Payments have become the hottest area in banking today. The field, which in the past was a tool and not an end in itself, has in recent years become the biggest and most talked about target market in banking and banking-related fields, bringing with it a large customer base, headed by the food retail chains.
The other week we learned that Shufersal had entered a cooperative venture with Israel Discount Bank to offer digital wallet services via Discount’s PayBox platform. The Rami Levy Group is now launching the digital wallet announced about a year ago, and is currently piloting the service among its employees. The service, which is expected get underway in the current quarter, will be more than a simple "wallet" and will offer additional financial services, including providing credit to customers of Rami Levy Group chains, for example Cofix and Good Pharm.
The moves by Rami Levy, Shufersal and Discount, as well as Bank Hapoalim, CAL-Israel Credit Cards and Bank Leumi, follow decades of "more of the same" in transactions between end customers and their main service providers. Now evolving technologies are changing the ground rules and making it clear that what was - is not what will be.
A conservative bank-customer relationship market
For years, there has been talk in Israel about advanced forms of payment. Now, after years of preparation by the Bank of Israel, the explosion is brewing. This is mainly thanks to the transition to EMV, an advanced standard based on a technology for securing credit card transactions that also allows for "contactless" transactions. The large chains are committed to switching to this standard.
Even before that, Israel's three major banks created online payment apps that rely on credit cards. What is happening now offers all players the opportunity to develop apps and switch to mobile payment, so that consumers may leave their wallets at home. The credit card companies, in turn, have come up with e-payment apps and are all-in. The next step is for international giants to enter the market, which may happen in the near future with the expected advent of Apple Pay in Israel.
Local financial market sources believe Apple will enter Israel in the first quarter of 2021. According to a local market source, "It's possible that the lockdowns here have delayed the Apple Pay launch." However, when that moment happens, it may turn out to be a transformative one for digital wallets and cardless payments. This is because of Apple's significant market share in Israel and its way of keeping users within a closed system.
When this happens, the battle among local entities will be over the rights to issue the card that will become the "primary digital wallet". This refers to the card whose details will be entered into the Apple Pay service, and will be the one used for actual payments, on which issuers and operators will be paid commissions for transactions.
To a large extent, Apple Pay's entry does not threaten the credit card companies; they do not yet suffer the effects of digital wallets as they still rely on plastic cards. In any case, even after Apple Pay arrives, a significant market share will remain where the great struggle will not be so much over card location and more about "wallet identifiers" for Android devices.
This will have real effects on the interface between private and business customers, and the dominant and conservative banks. It will probably also affect the balance of power between the banks and other players - especially the credit card companies, which sometimes work together and sometimes compete - in parallel to the expected entry of international giants.
In any case, it seems that in recent years - and even more so in recent months - banks, credit card companies and other players holding a large and potentially valuable customer base that actually uses their services, are marking this as a strategic area.
Technologically mature - Regulation ready
The bottom line is that Israel is simply joining a global process. These changes are expected to have a tremendous impact not only on the way products and services are purchased, but also on the balance of power in financial services.
As the Bank of Israel's website states, "Payment and clearing systems are an essential part of the economic and financial infrastructure in modern economies." Over the years, however, the Israeli market has been left behind with outdated services.
The Bank of Israel and the banks have viewed this subject as a pipeline requiring only minimal attention; not a focal point and far from being seen as the basis for future development and the ability to compete (which contrasts with Israel's advanced fintech sector). It so happens that the Israeli financial market still lags behind many countries - not only Scandinavia for example, but China and India as well.
Bank of Israel Governor Prof. Amir Yaron, has put the payments issue front and center, and is committed to developing the local market.
This will happen by applying the EMV standard, implementing contactless payment technology, and installing terminals. After years of delays, international players will be able to enter the market and move it forward, disseminating customer data to clients and other entities that can - and most likely will - offer new services.
Investments yet to show a return
Things began developing several years ago. The investments were huge - in the hundreds of millions of shekels - some of which are still not close to showing a return. This is true of Bank Hapoalim's BIT app, which aspires to be a sort of digital bank and has allied with CAL in order to attract customers of other banks with non-bank member clubs and a special credit card. This is true of Leumi's payment system as well, which is connected to Israel's most comprehensive digital banking platform: Pepper. This is also true of Discount's PayBox, which has incorporated Shufersal as a full partner in its app.
To a large extent, the applications of the three banks were, and still are, intended to attract customers, not drive profits. That must change. Payments-only platforms are not interesting and there is a need to expand beyond payments to other banking services. In other words, it seems that these days Hapoalim and Discount are falling into line with Leumi, with the understanding that acquired customers must translate to revenue. The three banks still have a long way to go and the road runs through broader digital banking platforms, such as Pepper, and the digital banking platform that Hapoalim wishes to set up, or alternatively through cooperation with Shufersal, which has hundreds of thousands of customers using its financial services, part of an attempt (not the first) to become a true financial services provider.
What they have in common is the search for a sustainable business model - and that it is still a long way off, if only because banks cannot monetize their customers like regular companies (for example by selling advertisements to a third party).
Google or Samsung expected to arrive this year
At present, there is talk of Apple Pay commencing operations in February. This is already fortifying the banks' resolve to find solutions for Android customers. Here, too, things are unclear. Underlying the readiness for change are the connections being formed by Hapoalim and Discount with external entities.
This is because payments to businesses will require the consent of the issuer (the bank where the customer's account is managed or a non-banking entity) for use of the card in a different digital wallet, which is not a given.
It's also worth noting that the need to find a digital wallet solution has led to other interesting connections, such as the one now being examined between Mizrahi Tefahot and Hapoalim's BIT, in which customers of Israel's third largest bank will be issued a digital wallet from their biggest competitor. Even if no agreement materializes, the fact of the negotiations demonstrates that the need for such a banking service is understood.
Other retail chains are also looking into this, setting up clubs and financial services in the wake of Shufersal and Rami Levy. They are now likely follow them in making the leap to providing diverse online financial services directed at customers, providing them with profitable new features as an additional revenue engine.
What does it all add up to? This year there will probably be mostly a lot of noisy consumer campaigns, to induce customers to use one issuer's card and not the other's (bank or credit card company). We will also see Hapoalim make efforts to enter the world of issuing non-bank cards to its competitors' customers. At the same time, more consumers will have payment apps, will choose this or that card for their digital wallet - on iPhone or Android (where there will be more to choose from) - and one card will come out the winner. But when Google or Samsung arrive in Israel, things may shift even more sharply. It's believed that one of them may do so as early as 2021.
In the long term, the current changes will significantly alter competition over retail customers, and could produce tectonic shifts in banking.
Published by Globes, Israel business news - en.globes.co.il - on January 31, 2021
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