Bank of Jerusalem (TASE: JBNK) is entering the credit card business. Sources inform "Globes" that the bank has signed a cooperation agreement with MasterCard, and has obtained permission from the Bank of Israel to enter the sector in competition with the three credit card companies. As far as is known, Bank of Jerusalem does not intend to conduct clearance at this stage. The bank will also not provide loans through credit cards in the near future, but may do so later.
The decision to enter the credit card business is part of Bank of Jerusalem's strategy of focusing in specialist products, instead of trying to recruit customers who will use it for conducting all of their banking business. Despite various measures taken in recent years, Bank of Jerusalem, Israel's seventh largest bank, has not managed to substantially increase its market share. The bank's credit portfolio totals NIS 9.7 billion, and its equity amounts to NIS 820 million.
In addition to the agreement with MasterCard, the bank also signed an agreement for obtaining services from an operations company in Europe. This company provides technological services to 150 banks, and is set to provide all of its technological and operational credit card services to Bank of Jerusalem. Obtaining external operating services will enable Bank of Jerusalem to work on a low-expenses model, while adopting technological payment innovations relatively easily. "Our model is significantly different from that of the existing credit card companies, all of which built their own systems in Israel," Bank of Jerusalem CEO Gill Topaz told "Globes."
Bank of Jerusalem's customers are currently issued credit cards from Israel Credit Cards-Cal (ICC-Cal), and this cooperation is also expected to continue. Bank of Jerusalem's aim is to enter credit card activity for the general public, and both cooperate with other banks and develop non-banking credit card clubs. The bank does not plan to offer ordinary credit cards that already exist in the market; it plans to focus on niche products. For example, in the initial stage, the bank is likely to focus on people who have been denied credit. Topaz says, "We have spotted a vacuum in this segment. It includes 25% of the public, so the products in this field have a potential amounting to hundreds of thousands of credit cards." Bank of Jerusalem plans to develop products that will enable this group to use credit cards that are not debit cards - the main current solution in the market.
Bank of Jerusalem's product for non-banking credit card clubs differs from the existing products in the market, and will also have added value. According to Topaz, the main advantages that the bank is likely to offer are a lean expenses structure and innovation. The main non-banking credit card club is Shufersal Ltd. (TASE:SAE), which is in a state of uncertainty. This club, which has 1.5 million credit cards, was managed in cooperation with Leumi Card, and the retail chain is currently considering bringing in another partner.
Bank of Jerusalem's decision to enter the credit card field comes at a time of upheaval in the credit card sector. The Promotion of Competition and Reduction of Concentration Law (Strum Law) is forcing the two largest banks to sell the credit card companies they own: Isracard and Leumi Card. The law also mandates other changes in the sector. For example, the banks will be forced to work with more than one credit card company, which is expected to cause changes in market shares and provide Bank of Jerusalem with an opportunity to work with other banks.
Topaz says that the Strum Law was not the reason for his bank's decision, but it has made Bank of Jerusalem's entry into the sector easier. "We have been working on our entry into the issuing of credit cards for a year, but there is no doubt that the Strum Law has eased our way and made it simpler for us to enter the business," he explains.
Bank of Jerusalem has realized that it will have problems competing with the larger banks in the providing of full banking services. "As a small bank, we must specialize. We cannot be present in all areas. We will be a bank specializing in products," Topaz declared.
As part of this change in concept, Bank of Jerusalem recently canceled the general exemption from current account fees it previously gave its customers, and decided to get rid of its brokerage business, which it is likely to sell to Meitav Dash Investments Ltd. (TASE:MTDS). At the same time, the bank has expanded its mortgage activity, and has decided to tighten its cooperation with external mortgage advisors.
Will Bank of Jerusalem manage to change the balance of power?
The credit card market in Israel has a NIS 300 billion annual turnover. Credit card use has been growing by 7-8% a year as a result of the rise in private consumption and the switch to the use of credit cards. Three companies control the market: Isracard, with a market share of almost 50%; Leumi Card; and ICC-Cal, whose market share is 25-27%. Will tiny Bank of Jerusalem manage to change the balance of power?
Despite the impressive growth in the sector, the market is saturated. There are over eight million active credit cards in Israel. The changes expected from the Strum Law are likely to increase the number of cards. It is believed that customers currently have an average of two credit cards each, and that this number is likely to increase substantially, and even double. The result will be competition for the customer's use of a card. A quarter of the current cards are already classed as inactive, and if the number of cards rises, competition between the companies to have the customer use their card will intensify.
Bank of Jerusalem faces a considerable challenge in trying to penetrate the market. The bank says that it plans to present specialized and innovative niche products, not the existing generic products in the market, but it should be kept in mind that competition is currently focusing on benefits. With all due respect to the technological innovations being offered, the Israeli customer is ultimately interested in benefits - what discounts and bargains are received for using the credit card. The best example of this is Diners Club - a brand that made little progress in Israel for years, until it hooked up with El Al Israel Airlines Ltd. (TASE: ELAL) and offered a preferential conversion ratio to its frequent flyers' club. This rejuvenated Diners Club's business in Israel, and the use of its cards soared. Bank of Jerusalem will probably not offer such far-reaching benefits; it will most likely focus on special credit and payment products. Will that be enough for the Israeli customer? Time will tell.
Published by Globes [online], Israel Business News - www.globes-online.com - on September 27, 2017
© Copyright of Globes Publisher Itonut (1983) Ltd. 2017