By Yonatan Brand on Wednesday 23 September 2020
Currently, while facing the Covid19, Israel's local fintech lending market is struggling to take off, says Fintech Partners' Yonatan Brand.
Israel is often referred to as the startup nation. However, the country with the highest number of startups per capita lacks such representation in the alternative lending space and moreover within financial technology.
When it comes to SME lending only 0.1 per cent of the market is provided by fintech companies, well below the European or American benchmark. If we look at different Israeli segments of lending we will see that very few of them are competitive with the majority dominated by a small group of incumbents.
This problem is at its worst when it comes to SME lending. SME lending is controlled by five big banks constituting 98 per cent market share with the remaining provided by smaller banks and alternative lenders. This distribution is skewed by 70 per cent and up to 90 per cent compared to other developed markets. Looking at the alternative lenders referred to above, the dominant product being used appears to be done by traditional lending, namely cheques clearing.
Such lenders are not based on technology or innovation and maintain standard practices within this industry. Out of the small 2 per cent share of alternative lenders in Israel, 95 per cent are cheques clearing companies.
On the demand side, Israel’s SMEs are craving for additional funding. 70 per cent of SMEs say they lack sufficient financial solutions. One out of 10 SMEs is profitable but shut down only because of insufficient financing.
Israeli SMEs contribute more than 50 per cent of GDP and employment but receive less than 20 per cent of business debt. Government research and various committees dictated that SME financing is a bottleneck for growth, leading the government to establish governmental backed funds for SME lending and push for legislation that will encourage competition within the SME credit market.
The question arises, given the gap between supply in demand, what is causing the lack of competition and innovation in such markets? Perhaps Israel is lacking the qualified personnel for this challenge?
Looking abroad, Israeli teams and companies are leading revolutions in many fintech sectors including SME lending. Companies like Payoneer, Lemonade, eToro, Tipalti and others were established by Israeli teams. Israeli teams are doing well in SME finance as well with examples such as BlueVine, Fundbox, Behalf, and UK’s based Ezbob. Hence, the hypothesis of a lack of talent seems to be refuted, leading us to look elsewhere.
Our hypothesis now rests with the regulatory environment. Israel is suffering from a very conservative and undeveloped legislation system when it comes to financial laws and regulations. Israel is one of the few developed countries in which a business needs a license in order to provide lending to companies, compared to the US or the UK as an example where such activity is exempted from regulatory constraints.
Taxation policy in Israel is often unclear when it comes to businesses, as for instance some lenders charge VAT on interest and some don’t which is a result of a cumbersome and uncertain regulatory environment. Israeli digital banking infrastructure is years behind. Open Banking directive is not present, and only recently a national credit bureau was established, for individuals only for the time being. But above all, the major shortfall for alternative lending is that Israel is lacking access to capital. Alternative lenders in Israel were banned from the stock market until 2015. According to the Israel law, until 2015, alternative lending companies could not offer their stocks to the public nor list bonds at the stock exchange.
Having no access to capital left Israeli alternative lenders capped at a glass ceiling. The inability to raise funding at scale deprives alternative lenders from the benefits of risk spreading or efficient operational structure. Instead, such alternative lenders are forced to use the only route left - high margins and unregulated credit and collection policies. This led the Israeli alternative market to become a semi-black market of loan sharks.
In 2015 Israel made a giant leap developing its alternative lending sector allowing private lending companies into the stock market. Since, the traditional cheque clearing market is booming in Tel Aviv stock exchange but nevertheless fintech lenders have yet to join.
Currently, there are very few fintech lenders operating in Israel. Several P2P providers such as BTBisrael and Tarya are accountable for less than 0.1 per cent of the market and are suffering from the usual problems P2P platforms are facing elsewhere. Other alternative lenders such as Habankaim.com, Midgalor or Hamazpen have yet to become a significant force in the market.
The major foreign players such as Bluevine, cabbage or Funding Circle are not interested in the Israeli market and unable to compete in it due to the need local for licensing and integration to the local booking keeping and other data suppliers which are different from the global standard.
Currently, while facing the Covid19, Israel's local fintech lending market is struggling to erupt. While the previous condition that the government created prevented it from happening until recently it may be that the new condition will prevent it still.
Digital lenders were discriminated at last governmental guarantee lending program and the regulators controlling the alternative lending licensing and taxation are still adding blockage to their activity instead of support it.