Remarks by Supervisor of Banks at the “Calcalist” 2018 Forecast Conference: Competition and Innovation in Banking – Are We Already Seeing a Change?
In the past two years, there have been a number of large-scale changes in the world of banking. A number of laws have been enacted with the aim of promoting competition in the financial and banking fields; the Banking Supervision Department has taken proactive measures to advance competition to benefit households and small businesses; and the financial world has started to undergo a digital-technological revolution, which is creating competitive pressure in the banking field in Israel, similar to what has been taking place in many other countries over the past few years.
Against the background of these changes, the question arises as to whether we can already see any tangible reflection of increased competition in the banking field, with an emphasis on competition among households and small businesses, and what can be expected in terms of banking competition in the next few years?
The data available to the Banking Supervision Department indicate that competition has increased, and is already being reflected in a number of areas, benefiting households and small businesses: in terms of service and variety available to customers—which are improving; in terms of bank fees for small businesses and households—which are declining; and in the structure of the financial market—which is changing dramatically.
In the area of service and variety available to customers, the developing competitive and technological pressures are leading to a situation where the banks are investing tens and even hundreds of millions of shekels in innovation, an investment that is making banking service much more available and convenient for customers. For instance, in the past year, three banks have launched payment applications that enable anyone to make money transfers instantaneously, for free, through their mobile device, to another person, without knowing that person’s account number or other details, beyond the beneficiary’s phone number. By way of comparison, a decade ago, the cost of a bank transfer was NIS 48, and transfers were made mainly through the branch. This is one of many examples where the banks have invested in innovation in order to improve service to their customers. This innovation contributes, among other things, to the fact that today, banking services can be consumer not only during the branch’s hours of operation, but at any hour of the day, remotely, by computer or smartphone, as well as through ATM machines that have grown much more sophisticated and can be used to execute a wide variety of transactions. Other such examples concern the world of investment counseling, which is expanding to digital means and is now available to households with small investment portfolios, and more. The banks’ competition over services to the customer is also reflected in the variety of communication channels between the banks and their customers. Some of the banks are expanding their digital services, while others are expanding the services offered to customers at the branches and are also expanding the number of services offered. This competition in communications enables the customers to choose the bank they prefer based on the channel of communications that is most fitting for them.
In the area of bank fees, there has been a marked decline in fees for both small businesses and households. Recently, the increased competition between the credit card companies, against the background of the expected spin-off of two of them from the banks, alongside the effect of regulatory measures instituted by the Banking Supervision Department, have been reflected in a decline in settlement fees. The savings caused as a result of the lower settlement fees for businesses are estimated at about NIS 300 million in 2017, compared with the situation in 2014. In addition, there has been cut-throat competition in the credit card market in the past year, which is reflected, among other things, in the number of agreements signed, which is already leading to a further decline in fees. For instance, the agreement between Isracard and the “Lahav” organization for small businesses and the self-employed, which involves a reduction in fees; the agreement signed between CAL and the GAMA Association, which also sets out lower settlement fees for small businesses; and more.
At the same time, households are also benefiting from lower fees resulting from the increase in the supply of digital services and in view of the Banking Supervision Department’s requirement to price direct channels at lower rates for customers. For instance, from November 2017, all banks have published the discount rates they offer for each of the financial services that the public can consume directly. These are discounts of dozens of percent per transaction. For instance, in the area of foreign securities, a transaction through direct means saves the customer about 70 percent compared with a teller-executed transaction; in the area of Israeli securities, the discount is 50 percent, and in the area of transferring money abroad, the discounts are about 37 percent when the transaction is executed directly. These discounts join the already existing discount in the area of current account transactions, which can reach about 75 percent if the customer conducts transactions directly, such as through ATMs, the bank’s application or the bank’s website, compared with teller-executed transactions. Alongside these discounts, Banking Supervision Department data show that the public is “voting with its feet”, and conducting more and more transactions directly, thereby saving fees.
In this context, the question is asked whether competition in banking will also be reflected in a decline in the interest paid on retail credit. The answer is not simple. On one hand, the increased competition, which is also influenced by the increase in the number of non-bank and independent players, will lead to a decline in the non-competition premium in the interest on credit. In contrast, there are a number of factors that may work to increase the interest rate—starting with an increase in borrower risk, which is derived from the fact that households are increasing the loans they are taking out, through the entry of riskier borrowers into the loan market, to the practice that has recently developed of more households and small businesses considering bankruptcy, which leads to concomitant increases in credit losses on the part of the banks and credit card companies. Another factor that may lead to increased interest rates is the higher cost of sources that is characteristic of the non-bank entities, and will apparently be characteristic of the newly-separated credit card companies as well. However, it is important to emphasize that international comparisons show that the interest on retail credit in Israel is no higher than in other advanced economies, and in the area of credit cards, the interest in Israel is lower than what is common in other countries.
