Remarks by Supervisor of Banks Mr. Yair Avidan at the Bank of Israel Conference—“A Look at the Future World of Payments”
It is a great privilege and honor to take part in this important conference dealing with the future world of payments.
We have already heard this morning about some directions and trends in the future world of payments, and we will certainly hear much more about it over the course of the day. I believe the world of open banking will be a major pillar in any direction in which the payments market develops and that is why I chose to focus on that issue this morning.
I am not sure if everyone noticed, but last Tuesday was a historic milestone in the local banking world. On that day, the Open Banking Law went into effect. This is a very important stage in enhancing competition in the financial system, but no less important—it is a significant step in improving the power of the financial customer and the customer’s ability to deal with the financial world.
The open banking project has been a flagship project of the Bank of Israel and the Banking Supervision Department in recent years, no other superlative can be used. Or maybe we can—it’s a project that is a real revolution.
This reform is the first step and the foundation stone to realizing the vision and strategy of establishing and creating an open financial world. That is a world in which not only banks serve as sources of information, but it is a world that incorporates data on long term savings and the pension world, and ultimately we should work toward an “open economy” world, a stage in which we will realize the vision of “open data” – activity whose buds can already be seen in the world.
The Financial Information Service Law, or as it is generally known—the Open Banking Law—was legislated within the framework of the past Economic Arrangements Law and published in November 2021, exactly 3 months after the Bank of Israel announced that it was requiring the banking system to implement the “Berlin Standard” of open banking.
It is a very important law, and its going into effect is expected to contribute a lot to strengthening the power and stance of the consumer, to encouraging competition in the financial system, to transparency about the information assets of the customer, as well as significant potential for enhancing financial inclusion and creating considerable value for citizens as customers, and for the economy.
This is an additional pillar in the changes in the banking world and the financial world, which is sufficient to move the meter and switch from a slow and stable track of evolution, in which the system advances by tiny steps in a measured and orderly fashion, to a track of revolution which changes dynamically and rapidly. The switch from evolution to revolution both in terms of speed and in terms of goods and services, contains significant potential to develop competition and the welfare of the consumer. Alongside that, the success obligates all the participants in the system, whether regulators, legislators, information consumers and information sources, to join in and contribute their part to the proper and appropriate development of this complex system. Notwithstanding that at this time it is still not clear what is the equilibrium to which the ecosystem will converge, it is crystal clear that without the welcome activity of all the participants, we will not reach a good, developing, and sustainable equilibrium.
The revolution that is driven, among other things, as a derivative of open banking, alongside the uncertainty, impact directly on the variance in the business model, on the new players in the financial market, and on the creation of new collaborations that challenge us as regulators. We could point, as an illustrative example, to banking platforms that collaborate with financial service providers, creating a “marketplace” in which services are provided by various financial entities, and there are no limits on the imagination going from there. We, as regulators, are ultimately guided by the understanding and management of the risks, by these services and occupations being permitted, and their impact on the economy and on competition from a positive view of the consumer.
The legislative process is never a simple one, but the legislative process of the Open Banking was especially complex, as there was a complicated interrelationship between the service provider and the customer, the customer and the information sources, the sources of information and the service providers, between the service providers and information sources with the various regulators, and also, no less complex, among the regulators themselves. This law led to many challenges for all of us and I am happy to say wholeheartedly that we met those challenges with flying colors.
It is not a coincidence that the Law that was legislated just about half a year ago has already gone into force. We have to say things as they are—if the Bank of Israel and Banking Supervision Department had not started the process of formulating and designing the reform three years ago, we would not be standing here today with data sharing based on a uniform and international standard already an accepted fact and implemented in actuality. In my assessment, our early preparation made the implementation of this reform possible here and now, years before it would have been implemented if the whole process had begun last November.
And allow us a small pat on the back. It is often said that regulators follow the pack. I will permit myself, in all modesty, to say that in this case we acted as a regulator that was a reformator, groundbreaking and leading the pack.
The Bank of Israel has taken upon itself the promotion of competition in the banking system and improving the position of the customer. The customer’s place, clearly, is at the center.
Already in 2016, we began regulatory steps to entrench the information sharing in the banking system, first as a regulator that enables, and then as a regulator that requires. Not only did we require the banks to implement open banking, but later on we also worked to choose an accepted international standard and we required the entire banking system to work according to this standard. As is known, we acted, even before the legislative processes were ready, activity that incorporated great risk and complexity throughout, and also complex tensions, all in order to implement the standard for the Israeli market, along with pushing the banking system to prepare for this big bang called open banking. Yes, it is definitely a bang. Activity for which the term “significant reform” as I noted is definitely appropriate.
The first information basket—information on balances and transactions in current accounts, went on air in April 2021. There were certainly complicated days before it went on air. Complicated days mainly as a result of the lack of legislation, and various claims and complaints from various sides. Each was looking through their own prism, each had their own interests. I hope that today it is clear to all that it was required and welcome activity that was necessary for the implementation of the open banking reform.
With the perspective of about a year, I am very happy that we did what we did. We anticipated that going live with the first basket would be a kind of pilot that would help us examine and see the “water flowing through the pipes”. As we expected, there were, and to some extent there still are, some birth pangs. Some of the difficulties are totally natural, and we saw this phenomenon in other countries that implemented open banking, as well as in other significant projects that involve many functions and various complex systems.
We have say honestly, this is a big system, huge amounts of data, complex business processes and numerous participants and entities impacting on it. The handling of disruptions can certainly be complex. Even though all of us already want to be at the point in time when everything works perfectly and the information flows smoothly among the various entities, we need patience. The adjustment to the legislative processes and the timeframe led to a relatively rapid development and therefore there could nonetheless be problems characterized as problems in getting off the ground.
