Competition and the changes in competition in the Israeli banking system: Excerpt from the forthcoming Annual Survey of Israel’s Banking System
· The Bank of Israel and the Ministry of Finance have defined the advancement of competition in banking as an objective, with an emphasis on households and small businesses, including all of the banking services they consume, in both credit and payments and settlements.
· In order to increase competition, the Banking Supervision Department is advancing a series of structural regulatory measures. Some of the measures are derived from new legislative provisions that have been led by the Bank of Israel and the Ministry of Finance, and some have been at the independent initiative of the Banking Supervision Department, and are intended to promote competition, encourage technology and innovation, and improve the efficiency of the banks. The changes in the environment in which the financial entities operate, the entry of technology to receive information and make banking transactions more easily, and the transition of customers and banks to digital services also create increasing competitive pressure in Israel and around the world.
· The measures to advance competition can be grouped into two main channels. The first is measures to increase competition between the existing financial actors, such as cancelling barriers to the transfer of information and creating “open banking”, easing the transition between banks, and providing incentives for significant streamlining of the banking system. The second channel is measures that will enable the entry of new actors—both bank and nonbank—that will make use of specialized and efficient digital business models that will create a competitive threat.
· Examining the competitive level of any market is a very complex task. Changes in the structure of the market require time, particularly in a small economy such as Israel’s. Therefore, this box focuses mainly on changes that have taken place in the competitive environment, barriers to competition that were removed, and barriers that the Banking Supervision Department expects to remove in the near future. Alongside these, the changes in various quantitative indices are presented, showing the trends in the area of competition.
· The measures taken in the past two years, and the regulatory environment that encourages competition have already led to an increased competitive threat and to an actual change according to various indices, mainly in the households and small businesses sector. Thus, for instance, competition in the area of retail credit has increased greatly, as reflected in a number of aspect, including: significant growth in the number of entities offering consumer credit to households—both bank and nonbank entities; increased competition within the banking system, reflected in the increased consumer credit provided by mid-sized banks and credit card companies as a share of total bank credit; improvement in the variety, quality and convenience of banking services for households and small businesses—including through technological and digital innovation; a significant decline in the fees charged to businesses in the area of payments and settlements; and more.
· Removing of many barriers to competition—a process that is underway—and the significant structural changes taking place in the financial market, are expected to lead to a continued increase in competition in the coming years in the areas of retail banking—households and small businesses. These are infrastructural changes, a process that will bear fruit gradually.