More than 1,400 Israelis are members of the Israel Facebook group, which aims to promote the introduction of Stripe the US fintech company's payment clearing services in Israel. The members include entrepreneurs who sell to customers abroad and online store owners, who expectantly await new developments on Stripe's arrival, complain about the existing alternatives on the market such as receiving payments via PayPal or Israeli credit card companies, and meanwhile check out other options.
One of the most popular alternatives suggested by the Facebook group is Stripe itself. Stripe is already available in 44 countries worldwide but does not operate in Israel and so cannot assist local businesspeople in receiving payments into their Israeli bank accounts. However, the alternative Stripe Atlas service offered by the company does assist Israelis in setting up a company in Delaware with a US bank account, for the receipt of payments. For several hundred dollars this can be arranged within a few weeks.
The Stripe Israel Facebook group was founded in January 2020 by Yossi Bezalel, an entrepreneur and software technology consultant. "I sell software to customers abroad and the problem is that if you use the solutions offered by Israeli credit card companies in order to clear payments from abroad, they rip you off with the price," Bezalel said. "For many years I've been using PayPal, which is a secure and good solutions, but the costs are relatively high. Stripe is an excellent solution with low costs, which is also the de facto standard on the market, which makes your customers feel secure throughout the world when making purchases from you."
The business environment for high-tech has been left far behind The group members have the hope that Stripe will be allowed to enter Israel is not groundless because the payment company has already been trying for four years to commence operations in Israel. At the start of last year, Stripe even appointed Gur Biron, a former senior executive at Google, to manage its operations in the Israeli market. But Biron is expected to leave his post at Stripe soon after the company has not yet succeeded in entering Israel. Sources close to the matter have told "Globes" that the reason is that Israel's complicated bureaucracy and technology have made it difficult for Stripe to launch here. Meanwhile, as Bezalel and the rest of the Facebook group wait, Stripe was able to launch its operations in the UAE last April. Stripe's entry to Israel would boost competition in the payments clearing market, which is controlled by the credit card companies, although the issue is even broader. Research published last June by consultancy company StartupBlink ranked Israel in third place as the world's strongest tech nation after the US and UK. But in everything regarding the business environment for integrating technology, Israel was ranked far lower in just 25th pace, beneath most European countries. The reason was the lack of digital services that are available in most Western countries such as Google Pay (which has meanwhile postponed its entry into Israel), cryptocurrency trading services like Coinbase and Stripe's clearing services. In the case of Google Pay, the delay is not connected to regulation but Google's decision to put off its investment until the end of 2021.
Transferring money simply by sending a WhatsApp message
Stripe was founded in the US in 2010 by the Irish brothers Patrick and John Collison, then aged 21 and 19. They came to the US to study at Harvard and MIT but dropped out to become entrepreneurs, successfully selling their first company, which developed a platform for managing the businesses of eBay traders, for $5 million. The main insight that the young brothers gained from their first company was that part of the most difficult challenge for online businesses was not the concept, developing it or finding customers but collecting payments from those customers. After they were themselves forced to waste weeks on bureaucracy in order to simply receive approval to collect payments, they founded Stripe, which was designed to simplify the process. "The ability to share a picture on Facebook but not transfer money in the same way felt like the Middle Ages."
With the chutzpah of the very young, the Collisons received their first investment from PayPal founders Peter Thiel and Elon Musk. In the presentation that they made to them, they explained why PayPal was too complex a solutions and how they wanted to transform money transfers over the Internet into something much more simple like being able to send a WhatsApp message anywhere in the world. Instead of a complex, integrated process with the credit card companies and banks, Stripe provided seven lines of simple code that allowed any website or app to embed options for receiving payments within a day.
Thiel and Musk were convinced and became Stripe's investors together with the Sequoia venture capital fund in the $20 million seed round in 2011. Since then, Stripe's valuation jumped to $1.8 billion in 2014, $20.2 billion in 2018 and $36 billion in 2020.
Specializing in app development from the start
The Covid pandemic, which boosted online buying, greatly benefitted businesses like Stripe, which raised $600 million at a valuation of $95.6 billion. One of the aims of the huge financing round was to expand Stripe's operations to regions like the Middle East, Europe, and Africa. The financing round made Stripe the most valuable, privately-held startup in the US, leapfrogging Elon Musk's SpaceX. Since it was founded, Stripe has expanded to a diverse range of fields including providing loans and preventing online fraud. It is the world's most valuable fintech startup and only Chinese startups and apps Tiktok and ByteDance are worthy more. Not bad for seven lines of code.
Stripe's orientation from the outset was suited to app developers and it became the preferred option for Silicon Valley entrepreneurs. Consequently, Stripe became the payment clearance solution for food delivery startup DoorDash and rideshare company Lyft in the initial stages of their development. In contrast to PayPal, Stripe has always worked in the wings as a brand embedded in the apps of its customers, and does not ask people purchasing to enter an external site.
