Could Israel's banks be doing more to help their customers?

Forget judicial reform, Israel’s presence in the West Bank, and whether Netanyahu is innocent or guilty. Israelis will never agree on those or most other issues. But one area everyone can get behind with enthusiasm is the perception that the country’s banks are making huge profits on the backs of its clients.

So, what to make of the announcements over the last week that in an historic turn of events, top Israeli banks have begun offering to pay customers interest based on their checking account balances? The nearly unilateral move has come as a result of an investigation that revealed a serious lack of market competition and a serious abundance of greed, but maybe there’s a chance that Israeli bank customers might actually benefit from the situation. Right?

In 2022, the Israeli banking sector witnessed significant growth and profitability, with several major banks reporting record-breaking profits. Bank Leumi, Mizrahi-Tefahot Bank, and Hapoalim all achieved remarkable financial results as a result of the Bank of Israel’s repeated decision to raise the national interest rate in order to combat inflation.

Bank Leumi, one of Israel’s leading banks, experienced a substantial increase in profits in 2022. Their net profit rose by 27% to reach a record NIS 7.7 billion compared to NIS 6 billion in 2021.

Mizrahi-Tefahot, another prominent financial institution in Israel, also recorded a record profit in 2022. Their net profit amounted to NIS 4.47b., surpassing their profit in 2021 by a whopping 40.3%.

Hapoalim, Israel’s largest bank, reported a record net profit of NIS 6.5b. in 2022. This represented a 38% increase compared to their net profit of NIS 4.9b. in 2021.

In light of these tremendous gains, Israel’s Competition Authority recently announced its suspicion that the country’s five largest banks have neglected to share these benefits with their customers – and what’s more, the pesky financial institutions have formed an oligopoly: a state of limited competition, in which a market is shared by a small number of producers or sellers.

Tax Authority to encourage better practice by banks

ACCORDING TO the Authority based on its research and findings, these top five banks – Hapoalim, Leumi, Israel Discount, Mizrahi Tefahot, and First International – hold nearly 100% of the nation’s market share of retail checking accounts. Faced with the data, the banks haven’t had much room to wiggle out of the accusations.

The Authority’s findings led government officials to float the idea of advancing legislation that would limit banks’ ability to lend.

Bank of Israel Governor Amir Yaron expressed concern over a proposed bill that would give the finance minister significant control over setting interest rates on consumer bank accounts. Under the bill, commercial banks would be required to pay interest on checking accounts at rates determined by the central bank governor but with final approval from the finance minister.

Yaron was staunchly opposed to this proposed legislation, and wrote a letter to Prime Minister Benjamin Netanyahu urging him to intervene and remove the bill from the agenda, stating that it would seriously undermine the central bank’s independence and ability to conduct monetary policy. The governor warned that such a move would harm competition, efficiency, and have negative repercussions from foreign institutions and credit rating agencies.

Responding to the matter on Monday, Finance Minister Bezalel Smotrich reprimanded the banks, calling their conduct “scandalous.”

“Interest rates were raised to fight inflation and maintain the economic strength of the country and not for the banks to rake in capital,” Smotrich said.

He went on to note, however, that taking sweeping measures to resolve the issue may also carry its own dangers, in a statement somewhat in agreement with Yaron’s warnings. “We need to be careful of populist steps that may do more harm than good,” he said.

At present, Smotrich plans to advance legislation that would tax banks’ excess profits, though voting on the mandatory interest bill is currently postponed.

According to Dr. David Disatnik, from the Coller School of Management at Tel Aviv University, both the governor and minister are on the right track. “If we want banks to pay a higher interest rate on checking accounts, you need more competition,” he said. “That’s the way to tackle the issue – not by legislation.”

In response to the Competition Authority’s findings, the subsequent political scuttlebutt, and a call from Bank of Israel Governor Yaron to pay interest on consumer current accounts, several of the leading banks have grudgingly initiated corrective measures, likely to avoid the implementation of legislation that would harm their positions in the market.

LeumiLeumi Bank will offer its customers a 1% annual interest rate on current account balances up to NIS 10,000 to customers with at least one Leumi product. From August 1 Leumi will offer a 2% annual interest rate on current account balances up to NIS 25,000 to customers with at least two Leumi products (such as a credit card, mortgage, or securities portfolio).Leumi will decrease the interest rates for private customers’ first- and second-stage overdrafts by 2% and 1% respectively.

