The Israeli government recently published a bill of law regarding the Regulation of Engagement in Payment Services and Payment Initiation. This bill serves as an update to the previous Memorandum of Law, released in January 2022.
As a supplement to the Israeli Payment Services Law, which regulates the consumer obligations that apply to payment service providers towards their customers, the bill focuses on the licensing aspects pertaining to payment service providers, and it sets forth provisions with respect to “payment initiation” activities in the framework of “open banking”.
The bill provides for:
- a licensing obligation or regulatory approval and the terms and conditions for receiving such a license or approval;
- the process of granting a control permit, and the terms and conditions for receiving this permit;
- permitted activities for the licensees;
- the preservation and protection of the customers’ funds; and
- other provisions, such as a requirement to determine mechanisms for data security, risk management, cyber-security and business continuity.
Responsibilities of financial regulators
The purpose of the bill is to define, in a comprehensive manner, the licensing and supervision aspects pertaining to providers of payment services in Israel. As part of this goal, the bill seeks to align the various areas of responsibility of each one of the financial regulators, including payment companies and credit card companies.
Payment companies
The bill proposes that entities engaging in the provision of “payment services” will act under the supervision of the Israel Securities Authority. Payment services include:
- managing a payment account;
- issuing means of payment;
- acquiring payment transactions; and
- providing advanced payment initiation services.
Effectively, this determination means that some of the entities currently supervised under a license issued to them by the Israel Capital Markets, Insurance and Savings Authority, as payment service providers, will be transferred to the supervision of the Israel Securities Authority. The holders of an acquiring license (by virtue of the Banking Law), with the exception of the credit card companies, will also be transferred to the supervision of the Israel Securities Authority. The bill sets forth transition provisions to create supervisory continuity, while giving the various entities sufficient time to make the requisite preparations.
Credit card companies
The bill proposes to define credit card companies as “payment service providers with stability importance”. As such, for the time being, they will remain under the supervision of the Bank of Israel.
Nevertheless, the Minister of Finance will have the authority (in consultation with the Israel Securities Authority, the governor of the Bank of Israel and the Israeli Competition Authority Commissioner), to amend the above definition. This would be to subject the credit card companies to the supervision of the Israel Securities Authority as well, “should the Minister be satisfied that this is necessary for the purpose of promoting competition in the financial system, while paying heed to the stability of the financial system and its regular activities”.
Prohibition on insurers engaging in payment services
An insurer (as defined in the Financial Services Regulation (Insurance) Law) may not, itself, engage in the provision of payment services. This prohibition will not apply to the controlling shareholders of the insurance company. This carve-out is very significant in light of the two recent major acquisitions of credit card companies by holding companies controlling insurers, namely the aquisition:
- closed recently, of Max by the Clal group; and
- currently in process, of Isracard by Harel group.
Regulation of payment initiation
The bill specifies two definitions of services in this context: basic initiation and advanced initiation.
“Basic initiation” means providing payment instructions, through an interface system for giving payment instructions (a service that is due to enhance greater efficiency and automation in the process for transmitting payment instructions and creating or cancelling debit authorisations).
“Advanced initiation” means providing means of payment to the payor and undertaking to transmit a payment instruction that will be given to the payment account manager, for the purpose of the execution of the instruction by the payment account manager for the payor (a type of activity that could expose the payor as well as the payment service provider to various risks).
It should be clarified that, being distinct from other payment service providers, the payment initiator does not “touch” the funds that are transmitted. Therefore, this activity involves relatively lower risks, which is why there are fewer obligations in the bill that apply to licensees of this kind.
Foreign service providers
In order to encourage the entry of new and diverse players into the payment services field, the bill proposes to allow foreign (non-Israeli) entities that are engaged in the provision of payment services or basic initiation services. The activities of these services are satisfactorily regulated and supervised by the local foreign supervisory authority, to obtain a license to also operate in Israel in a more lenient procedure, based on the license that they hold abroad.
Under this framework, the Israel Securities Authority may grant a license to a foreign service provider even if it does not satisfy some of the Israel conditions for the granting of a license. The Israel Securities Authority may also exempt a controlling shareholder of a foreign service provider from receiving a control permit after weighing up the reasons that would benefit the public, while protecting the customers’ best interests. This is provided that the Israeli Securities Authority finds that the supervision of the foreign service provider’s business constitutes an adequate response to all relevant aspects.
Connectivity between service providers for transfer of funds between individuals
Although in recent years a number of apps have been launched for the transfer of funds between individuals (P2P services), the explanatory notes to the bill indicate a concern with the development of a concentrated market in this regard, which does not serve the consumers’ interest in an optimal manner.
Therefore, the bill proposes the introduction of “universal” P2P service providers (ie, providers that offer services to users who do not have a payment account with them). These providers will be defined as “having an extensive scope of activities” and will be required to allow connectivity to other P2P services (including those that will not be defined as such).
The transfer of funds between these different services will be done based on an identifying detail (eg, a phone number or an email address, to which the service provider will connect to the customer’s account).
The bill is comprehensive and significant. Its purpose is to regulate broadly the licensing aspects of payment service providers, and to thereby constitute a supplemental legislative measure to the Payment Services Law and effect significant change in the world of payment services. This reform will require a significant and long-term process of preparation and assimilation both by service providers and regulators.
The draft of this bill remains subject to changes and updates that may be introduced in the course of the legislative process.