Over time Stripe expanded and became the payment solution of giants like Amazon, Booking.com and Israeli company Wix. Users who open a store on Wix can choose to install Stripe's payment solution. Of course Israeli users can't choose that option because Stripe, despite its strenuous efforts, does not operate in Israel.
Only five bodies have a clearing license in Israel
The first way for Stripe to operate in Israel is through a clearing license from the Bank of Israel. Only five bodies currently hold such a license - the three credit card companies (CAL, Isracard and MAX) and two private companies Cardcom and Tranzila, which received licenses in 2017 and 2018. Respectively. The Bank of Israel is proud that in 2015 it implemented significant relaxations in the requirements for receiving a license, enabling Cardcom and Trazila to receive licenses, but market sources say that the process is still extremely complicated.
Cardcom and Tranzila are both Israeli companies that already worked on the domestic market. Both provide clearing solutions to businesses and the clearing license has allowed them to expand and implement the entire process themselves, including receiving money from credit card companies and crediting businesses as Stripe does worldwide. However, these are local companies that both offer the advanced technology and international connections that Stripe provides.
Former Minister of Science and Technology Izhar Shay, who has worked to streamline fintech technology, told "Globes, "I remember the CEO of an Israeli fintech company that developed a more efficient clearing system for transactions. In order to operate the service in Israel, he needed a license, and I remember he showed me a thick file full of forms that you have to fill, including check on guarantees and equity. It's a never ending nightmare and seven layers of hell for both Israeli and foreign fintech companies."
Shay added, "Stripe provides the basis for a contemporary fintech infrastructure and it is important for businesspeople and the market that there be such a service. They have led very positive changes in the US and if they have really been trying to enter Israel for four years, and have not succeeded, then that is very regrettable."
The changes that got stuck due to the transitional governments
Stripe has never submitted an official request for a clearing license but has conducted preliminary talks with the Bank of Israel. At the same time the company has been waiting for an amendment to the law that would allow the relatively easy entry of fintech companies into the Israeli market but the amendment has been held up by the transition governments over the past few years. "What Stripe needs is somebody who will lead it by the hand and help it but it is hard to find somebody to do that when it is not clear who will be the Minister of Finance tomorrow," a market source familiar with the subject told "Globes." "Of course Stripe can bring with it enough money to comply with any of the Bank of Israel's regulations but when you are striving to work in 200 countries, it is clear that first of all you will focus on the easier places like the UAE, and not where it is difficult like Israel."
A senior executive with one of Israel's credit card companies believes that Stripe's main problem is not money. "To receive a license from the Bank of Israel for clearing means being supervised by it and international companies like Stripe, which operate in many countries, don't want to be supervised in each and every country."
Automated Bank Services poses a unique obstacle
If and when Stripe receives a clearing license, there awaits the complex process of integrating technologically in Israel. While in most countries in which Strip operates it needs to connect up directly to the networks of the credit card companies of Visa and MasterCard, in Israel there is an extra and unique layers in the Automated Banking Service (TASE: SHVA), which services as a junction of the credit cards' clearing route. Cardcom and Tranzila, which received clearing licenses several years ago have still not begun actually clearing payments. Another Issue that Stripe will need to deal with will be the significant changes needed regarding the opening of accounts by merchants using its services. Stripe is known for its good and swift customer experience but in Israel the matter is subject to many regulations and controls.
A source at one of Israel's financial regulatory authorities dismissed the criticism. "The process for receiving a license is not complicated and the fact is that there have been companies who applied for and received a clearing license. You have to show who are the controlling owners, prove integrity, and to present a business and technological plan and then receive the contingent license, which gives the green light to start the process. If you come along with a company from abroad that is already connected to Visa and MasterCard, it can be the simplest of things."
Another option, perhaps even simpler, is for Stripe to operate in partnership with one of Israel's credit card companies. In this way, Stripe could save itself the complexities of obtaining a license and technological integration and begin operating more quickly. A source close to the matter told "Globes" that Stripe conducted intensive negotiations with all three Israeli credit card companies but the talks did not progress to fruition and a signed agreement. Sources at the credit card companies say that this was because Stripe was not in a rush to close an agreement for whatever reason while others in the market claim that the credit card companies had no interest in opening the door to a rival.
Stripe characterizes the complexities that fintech services companies have in entering the Israeli market. Israel may lead in developing advanced fintech services but most of them are not available in Israel itself, because it is perceived as a small market with regulatory and technological complexities. The case of Stripe demonstrates the kind of difficulties other international fintech services will be confronted by should they want to enter Israel in the future, such as Facebook Pay.
Stripe has in any event not entirely lost hope of entering Israel and is currently recruiting somebody responsible for partnerships in the Israeli market whose job description includes building deep relations with the Israeli regulators. At the same time, and unrelated, Stripe is currently hiring its first engineer in Israel for development systems. For the time being this is the only position that the company has sought to fill in Israel although it could become a part of a small development center that would be set up in the country. What is certain is that opening a development center in Israel would be far simpler than beginning commercial operations.
Published by Globes, Israel business news - en.globes.co.il - on August 9, 2021
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