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

Monicel
It is not certain that Bit’s success will benefit customers

The financial system as mixed after the Bit app, owned by Bank Hapoalim, announced earlier this month that this November it will launch “a new service under which funds will be transferred directly to the bank account, when users they will be able to accumulate the remaining funds in the application and use it.”

The implication of the bank’s announcement is that Shavit is upgrading from an app for transferring money between people to one that is, in practice, similar to a bank checking account.

The announcement of the application comes in the shadow of the entry into force of the law “Regulating the practice of payment services and payment initiation”, which allows registered and supervised financial institutions to compete with banks in the management of the current accounts and deposits of the Israeli public.

The law was enacted following 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 upward trend in interest rates has put the spotlight on the interest that bank customers receive on their current balances and deposits , compared to those charged by the banks, the public criticism led the legislator, among other things, to the reform of open banking and the opening of the local financial market to new actors.

“This is done in two stages, when in a first stage they provide the public with knowledge while the regulator examines the licenses of the new players, and in the second stage they allow the entry of the latter as different fintechs to compete with the banks and offer the Israeli consumer current account and deposit services.”

However, Bit’s latest announcement raised doubts among the supporters of the legislation about the possibilities of enforcement of the law, since the essence of it is the introduction of new digital players that will compete with banks, while Bit, as has been said, is owned by one of the largest of them.

In addition, the Competition Authority’s July 2021 “P2P Transfer Apps” market study found, among other things, that “the Bit app almost took over the P2P field ” and that “in 2020, Bit concentrated the vast majority of payments”. operations in terms of the number of operations and the scope of the Caspian”, and therefore “the market converges in the structure of a single winner – Bit”.

Kashi says that “In other words, the competition authority is pointing the finger at Bit as the single dominant player in the application market in the field, akin to the power of a monopoly. Since this is the case, fears arise that other players will find it difficult to enter and benefit from the Israeli financial consumer.”

Kashi. ”There is concern that other players will find it difficult to enter and benefit from the Israeli consumer” (Credit: PR)

How hard will it be? The Authority’s research indicates that even applications already operating in the market and in the hands of competing banks could not compete with it: “Almost 50% of non-group transfers were made when the group of selection of the users included only the Bit applet compared to a percentage of transactions in which the selection groups included Only Paybox (Discount Bank) or only PAY (Bank Leumi)”.

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

Competition Authority data from the study shows that 50 million transactions were made in the payment applications of 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 operations in terms of the number of operations and financial reach.”

The Competition Authority estimates that “this clear preference for payment in Bit, even when users are faced with additional options, may derive from a preference to concentrate activities in a single place, a habit or a preference by the functions of the application”.

How can this affect our money? According to Kashi, “If new players in the financial arena 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 the banks and increase their benefits. margin”.

NIS 438 billion in their checking account and another NIS 738 billion in short-term deposits. Interest in checking funds and deposits is another question mark that arises as a result of the request message. “Banks are not required by law to pay interest on check funds and deposits,” explains Kashi, “although they distributed interest in the last year. The low interest rate they distributed was part of, as has said, of public criticism of them, as a result of which the banks decided on their own to pay interest on the control 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 fair balances of the savers who will remain with them to be a center of attraction to attract their funds.

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

How much money is involved? Bank of Israel data shows that in 2023, the Israeli public held NIS 438 billion in their current accounts, along with 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 able to manage a balance of up to 20,000 NIS, along with transactions not exceeding 100,000 NIS per year.

Attorney Michal Ohana (Credit: PR)

Attorney Michal Ohana, partner and leader of the field of financial regulation at the law firm Shiblat and Partners, clarifies: “Studies published as part of competition in the non-bank credit industry revealed that one of the reasons for the failure of the industry as a competition for the banks was their financing by 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 disconnect from the banks, and offer an interest rate that will compete with the latter, that is, higher in our checking funds and deposits

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

“The ‘network effect’ itself is created by the fact that the applications on the market work 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 skewing toward a single winner, raising concerns about a lack of competition.

“It should be noted that the law responds to this and that in order to reduce the network effect it requires service providers that have a wide scope of activity to allow their clients to receive funds from a payer that is another’s client. 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 based on the value proposition it offers them, without being tied to a service that serves the large customer base. To make this really happen, the legislator has 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 intention is for there to be a central system to which all the players in the field connect and thus be able to transfer funds between them. It will not be necessary to connect between each entity, and a new company that will enter it will not. to connect with one’s own bodies but only with the system.

“The legislator is already testing himself in the next law of arrangements, which should contain a reference to the increase of competition in the Israeli financial market by giving a permit to a real financial institution 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 maintain the market share they have already captured and even expand it, and the fact that new players 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 sector, which, despite its investment and the value proposition it brought to Israeli financial consumers, including through higher interest rate deposits, has not yet led to competition from banks.

So the question is whether the entry of additional new players will actually lead to competition for the pocket of the Israeli consumer or whether regulatory measures such as cellular reform will necessarily be required.

The Competition Authority: “Bit is required by law to allow the transfer of funds to other applications” The Securities Authority, which is responsible for distributing licenses to players in the field and oversees their activities, responded: “The application is a Bank Hapoalim application and therefore remains, as written in the law, supervised by the Bank of Israel.”

In response, the Bank of Israel stated: “The application does not become a wallet under the law regulating the practice of payment services. The Banking (Licensing) Law actually allows any bank, including Bank Hapoalim, 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 the actions that can be carried out through it.”

The Competition Authority responded: “The Authority did find in its study, published in 2021, that Bit has significant market power in the area of ​​money transfers between individuals. It 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 applications in a way that allows the development of a competitive market in which each consumer chooses to use the application that suits their needs. needs without their 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 approved more than a year ago, the Authority managed to push a section of the law that obliges Bit (and any other application that will be responsible of more than 20% of money transfers between people in Israel) to allow the transfer of funds to other applications and vice versa. This section came into force recently.”

Bank Hapoalim: “We will not be able to resolve questions about interest rates”

In response to the question of whether Bit intends to pay interest on the correct balances that will accrue to registrants in the application, Bank Hapoalim stated that “for reasons of competition law, we cannot address questions about rates interest”.

On the question of whether the bank intends to compete with itself through Bit and whether, in its opinion, its participation does not contradict the essence of the law, it has answered: “We will not refer to the future model of activity of the bank. In any case, the bank operates in accordance with all laws.”



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