Israel releases draft directive on open banking
While Israel has strong banking system, it has been a late mover in initiating open banking:
Israel is in the process of implementing open banking. The country’s central bank, the Bank of Israel, has recently released a draft of the Proper Conduct of Banking Business Directive on the implementation of open banking standards and the draft contains stipulations banks and credit institutions should follow like enabling licensed and supervised third parties to get access to customers’ bank accounts, of course with the customers’ explicit consent, in order to retrieve information or execute transactions. Israel had about 2 years ago enacted a legislation, titled ‘the Increasing Competition and Reducing Concentration in the Banking Market Law and this law too requires financial institutions to enable service providers to have access to customers’ financial information.
SETTING STANDARDS
The Bank of Israel says the Directive is intended to set the grounds for ‘open banking’ in the country and to strengthen the control of private clients over their financial information and bank account management. The draft Directive covers the duties and obligations of banks and credit card companies including information and cyber security protection requirements, consent management requisites and risk assessment tools. Banks and credit card companies will also be required to provide other regulated financial institutions with access to account information on the customer’s behalf, subject to the customer’s consent. Such access shall be granted without charge and without any contractual obligations arising between the disclosing and receiving institutions. One special provision that is mentioned in the draft Directive is that the board of directors and senior management of banks and credit card companies should conduct a thorough risk analysis, specifically with respect to the areas of information and cyber security, privacy, fraud, legal, money laundering and strategic risks. It also deals with issues of consent management, including how consent should be provided, obtained, retained and withdrawn, and which information should be provided to the customers before obtaining the required consent.
COMPETITION, INNOVATION
The Bank of Israel wants to promote competition and innovation in the Israeli banking system, joining the likes of financial regulators across the UK, Australia, Singapore, the EBA, and others who have published Open Banking principles for the financial system. It believes open banking will be a step forward in the development of new services and products across the payments industry, which may subsequently increase competition for financial services.
Initially, the Directive specifies that access will be provided to information on balances and transactions in the customer’s current account, while information on bank and non-bank payments will be made accessible in the second phase, which will be actioned in 18 months, allowing banks to initiate payments in the customer’s bank account. The Bank of Israel’s target is 2 years within which banks will gain access to additional customer information on the customer’s credit and loans, deposits and savings, and on the customer’s securities portfolio.
STILL SOME WAY TO GO
In January 2019, the Israeli Parliament Knesset had enacted the Payment Services Law, which was supposed to become effective on January 2020 but it is now likely to happen in August 2020. The Payment Services Law when it comes into force is Israeli equivalent of the European PSD 2 and sets forth similar (although not identical) requirements regarding disclosure obligations and other obligations on the payment service providers (vis-à-vis either the payer or the beneficiary of the payments). It also includes provisions regarding means of identification of users, and provisions regarding cancelation of payments due to fraud, unauthorized use, card-notpresent transactions and other types of transactions.
While the open banking has not yet reached Israel, it is a fact that most of the IT systems of banks are not adapted to it and there are no regulatory demands in this direction. While the Bank of Israel notifications from time to time indicate its intention to consider applying this reform. Today, most of the commercial banks in Israel allow limited API access for very specific modules of them. Most banks allow access to a securities trading system via the API, while some allow for foreign currency trading and some for limited-scale information. Besides, the core computer systems of many banks are proprietary and relatively old and for banks to support of open-banking, they will require to make investment in IT infrastructure.