Is­raeli fin­techs are be­com­ing global en­ter­prises

Banking Frontiers - - Country Report -

While it is the startup na­tion of the world, Is­rael is also fast be­com­ing a fin­tech hub:

Is­rael is of­ten named as the ‘ startup na­tion’ of the world. It has over 7000 star­tups. With a pop­u­la­tion of just un­der 9 mil­lion, the coun­try has the high­est den­sity of star­tups per capita in the world. These star­tups are es­ti­mated to have gen­er­ated $4.5 bil­lion of fund­ing in 2016. And 20% of this fund­ing has gone to fin­tech star­tups. There are over 500 fin­tech star­tups with a cu­mu­la­tive fund­ing of $600 mil­lion. The largest num­ber of these fin­techs op­er­ate in the dig­i­tal pay­ments seg­ment com­pris­ing mo­bile pay­ments, P2P money trans­fers and eCom­merce with an es­ti­mated trans­ac­tion value of $6 bil­lion in 2017. The sec­tor is poised for an an­nual growth rate of 10.5% and is ex­pected to have a trans­ac­tion vol­ume of $8.96 bil­lion by end-2021.

The other two im­por­tant seg­ments where fin­techs are in­volved are busi­ness fi­nance and per­sonal fi­nance. Busi­ness fi­nance ac­counts for $2.5 bil­lion trans­ac­tion value, with ex­pected an­nual growth of 21.9%, reach­ing $5.4 bil­lion by the end of 2021. The busi­ness fi­nance seg­ment in­cludes crowd in­vest­ing, crowd fund­ing and crowd l end­ing. Per­sonal fi­nance ac­counts for $0.4 bil­lion trans­ac­tion value, with ex­pected an­nual growth of 42.0%, reach­ing $1.8 bil­lion by the end of 2021. The per­sonal fi­nance seg­ment is com­posed of mar­ket­place lend­ing and robo-ad­vi­sory.

TECH GROUND­ING

Is­rael, as is well known, has high ex­per­tise in tech­nolo­gies like big data an­a­lyt­ics, ar­ti­fi­cial in­tel­li­gence, blockchain and com­puter vi­sion. Its rel­a­tively small size, the large num­ber of star­tups and its rep­u­ta­tion for en­trepreneur­ship ren­ders it to be an ideal test­ing ground for in­no­va­tion. The coun­try has a very healthy reg­u­la­tory prac­tices with reg­u­la­tors like the Bank of Is­rael and the Com­mis­sioner of the Cap­i­tal Mar­kets, In­sur­ance and Sav­ings (CMIS) play­ing a cru­cial role.

The Is­raeli gov­ern­ment has set up the Is­raeli In­no­va­tion Au­thor­ity, which pro­vides direct fund­ing for re­search and devel­op­ment (R&D) in var­i­ous fields of tech­nol­ogy. Many of the fund­ing pro­grams are avail­able for com­pa­nies look­ing to in­no­vate in the fin­tech field. The Au­thor­ity sup­ports early stage star­tups through fund­ing through tech­nol­ogy in­cu­ba­tors, a num­ber of which are open to in­vest in fin­tech com­pa­nies. The Au­thor­ity has also of­fered spe­cial fund­ing pro­grams for multi­na­tional cor­po­ra­tions to es­tab­lish R&D cen­ters or in­no­va­tion labs in Is­rael.

TAX IN­CEN­TIVES

There are also tax in­cen­tives for tech­nol­ogy com­pa­nies, in par­tic­u­lar those op­er­at­ing in cer­tain geo­graph­i­cal ar­eas in Is­rael. These in­cen­tives are avail­able to fin­tech com­pa­nies or their in­vestors (like re­duced cor­po­rate tax rates, ac­cel­er­ated de­duc­tion of R&D ex­penses, and tax ben­e­fits for an­gels in­vest­ing in star­tups). The gov­ern­ment also sup­ports mar­ket­ing and ex­port ac­tiv­i­ties and co­op­er­a­tion with non-Is­raeli cor­po­ra­tions through var­i­ous fund­ing pro­grams.

Is­rael has only 5 bank­ing groups con­trol­ling over 90% of the whole of bank­ing credit. This means fund­ing for fin­tech star­tups should come from other sources, mostly ven­ture cap­i­tal­ists and multi­na­tional banks. An­other as­pect is that most of these fin­tech star­tups feel their scope of ac­tiv­ity in Is­rael is lim­ited given the lim­ited size of the fi­nan­cial ser­vices sec­tor. How­ever, the gov­ern­ment has been do­ing its best to help them, one of the re­cent ini­tia­tives be­ing the set­ting up of a Sand­box.

GLOBAL IN­VOLVE­MENT

A re­cent re­port by a non-profit Start-Up Na­tional Cen­tral said some 40 multi­na­tional fi­nan­cial ser­vices com­pa­nies are op­er­at­ing in Is­rael, and most of them are in­vest­ing in Is­raeli fin­tech. As much as 73% of all ven­ture cap­i­tal­backed in­vest­ment in Is­rael’s fin­tech sec­tor since the be­gin­ning of 2018 in­volved for­eign money - up from 60% in 2016. The re­port also said the fin­tech sec­tor in the first 6 months of 2018 showed record num­bers and in­vest­ments made, in­clud­ing more than $400 mil­lion raised in 45 deals. The study said sec­tors like pay­ments and trad­ing and in­vest­ing grew and at­tracted more fund­ing, with the pay­ments sec­tor ac­count­ing for 30% of the to­tal sec­tor fund­ing. The num­ber of in­surtech star­tups has also dou­bled since 2015.

Ac­cord­ing to The Floor, one of the fin­tech startup hubs in Tel Aviv, at least 430 Is­raeli fin­tech com­pa­nies are de­vel­op­ing prod­ucts for needs rang­ing from dig­i­tal bank­ing to fundrais­ing. The Floor is a global Fin­tech In­no­va­tion Cen­ter and op­er­ates a Re­verse In­no­va­tion Plat­form through which it sources busi­ness pain points trans­formed into so­lu­tions from the fin­tech ecosys­tem and its in­no­va­tion labs. It is in the process of cre­at­ing the ‘Bank of the Fu­ture’ by lever­ag­ing lat­est tech­nolo­gies and ex­per­tise.

At Fin­tech Junc­tion, Is­rael’s largest fin­tech con­fer­ence

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