Israeli fintechs are becoming global enterprises
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.
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.
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.
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