- An analysis of data from 2016 to 2020 provides evidence of a moderate increase in competition in the retail credit market, mainly in consumer credit. However, in credit to small and micro businesses, there was no significant change in the balance of powers between bank and nonbank credit, and the banks are the almost sole source of credit to such businesses.
- There was a decline in the concentration of consumer credit, which is reflected in both a decline in the weight of bank credit and an increase in the weight of nonbank credit as a share of total credit, and in a decline in the large banks’ market shares and an increase in those of the medium banks. With that, there was a slowdown in the growth of consumer credit (until the COVID-19 period). It seems that most of the change in concentration is due to a decline in the balance of credit from the large banks and a diversion of their sources to credit to large businesses.
- There was a slight increase in the rate of customers taking out consumer loans from credit providers (bank or nonbank) in which the customer does not manage a current account. In addition, following the establishment of the credit data register, there was a decline in the hold-up premium (the difference between the interest paid by customers who manage a single current account and those who manage a number of current accounts). This decline is an initial indication that data sharing through the register is working to reduce the gaps in credit prices by reducing customer dependence on the bank in which they manage their current accounts.
- The report indicates a slowdown in progress in the removal of barriers to competition since the last report in March 2020, as a result of the COVID-19 outbreak and the political uncertainty that prevailed during this period. The removal of the barriers, which constitutes a necessary condition for increasing competition, is now under intensive work. As part of this, the Open Banking Law is being advanced as part of the Economic Arrangements Law for 2021 and 2022. In parallel, the government decided to advance regulation in the payments market and to publish legislative memoranda on regulating payments services by December 30, 2021.
The Committee to Examine Competition in the Credit Market is today (Monday) publishing its third report. The report includes an update regarding changes that took place following the publication of the second report, expands the quantitative analysis, and reviews the period between December 2016 and December 2020. The reviewed period includes the COVID-19 period, but the main emphasis of the report is an analysis of the changes in competition in the months leading up to the pandemic, while the changes in competition in view of the pandemic are analyzed in a separate chapter.
The report indicates that since the start of the reform, there has been significant progress in lowering barriers to competition, which is a necessary condition for increasing competition. This progress slowed following the publication of the last report in March 2020, both due to the COVID-19 period and as a result of political uncertainty that prevailed during the reviewed period.
The progress includes first and foremost the gradual establishment of the digital bank through the use of the computer services office and the provision of the option to make additional transactions online (via both banking entities and nonbank credit suppliers).
However, the implementation of significant measures is being delayed. In particular, regulations have not yet been set out regarding the use of online financial information (Open Banking Law). These regulations are being advanced as part of the economic program for the years 2021 and 2022, and are expected to significantly improve customers’ ability to compare various products and financial providers. Furthermore, the regulation of payment service providers and of payment initiation services has not yet been completed, but according to government decision, legislative memoranda are expected to be published for public comments by the end of 2021. In parallel, the existing restrictions on payment facilitator activities have not yet been removed. At the same time, there are processes that are expected to be completed soon, such as the transition from bank to bank project that is expected to be completed in 2021.
The conclusions of the quantitative analysis show that the downward trend in concentration in the consumer credit market continues. This is due to the decline in the weight of bank credit and the increase in the weight of nonbank credit, as well as the decline in the market shares of the large banks and the increase in the market shares of the medium banks. In contrast, most of the change in concentration is due to the decline in the outstanding credit of the large banks (and the diversion of their sources to credit to large businesses) while there was a concurrent slowdown in the pace of growth of total consumer credit as a share of total credit (until the COVID-19 crisis). This slowdown weakens the conclusion that there was an expansion in the supply of credit during the period as part of the increase in competition.
Additional pro-competition indications in the consumer credit market include declines in the indices of the banks’ market power. In particular, there was a decline of about half a percentage point in the interest rate, which we understand to reflect only moderate changes in intensity.
Contrary to the upward trend in consumer credit, there was no prominent change in the balance of forces between bank credit and nonbank credit to small and micro businesses, and the banks are the almost sole source of credit to such businesses. In terms of profitability margins, the slightly downward trend in indices of the banks’ market power continues, in parallel with the increase in balances. In this case as well, the decline in the interest rate amounts to about half a percentage point.
Finally, the report shows that one of the barriers to competition is customers’ tendency to purchase a basket of products from the bank where they manage their current accounts. In this context, there were two indications of improvement in competition. Frist, there was a slight increase in the rate of customers taking out consumer loans from a credit provide (bank or nonbank) where they do not manage their current accounts. Second, following the establishment of the credit data register, there was a decline in the hold-up premium (the difference between the interest paid by customers who manage a single current account and those who manage a number of current accounts). This decline provides an initial indication that data sharing through the register is working to reduce the gaps in credit prices by reducing customers’ dependence on the bank where they manage their current accounts.
Increasing competition is a gradual process. As such, we can expect that once all the above-listed regulatory measures to increase competition and other measures detailed in the report are completed, there will be a further improvement in competition in the retail credit market. However, the extent of the effect of these measures on competition in the credit market for small and medium businesses seems unclear. The Committee will continue monitoring developments, gathering the necessary information in order to quantitatively measure the effect of the changes and the extent of increase in competition in the credit market, and report to the public, the government, and the Knesset on its findings.
In accordance with the provisions of the law, the Committee is co-chaired by Ministry of Finance Director General Ram Belinkov, and the Head of the Bank of Israel Research Department Prof. Michel Strawczynski. The other Committee members are the Supervisor of Banks, the Ministry of Finance Budget Director, the Director of Capital Markets, Insurance, and Savings, the Supervisor of Competition, and the Head of Payment Systems at the Bank of Israel. The Committee’s role is to monitor the implementation of the Increasing Competition and Reducing Concentration in the Banking Industry Law, and to recommend measures to improve and increase competition in the credit market, periodically examine the state of competition in the credit market, and find barriers to the development of competition in the market.