Dennis Mitzner
Israeli finance technology has taken giant leaps in the last few years. Hundreds of local startups are developing new technologies for payment and security solutions, and multinational companies and banks are flocking to Israel for a piece of the action. Much like other tech sectors in Israel, the country’s fintech know-how is largely a byproduct of innovations in other fields, such as cybersecurity.
Investor interest in Israeli fintech is rising fast: 15 percent of fintech companies in 2014 raised capital, and 43 companies raised capital during January-September 2015 alone. The study, conducted by IVC Online, predicts the number will grow by the end of 2015, approaching the 2014 record of 61 companies that raised $369 million in capital. In contrast, Israeli fintech startups raised only $13 million in 2009.
According to the IVC Online study, Israel has 430 fintech companies and 14 multinational R&D centers. In 2002, Israel had only 90 companies in fintech.
“Israel has an innovative and well-managed financial sector. Our banks were some of the few banks in the world that were not badly damaged in the 2008 global financial crisis. Israeli finance people often have a global set of experiences having worked both in New York, Europe, and now increasingly in Asia. Therefore it is not surprising that with this financial background and the entrepreneurial spirit of Startup Nation that Israel will develop a robust fintech sector,” said Jon Medved, the founder and CEO of OurCrowd, an equity-crowdfunding platform that has invested in several Israeli fintech startups.
Israeli fintech covers all aspects of the growing demand for better payments systems and security solutions. There are companies that focus on a growing demand for P2P and SMB lending, such as Blender, Fundbox, Ezbob and BlueVine, while others, such as Payoneer and MyCheck, focus on payments systems. Others work in providing better security for payments.
Behind every successful financial technology is a sturdy security apparatus. Israeli cybersecurity is well-known globally, but little has been written about the relationship between cybersecurity and fintech. Security innovations have significant ramifications to fintech, and Israel’s security-driven approach has proven to have many applications.
Recently, Gartner’s Magic Quadrant for Web Application Firewalls named Incapsula’s solution — an Israeli website security company acquired by Imperva in 2014 — as one of the leaders in the web app firewall security space.
Headquartered in California, but with R&D in Israel, Imperva was founded by Shlomo Kramer, the co-founder of Check Point (considered a pioneer in Israeli cybersecurity), who believes that fintech and cybersecurity are intimately linked.
“Both security and fintech are at their core about measuring risk and making real-time decisions about activities of an underlying system (IT or Financial). There are a lot of similarities between deciding if a small business is creditworthy — what Fundbox does — to deciding if a network user is trustworthy — what Exabeam does. Both use big data analytics and machine learning to reach a risk score and based on that risk score decide on an action,” said Kramer.
According to Medved, while the connection between fintech and cybersecurity is strong, fintech is rooted in a number of fields.
“There is a connection between cyber and fintech, essentially as it relates to blockchain technology. However not every fintech startup has its roots in 8200 (the Israeli army’s elite intelligence unit). There are new Israeli companies going after payments, crowdfunding, lending, insurance, wealth management, fee reductions, etc. that include entrepreneurs who do not have a specific or direct cybersecurity background. However when you have both a fintech and cyber background, the combination is clearly a winning combination,” Medved said.
BillGuard is another example of an Israeli company where security and financial technology meet. The company, named app of the year by Google in 2014, was acquired in September by peer-to-peer lending company Prosper Marketplace.
Considering the relatively small pool of Israeli hi-tech actors, and especially the number of individuals, local industries tend to emulate each other’s innovations. What’s more, the flow of skilled labor between different industries makes it possible for battle-tested ideas from one industry to be transferred to another. The relationships between Israel’s tech actors are intimate and reciprocal. Israeli fintech, too, owes much of its success to other fields and actors.
“Fintech is primarily about deep data science. An area that is particularly strong in Israel as it has strong military applications across areas such as security, computer vision, NLP and many others. It’s hard to quantify, but qualitatively fintech borrows significant talent and know-how from other, traditionally established, disciplines. The IDF continues to be an important source for young technical talent and advanced technologies across the board and fintech is not excluded here,” Kramer said.
Although exciting things are happening in fintech, Israel’s financial institutions are still stuck using archaic methods.
“This is due to a duopoly and a small local market. Israel is a small country, and therefore any startup starting here is thinking global from day one, if you consider fees for example there are $10B in fees every year, certainly a considerable market, but there are $600B of fees in the U.S., more than twice the GDP of Israel. The duopoly of Bank Leumi and Bank Hapoalim with the support of the regulator — which protects the system and not the consumer — also makes it very difficult,” said Uri Levine, the co-founder of Waze and now the co-founder and chairman of FeeX, a service that helps users find and avoid hidden fees in their retirement accounts.
Others see weaknesses in the global banking system and believe that financial services are up for disruption. According to Roy Sebag, the founder of BitGold, a global gold payments and savings platform, the fintech revolution is riding a wave of widely spread consumer discontent.
“The disintermediation of banking will continue in 2016 and beyond as consumers develop relationships with non-bank service providers that can better deliver financial services previously monopolized by banks. More specifically: lending, borrowing, payments, wealth management. Banks were able to reach their present dominance by gathering deposits and paying a market interest rate,” said Sebag.
“For the last 8 years we’ve seen interest rates reduced to zero and in some countries negative. This is unprecedented and akin to kryptonite for the banks who require deposits to build out their other businesses. If banks don’t pay deposit rates, why deposit funds with banks when there are superior and more innovative services out there for performing financial services?,” Sebag asked.
To further illustrate the country’s fintech prowess, major international banks are establishing their presence in Israel. In 2013, Citibank launched Citi Innovation Lab in Tel Aviv, and Citi Israel’s CCO, Neil Corney, recently said that Israel is the center of fintech.
“Four years ago we set up the innovation lab and it has grown exponentially. Israel is an incredible hub. We’ve doubled our employees every single year and it looks like we’re continuing to grow. This is really the place to be for financial technology,” Corney told i24news.
In addition, Barclays is launching in March 2016 an accelerator for startups in fintech and cybersecurity startups.
Fintech also is buzzing on a governmental level. In November, Israel’s Economy Ministry’s Chief Scientist Avi Hasson signed an R&D agreement with the Commonwealth Bank of Australia to develop joint research projects in the field of financial technology.
While Israeli fintech industry is relatively nascent, the country will continue to draw resources, human capital and innovation from sectors where Israel has already established itself as a world leader.
“I suspect there will be many startups that will emerge as leaders in the space. Recently, I spent some time with entrepreneurs in Israel utilizing machine learning algorithms in ways I had never seen before. The advantage Israel has is the deep pool of human capital across multiple disciplines in technology, math, and physics. Once the local community focuses on a new industry — in this case fintech — it’s only a matter of time before they build a better mousetrap,” Sebag concluded.
Comment