MizrahiMizrahi Tefahot will offer 2% annual interest on current account balances of up to NIS 25,000 to customers at least a combined NIS 50,000 in the bank in their current accounts, deposits, and securities portfolio.Mizrahi Tefahot’s overdraft interest rates will also be decreased by 1%-2%.

First InternationalFirst International will offer 1.8%-2.2% interest on bank accounts of up to NIS 25,000 – assuming they pay their salaries into the account or their financial assets in the bank do not exceed NIS 50,000.

DiscountAt the time of writing, Israel Discount has not announced any new plan or attempt to appease the Bank of Israel’s concerns.

HapoalimUnlike its not-so-competitive competitors, Hapoalim is not offering direct interest in customer accounts. Instead, they have implemented a system where the days of a positive balance in the account offset the days in overdraft, meaning that if a customer has a positive balance in their account for a certain number of days, those days will be used to offset any days they spend in overdraft.

WHILE THIS technically satisfies two of the Bank of Israel’s demands – paying interest on current accounts and lowering interest on overdrafts – customers who don’t go into overdraft are unlikely to enjoy any kind of benefits from the new plan.

This is the common element among all of the offerings made by the country’s top 5 banks: while they all tick the correct boxes in some way or another, the actual impact made on the end consumer is unlikely to feel very significant – and that’s assuming they meet the stipulations and criteria each bank has put into place in order to gatekeep their new plans.

Seeing these paltry interest plans may lead one to ask “But if everyone’s just putting in minimal effort to keep legislation off their backs, why doesn’t one bank just offer an amazing plan and poach the others’ customers?”

As Disatnik put simply: “It is not that easy to switch from one bank to another bank.”

He explained that security deposits are one of the key factors preventing customers from moving to whatever bank offers them the best rate. “In order to have a security deposit in the bank, you also have to have a checking account. You have to have the cash in the same bank,” he said, noting that the increased complexity presented by this facet of the Israeli banking system is typically enough to keep customers locked in.

Disatnik went on to explain that tackling the security deposit issue would be a tremendous first step in enabling higher competition in the market. Targeting this with regulatory measures, he said, would be the proper way to utilize legislation to solve the oligopoly problem.

“If you want to have competition, allow people to have a savings account in one bank and a checking account in another bank. Then, when a customer has a checking account in one bank, that bank sees that the owner is transferring funds to another bank’s savings account and they might try to ensure that the customer uses them instead. They will offer a higher interest rate, for example. That’s the way to force them by legislation,” he said.

The incremental measures some of the banks have taken to compensate account holders for being in plus in the bank accounts is too little, too late, for some consumers.

“I was in overdraft for about 25 of the 35 years I’ve lived in Israel,” said Sheldon Pfeifer, a US immigrant from Modi’in. “And my bank never thought twice about adding interest on all the time. Now that I’ve finally managed to even it out and actually have some money in my checking account, I would certainly expect them to reward me the same way that they penalized me.”

PFEIFER IS one of many bank customers who are skeptical about the actual benefit these newly implemented offerings provide. As far as he is concerned, the move seems more akin to lip service than customer service.

“What it seems like they’re offering, though, isn’t even enough to get online to do something about, never mind risk actually going into the bank and talking to a human,” he said.

Another self-described “American-born, long-time Israeli citizen” weighed in on the matter, noting that “Mizrahi is offering 2% up to NIS 25,000, which is far better than nothing. I don’t see a downside or a catch to this – in the States, I had a checking account that earned interest, so why not here?”

Daniel Zaslavsky, a Leumi customer in his mid-20s, was unsure of the impact that his bank’s new interest offering will have. “I don’t feel like I’ll see the benefits of this,” he said. “At the end of the day, the percentage is high on an extremely low amount of money, and won’t affect much. It also has multiple requirements that not everyone is able to meet, so people who are extremely short on money won’t even be able to fully utilize said interest.”

“That being said, I don’t personally care why I’m offered said benefit,” he went on to admit. “I’m getting it, and that’s good enough for me.

With the general consensus seeming to range from “good enough” to “not quite good enough but whatever,” it’s unlikely that any of the top five’s unremarkable interest plans will make enough waves to affect the amount of competition within the banking space. At this point, the only question seems to be whether or not the government too will find the banks’ attempts “good enough.”

If not, there’s a chance that Israeli bank customers might actually benefit from the situation. Right?•