in the hands of the competing banks, were not able to compete with it: "Nearly 50% of the non-group transfers were made when the selection group of the users included only the Bit applet; this compared to a few percent of the transactions in which the selection groups included Only Paybox (Discount Bank) or only PAY (Bank Leumi)".

It is also written that "the data indicates a significant difference between Bit and the other applications. While a considerable proportion of Bit users are registered only with Bit, this proportion is significantly lower compared to Paybox and PAY".

The Competition Authority data in the study show that 50 million transactions were made in the payment applications of the major banks in 2020 with a financial volume of approximately NIS 10 billion, and that in that year "Bit consolidated the vast majority of payment transactions in terms of the number of transactions and the financial scope".

The Competition Authority estimates that "this clear preference for payment in Bit, even when users are faced with additional options, can stem from a preference to concentrate the activities in one place, a habit, or a preference for the app's features."

How might this affect our money? According to Kashi, "If new players in the financial field fail to penetrate the market and compete for our funds, the situation will not change and we will continue to receive negligible interest on our billions of shekels that are parked in banks and increase their profit margin."

NIS 438 billion in his current account, and another NIS 738 billion in short-term depositsThe interest on checking funds and deposits is another question mark that arises as a result of the application message. "The law does not require the banks to pay interest on the checking funds and deposits," Kashi explains, "even though they distributed interest in the last year. The low interest rate distributed by them was, as mentioned, part of the public criticism of them, as a result of which the banks decided of their own accord to pay interest on the checking funds. But this is not a mandatory step.

"Since this is the case, the new law allows the new players to pay interest on the right balances of the savers that will be held with them in order to be a center of attraction that will attract the funds to them.

"Therefore, the question arises, if Bit, which is a payment application from Bank Hapoalim, will at all offer interest on checking balances to consumers who manage and will manage funds through it, and if so, at what rate?"

How much money is involved? Bank of Israel data show that in 2023, the Israeli public managed NIS 438 billion in their checking accounts, alongside NIS 738 billion in short-term deposits.

In this context, it should be noted that for the time being Bit will remain subject even in its new form to the supervision of the Bank of Israel and not the Securities Authority, and that according to the Bank of Israel it will be possible to manage a balance of up to NIS 20,000, alongside operations that do not exceed NIS 100,000 per year.

Attorney Michal Ohana, partner and leader of the field of financial regulation at the Shiblat and Partners law firm, clarifies: "Studies published as part of the competition in the non-bank credit industry revealed that one of the reasons for the industry's failure to rise as competition for the banks was its funding from the banking corporations, which turned the entities into a kind of sub-agents of the banking system.

"The current law, however, allows the entry of new players who have capital that allows them to be disconnected from the banks, and to offer an interest rate that will compete with the latter, i.e. higher on our checking and deposit funds.

"But the competition authority noted another advantage of Bit over the others, and it is found in the value each customer receives from the app, which is directly affected by the amount of additional customers registered for that app. This is called the network effect.

"The same 'network effect' is created by the fact that the applications that exist in the market operate as a closed system. That is, a customer can only transfer funds to another customer registered for the same application. The network effect results in the field tending towards a single winner, thus raising concerns about the lack of competition.

"It should be noted that the law provides an answer to this and that in order to reduce the network effect it requires the service providers who have a wide scope of activity to allow their customers to receive funds from a payer who is a customer of another service provider, as well as to transfer funds to a beneficiary who is a customer of another service provider.

"In this way, customers will be able to choose their preferred service according to the value proposition it offers them, without being tied to one service that holds the large customer base. In order for this to actually happen, the legislator added the eighth supplement to the law, in which the characterization of the system in which all service providers will be concentrated is determined the financial.

"The intention is that there will be a central system to which all players in the field will connect and thus be able to transfer funds between them. There will be no need to interface between each body, and a new company that will enter will not have to connect to the bodies themselves but only to the system.

"The legislator is already being tested in the upcoming law of arrangements, which should contain a reference to increasing competition in the Israeli financial market by giving a permit to a real financial entity to accept deposits from the public and give credit to the retail sector, with an emphasis on small businesses."

Each of the existing players wants to continue to hold the market share they have already captured and even expand it, and the fact that new players will enter does not guarantee an increase in the interest rate on the public's current account and deposits.

Bank Zero is an example of a new player in the Israeli financial industry, which, despite its investment and the value proposition it brought to Israeli financial consumers, among other things through higher interest rate deposits, still failed to provoke competition from the banks.

Therefore, the question is whether the entry of additional new players will indeed lead to competition for the Israeli consumer's pocket or whether there will necessarily be a need for regulatory measures such as the cellular reform.

The Competition Authority: "The law requires Bit to allow the transfer of funds from it to other applications"The Securities Authority, which is responsible for distributing licenses to players in the field and supervises its activities, responded: "The application is an application of Bank Hapoalim and therefore continues, as written in the law, to be supervised by the Bank of Israel."

In response, the Bank of Israel stated: "The application does not become a wallet by virtue of the law regulating the practice of payment services. The Banking (Licensing) Law actually allows any bank, including Bank Hapoalim, to manage payment accounts. It should be noted that this is a limited payment account, both in the volumes accumulated in it and in the annual cycles and in actions that can be performed through it."

The Competition Authority responded: "The Authority did find in its study, published in 2021, that Bit has significant market power in the field of money transfers between individuals. It was also clarified in the study that this is an area that tends to have a significant network effect.

"Therefore, the authority recommended dealing with the network effect by creating connectivity between the applications in a way that would allow the development of a competitive market in which each consumer chooses to use the application that suits his needs without his choice being dictated by the scope of the application's users.

"Indeed, in the enactment of the law regulating the practice of payment services that was passed over a year ago, the Authority succeeded in promoting a section of the law that obliges Bit (and any other application that will be responsible for more than 20% of the money transfers between individuals in Israel) to allow the transfer of funds from it to other applications and vice versa. This section entered Recently effective".

Bank Hapoalim: "We will not be able to address questions regarding interest rates"

In response to the question of whether Bit intends to pay interest on the right balances that will accrue to those registered in the application, Bank Hapoalim stated that "for reasons of competition law, we cannot address questions concerning interest rates."

On the question of whether the bank intends to compete with itself through Bit and whether, in his view, its holding does not contradict the essence of the law, he responded: "We will not refer to the bank's future activity model. In any case, the bank operates in accordance with all laws."