Bank of Israel: Spurring Paytech Innovation in Smaller Developed Markets

One of the unique challenges faced by regulators of payments and payment systems in smaller but developed markets is ensuring an attractive business case for stakeholders, be they banks, big-techs or Fintechs, as they consider whether to develop propositions for a given domestic market. In many such markets, an additional element exacerbating this challenge is that legacy payment systems and payment methods generally work well, providing high levels of uptime, stability and often reasonable costs and transaction times. Small market size also tends to limit the number of players in the domestic payments space and therefore lowers competition and innovation. In these jurisdictions, as we think about prioritizing our initiatives, we conduct a cost-benefit analysis: What benefit will new Paytech initiatives bring consumers and businesses, and at what cost? What will be the impact on the domestic market in terms of payment system stability, settlement finality and economic cost?

In Israel’s market these questions come into special focus. Major global market-moving Paytech initiatives are developed by Israel-based teams, yet many of their innovations are not offered domestically. What measures should we take, if any, and how far should we go, to lower domestic barriers to entry for Paytech firms?

Paytech in the Startup Nation

With only 0.12% of the world’s population but 8% of the world’s unicorns, Israel enjoys an abundance of local research and development in the high-tech sector. This sector delivers nearly 13% of domestic GDP and 40% of exports. In the late 2000s Israel’s active startup scene earned it the nickname “Startup Nation.” So many of the early stage companies have grown in recent years that new nicknames have emerged for the country in the venture capital industry—“Scale-up Nation”, and in some respects, “Fintech Nation”.

Indeed, domestically developed Fintech and Paytech propositions stand out. The domestic Fintech powerhouse raised US$3.2 billion in the first eight months of 2021 alone and has been delivering impressive ...

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