In Europe, it was all at once and after going on air, all the efforts were invested in stabilizing the system. In Israel, after each part, the information sources have to add more information to the open banking and to prepare for the next round, and this is in parallel with stabilizing and fixing problems that came up in the previous round. This also indicates the importance of working in accordance with the uniform standard adopted in Israel. The correct and optimal use of this common language creates the clarity and linkage required to implement this reform properly. It is the standard that will ensure the ease of the connection and the interfaces of the information service providers with the API. We are aware that there is still criticism on the processes of sharing information and I am proud to say that we are gaining a lot of value from it. The criticism helps us to discover deficiencies and failures, and pushes us to improve constantly in order to lead to a minimum of deficiencies and their continued handling.
We need determination. We need the desire of all the participants. We need to have SLA. We need enforcement.
And if we are already talking about the activity of information service providers, we find ourselves at a significant point of opening the ecosystem to outside the banking system and granting the possibility of access to information to additional entities. We are very much looking forward to the entry of new participants that will open and expand the ecosystem and will help the consumers make informed and correct use of their information.
And let’s not be confused. We have to be extremely careful and cautious. We are dealing here with information. To be precise, with sharing of information. Sharing customers’ information. Data security, protecting privacy, and the trust of the consumer are the foundation stones of the entire ecosystem. Without these, we probably won’t succeed or successfully implement the reform. The banking system is experienced and is well acquainted with the challenges involved in managing these risks, but that is not enough. All the entities and players active in the area bear the obligation to appropriately manage the risks involved in sharing the data, particularly the cyber and information security risks.
In order to create this trust, we all have to act in accordance with the rules and to take care to execute all the processes fairly and in accordance with the law and regulation. It begins from the stage of receiving the customer’s agreement, with all that is entailed, through receiving the information and protecting it, through making the information accessible and creating value for the customer. These all need to be carried out properly and at the highest standards. This is also the reason for the heavy responsibility placed on us, the various regulators, to supervise the activity of the various players. The interconnectedness and flow of data can create concern for potential contagion and even, as I noted, concern of calling into question and adversely impacting customers’ trust of the banking system.
We believe that the information collected on the customer’s activity is information that belongs to the customers, and as such the customer is the one to decide who will be able to use it and for what reason. The entire open banking reform is based on this approach. However, we mustn’t be satisfied with that. We should begin, as we have done, with the banking information, to continue with information from all financial entities and to aim to integrate all the information on the customer’s activity. In today’s world, information is power, and just as business entities use information to develop and adjust goods and services, so too the customer will be able to use the information for his personal benefit and to increase his gain.
The manner of using information is a challenge in and of itself. It is still too early to forecast all the uses that will develop as a result of the reform. However, we can certainly already say that they will support the existing, intensifying, trend, which is characterized by strengthening the power of the customer, opening the market to competition, disconnecting goods and services, monetization of information and the entry of technological companies and players into the evolutionary financial world. These all will require an infrastructure and legal interpretation that supports and enables the development of this world. It is also certainly a notable challenge to the regulatory environment that is supposed to regulate and supervise this activity.
Open, stable and active banking can bring added value to the customer and the players active in the area. This is why we are excited ahead of the opening of the eco-system beyond the borders of the banking system. The turning point is expected to be in December 2023, when all information baskets are expected to go into effect with regard to all customers and corporations.
We are in the midst of a process of growing and developing the market until the right equilibrium point is found, although it is possible that it will be dynamic and change with the development of the system, the composition of the players, collaborations and more. We are convinced that there is room to promote an open financial system in which the customers, in line with their choice, will choose how they will consume the services and will allow the use of the information asset they own. In this way, customers will be able to receive added-value offers and more tailored products, better consultation, a more diverse service, a better customer experience as well as financial inclusion in a range of services and financial products. The customer can now consume financial services from among several entities without losing control of the information about his financial conduct.
The infrastructure built for open banking activities serves as a tool for accessing customers' accounts, and therefore the infrastructure can also be used for innovation in the worlds of payments and other activities.
The Bank of Israel began this journey by requiring banks to adopt the open banking standard for writing payment instructions as well. At this stage, we have required a single payment, but from here on, the sky is the limit. The road has been paved, now we can drive on it. Later on, additional services will be added, related to the worlds of payments—whether by regulators, the Berlin group that defines the standard or the ecosystem itself.
However, just like open banking with regard to information, legislation was very important, here it is as well. In order to entrench the banking payment services in open banking, parallel legislation is required in the payments sector—that will arrange the regulation and licensing of the entities that will be able to provide those services as well as protection of the customers.
Joint work teams are working diligently to advance this important legislation.
And we cannot finish these remarks without mentioning the social aspect. In recent decades, there has been expanding awareness that brings together the business and social worlds.
Social responsibility encourages organizations to maximize value not only to themselves, but also to the environment, society, the State and the world at large. The source of the connection is the understanding that profits generated while providing social value have a higher strategic value. I believe that the open banking reform is an excellent example of an opportunity that creates shared value that is expected to enhance the wellbeing of the public and the economy, in a way that will empower and enable us to live in a better society.
In conclusion, the open banking reform is a groundbreaking reform. The reform impacts materially on the balance of power between the customer and the service providers.
In all that is related to investments required to develop the ecosystem, I would like to be clears: there is no time better than the present. Now is the time. It is a great privilege and great responsibility to take part in a reform of this magnitude, which will receive a place of honor in the history of the banking and financial system.
It is our shift and we all have to do our part to realize this reform in the best way possible.
Thank you, and enjoy the rest of the conference