While publication of the Strum Committee's conclusions is being delayed, the Bank of Israel is already preparing for the day after the Committee's report. The Bank of Israel today published instructions substantially easing regulation for credit cards and merchant acquiring.
A draft prepared by the Bank of Israel Banking Supervision Department, headed by Supervisor of Banks Hedva Ber, shows that the Bank of Israel intends to create a new level of supervision that will be lower than the supervision for banks. The Bank of Israel is thereby seeking to make it easier for credit card companies that do not solicit deposits from the public, and which are consequently less exposed to risk than the banks. The Bank of Israel wrote that the purpose of the measure was "to encourage the entry of additional participants into merchant acquiring activity and to support competition in the credit cards field. After taking effect, the new policy will serve to examine the granting of a license to new merchant acquirers and the granting of a control permit to new merchant acquirers that are not credit card companies."
Most of the credit card companies' business is in merchant acquiring (80%-85% of revenue), and the Bank of Israel also recognizes that this business is less risky than full banking business. Furthermore, in contrast to banks, the credit card companies do not solicit deposits from the public. The Bank of Israel wants to encourage competition in this NIS 240 billion credit market, in which the average interest rate is 1% (obviously, small and medium-sized businesses pay higher interest rates than large ones). Any reduction in the merchant acquiring charge will therefore save the business sector billions of shekels a year, which is likely to trickle down to the consumer and lower the cost of living.
The Banking Supervision Department's instructions published in today's draft are concentrated in two areas: making it easier for new merchant acquiring companies to enter the market, and easing regulations for credit card companies. The new instructions involve the capital requirements, and enable new players to use the veteran credit card companies' existing infrastructure. At the same time, the Banking Supervision Department's instructions exclude large financial and non-financial entities, which will not be allowed to acquire the existing credit card companies.
Hitching a ride from the veteran companies
Where new merchant acquiring companies are concerned, the Bank of Israel will allow those applying for new licenses to obtain a letter from the Banking Supervision Department even before a license is granted, so that the new merchant acquiring companycan be connected immediately to the credit and debit cards system, while completing the processes for obtaining the authorization from the international operators needed to obtain a license.
Another concession being proposed by the Bank of Israel is the removal of a technological barrier in being connected to the credit and debit cards system, so that after obtaining a license from the Bank of Israel, the new merchant acquirer can be connected to the credit and debit cards system on the basis of an agreement signed with an existing merchant acquirer that will host the new merchant acquirer on its infrastructure in an aggregator format. This is reminiscent of the virtual operator in the cellular reform, which allowed new players to "hitch a ride" with the veteran operators' cellular networks. The Bank of Israel emphasizes, "The hosting will be provided for a limited time (for instance, until the required certifications are obtained from the international card organizations for the independent clearing of their brands, until the transition of a significant part of clearing activity in Israel to the new payment card system (“Ashrait EMV”), and so forth)."
In other words, the transition from being temporarily hosted on the veteran credit card companies' infrastructure to establishing an independent system will take place over time, due to the transition to the EMV system. It is believed that the Bank of Israel will approve a new merchant acquirer within a few months, and several requests have already been made to the Bank of Israel.
As of now, the Bank of Israel does not intend to force the existing credit card companies to sign system sharing agreements with new merchant acquirers, but has signaled to the existing companies that it is worthwhile for them to do so, while not ruling out the possibility of future compulsion being used.
No entry to large companies
The second part of the new instructions concerns regulation for credit card companies. The requirements have been eased in three ways. One is a reduction in the minimum controlling core from 50.1% to 20% for a large merchant acquirer and 25% for other merchant acquirers. In another change, the financial resilience requirement for a controlling shareholder in terms of its capital interest has been lowered from the current 250% (the same as for banks) to 150%. The Bank of Israel will also allow corporations previously barred from being part of the chain of control to own the means of control in a merchant acquirer (directly or indirectly). For example, a non-financial company or investment fund will be able to form a controlling core in a merchant acquirer.
The Banking Supervision Department also intends to allow the decentralization of the controlling core in a merchant acquirer. The ownership structure of a merchant acquirer or credit card company can be completely decentralized. This requires legislative changes that will institute similar arrangements to those applying to a bank with no controlling core. At the same time, in order to prevent over-concentration in the sector, and in compliance with the Promotion of Competition and Reduction of Concentration Law, the Bank of Israel ruled that a large institution will not be allowed to control a large merchant acquirer. In effect, the Bank of Israel is therefore restricting the number of players that will be able to acquire credit card companies after the Strum Committee report by excluding the major insurance companies, Psagot Investment House Ltd., and Mizrahi Tefahot Bank (TASE:MZTF). Furthermore, non-financial companies classed as "significant" under the Promotion of Competition and Reduction of Concentration Law will also be barred from acquiring a merchant acquirer (this refers to a company with an annual turnover of over NIS 6 billion, or a monopoly with an annual sales turnover of more than NIS 2 billion).
The Bank of Israel is leaving the door open to additional regulatory concessions, stating, "The Banking Supervision Department intends to make adjustments in 2016 to the applicability of Proper Conduct of Banking Business Directives, easing the regulatory burden on merchant acquirers in view of the uniqueness of these entities and the lower risks in their activities than those to which the banks are exposed. The adjustment will be made in relation to new directives and also in relation to the currently existing directives. Among other things, the Banking Supervision Department is examining easing the capital requirements for merchant acquirers."
Ber added, "The Banking Supervision Department is taking steps to increase competition in the area of payment cards and in the area of credit. This process will make it possible for additional parties from Israel and abroad to enter the merchant acquiring and credit cards market, benefiting households and small and medium businesses. In addition, the changes we are publishing today, and those that are planned, will lead to the creation of a new supervisory “tier” within the Banking Supervision Department, which will supervise financial entities that do not receive deposits but have systemic importance to the stability of the financial system and the entire economy, and will be a more lenient supervisory regime than over the banks.”
The credit card companies issued no statements today, and declined to comment on the instructions before reading the complete draft.
Published by Globes [online], Israel business news - www.globes-online.com - on November 17, 2015
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