In terms of the structure of the financial market, there is a significant change that also leads to increased competition over households and small businesses. In recent years, the number of financial entities offering loans to households has increased greatly. While just a few years ago, a customer interested in a loan could go only to his bank, that customer today can go to a different bank, where he does not manage an account; to a credit card company; to a non-bank credit provider; to his provident fund or advanced training fund; or to P2P loan platforms. All of these offers are available to the customer, and he can conduct market comparisons through a quick search on the Internet or remote enquiry with the various entities. There is no doubt that the variety of alternatives currently available to the customer creates competition in and of itself.
In addition, In the past two years, competition within the banking system, between the two large banks (Hapoalim and Leumi) and the mid-sized banks (Mizrahi-Tefahot, Discount and First International), has increased. The share of the credit market held by the two large banks declined from about 57 percent at the start of 2016 to about 54 percent at the end of 2017, while the share held by the mid-sized banks increased to about 41.5 percent. The factors contributing to the increased competition within the system include higher capital requirements imposed on the two large banks by the Banking Supervision Department, and a more competitive business strategy now being adopted by the mid-sized banks.
The answer to the question of when the establishment of a new bank in the system can be expected depending on business factors in the economy. For its part, the Banking Supervision Department has eased the regulatory requirements, chiefly the capital requirement and the requirement for a separate technological system, and has eased the process of granting a license to a new player, so that anyone interested in establishing a bank will be guided closely by Banking Supervision staff who will help in the process. In the first stage, the entrepreneur will be able to obtain a limited bank permit, which will provide him with the necessary certainty even before the large financial investment required to establish the bank. In this context, it should be pointed out that as part of the easing of conditions, the Banking Supervision Department provided a license this year to a new merchant acquirer, for the first time in many years.
The establishment of a new, competitive bank with a focused technological model is expected to increase competition in the banking segments, but it is important to emphasize that the entry of additional players is not a necessary condition for increasing competition. Competition in banking and in the financial field will continue to increase as a result of the technological changes and easier conditions that will be implemented in providing information to the customer; the increasing number of non-bank entities, as happened in the field of business credit; increased competition within the banking system, which can be seen in the increased market share of the mid-sized banks; and the competitive pressure created due to the removal of many entry barriers in the market, which is leading the banks to make more competitive offers to customers and to significantly streamline so that they will in the end be able to roll the fruits of that streamlining over to the customers.
In 2018, the Banking Supervision Department will advance a number of significant reforms in the area of information, which are expected to strengthen competition. These reforms will make information much more accessible to customers, improve the customer’s ability to compare the terms and services offered by the various entities, save costs, and improve the customer’s ability to easily move from one financial institution to another—or even just threaten to move—thereby improving the service and conditions he receives.
The first measure that the Banking Supervision Department is leading that will take effect in 2018 is the digital dispatch, at the press of a button, of the customer’s “Banking ID” to supervisory entities, including cost comparison service providers, banks other than the customer’s bank, credit card companies, financial institutions, and more. As we know, the information included in the customer’s Banking ID includes a complete picture of the status of all financial assets he holds at the bank—deposits, securities, current account balance; all of his loans, including current account overdrafts, short- and medium-term loans, mortgages, and fees paid, listing them by the various transactions (securities, current account, etc.); and the total interest he paid to the bank or received from the bank. The transfer of this information at the push of a button will enable the customer to obtain relevant offers from competing financial entities more easily.
Other initiatives that will be advanced and take effect in the field of information are the establishment of the central credit register, which the Bank of Israel is advancing and is expected to become active at the beginning of 2019; the transfer of information on the customer’s current account to credit card companies and supervisory entities, according to the outline set out in the Strum Committee reform; and writing a uniform standard for transferring all customer information, including current information, in a secured manner (API), in accordance with the outline recently set out with the Ministry of Finance and the Ministry of Justice.
In summation, competition in banking is increasing and will continue to increase. Competition began more than a decade ago in the area of credit to large businesses, and it has increased and is continuing to increase in the areas of banking for households and small businesses. The changes taking place in the banking system globally, and particularly the digital and information revolutions being advanced by the Banking Supervision Department, are expected to lead over the coming years to a financial market that is different, and more competitive. These changes are defined by the Basel Committee on Banking Supervision as having a “disruptive” effect. The customers are already feeling the change, and will continue to feel it.