Israel: Regulating Payment Services and Payment Initiation
The Regulation of the Engagement in Payment Services and Payment Initiation Law was enacted as part of the Arrangements Law for the years 2023-2024. The purpose of the law is to regulate the engagement in payment services and to set uniform requirements for entities engaging in the provision of payment services that will correspond to the technological developments in the payment services sector, while providing broad consumer protection and encouraging competition in the payment services sector in Israel. This new law completes the regulatory framework for the various types of financial services – lending, financial assets, and now the payments sector as well.
The new provisions will require entities engaging in various financial services to examine the need to obtain a payment services license concurrent with their existing licenses, since the holding of a financial license does not constitute an automatic exemption from a payment services license.
New Licensing Regime
Payment Services License
The law sets out the obligation to obtain a license to provide payment services, which will be issued by the Israel Securities Authority and regulates various aspects of the license. The licensing procedure will be formulated by the ISA and will include requirements pertaining to stability, data security, business continuity, and the prevention of money laundering.
The law will apply to service providers providing the following services:
- Acquiring of payment transactions.
- Issuance of a means of payment.
- Management of a payment account enabling payments to be transferred from account to account.
- Basic payment initiation service and advanced payment initiation service.
The supplementary regulatory framework to this law is the Payment Services Law, which entered into force in October 14, 2020, and sets out the consumer aspects of payment services.
The law will not apply to service providers issuing means of payment or acquiring payments for the sole purpose of executing cash deposits or withdrawals from a payment account.
License Exemptions
The law exempts several types of entities from the obligation to obtain a license, insofar as they are already under supervision in relation to the payment services themselves: banking corporations holding a license to provide systemically important payment services (acquirers under the supervision of the Bank of Israel) and licensees to provide deposit and credit services. On the other hand, financial asset service providers and credit providers, insofar as their service includes a payment service component, will be obligated to hold dual licensing, from both the Capital Market, Insurance and Savings Authority and from the Israel Securities Authority.
Initiation Service
The Regulation of Payment Services prescribes the obligation to obtain a license for a new service – initiation service. The licensing procedure will be formulated by the ISA and will include requirements pertaining to stability, data security, business continuity, and the prevention of money laundering.
“Basic initiation” is the service of writing a payment instruction or a debit authorization at a customer’s request for execution by an account manager, when the customer performs identification opposite the account manager. “Advanced initiation” is a service in which the payer identifies himself in advance to the initiation service provider and issues authorization to it to access the payer’s account and transfer payment instructions to the account manager prospectively. The law includes various provisions pertaining to this service, including the obligation to provide access to an account manager, prohibition of giving conditional access, and more. These initiation services will be defined as payment services, and all consumer aspects regulated by the Payment Services Law will also apply to initiation services. In addition, the law lists a number of supervised entities that will be exempt from obtaining an additional license for the purpose of providing initiation services, and they will be obligated to obtain approval from the regulatory authority only.
Gift Cards
Up until now, gift cards intended for use in an open system (i.e., that allowed payment not only to the issuer of the card) were excluded from the scope of the Payment Services Law, out of the understanding that imposing an obligation to license gift cards or gift certificates will lead to unnecessary burdens and costs being imposed on customers. The exemption was not permanently prescribed in the law, but its validity was extended for a period of three years, during which the ISA will examine the possibility of obligating entities issuing gift certificates to obtain a license. Therefore, issuers of such cards need to follow closely these discussions and consider their long-term plans in this respect.
The Granting of a License to a “Systemically Important Payment Service Provider”
The Regulation of Payment Services amends the Banking Law and prescribes a new license – a license to a “systemically important payment service provider.” At this stage, the law preserves the Bank of Israel’s power as the regulator of systemically important payment service providers. These service providers are auxiliary corporations engaging in the provision of payment services and credit card companies. The Minister of Finance will have the authority to determine additional bodies to be included in the definition, when necessary.
The law allows the Commissioner of Competition, after consulting with the ISA and with the approval of the Knesset Economic Affairs Committee, to delegate authority to the ISA to supervise credit card companies.
The law includes provisions regarding additional services that licensees are allowed to offer, and prohibits licensees from controlling or being interested parties in those auxiliary corporations without the approval of the Supervisor of Banks.
Entry of Foreign Payment Service Providers to the Israeli Market
The Regulation of Payment Services Law prescribes a permanent arrangement obligating foreign payment service entities to obtain a license from the Israel Securities Authority.
However, since one of the purposes of the law is to prevent excessive unnecessary regulation, the law prescribes that the ISA may grant a license to a foreign service provider, even if it fails to satisfy all of the license conditions, if it finds that the foreign law regulating the payment service provider’s business and the supervision over its business provides an adequate response to all matters regulated in the license conditions.
Up until now, the regulation has granted a full exemption from obtaining a license to foreign entities from specific countries according to the exemption regulations. From now on, the regulation contains an individual exemption from fulfilling some of the license conditions at the ISA’s discretion.
The validity of the current provisions of the license exemption regulations has been extended beyond January 1, 2024, until the inception date of the new law. This thus enables entities that have already commenced their operation to continue such.
Provision of Additional Services Incidental to a Payment Transaction
A licensee for the provision of payment services will be allowed to engage in additional services listed in the law – ATM services, currency conversion incidental to a payment service, and credit incidental to a payment transaction – without having to obtain an additional license pursuant to the Supervision of Regulated Financial Services Law.
The provision of credit incidental to a payment service is allowed subject to the new criteria:
- The credit is provided as a service accompanying a payment operation and for the purpose of executing it.
- The credit must be repaid within a period not exceeding 12 months after the credit was provided.
- The licensee’s equity is at a level commensurate with the volume of credit it provided.
One of the most significant innovations in the law is that a licensee for the provision of payment services can offer deposit and interest-earning services to its customers on the balance of their funds maintained in the means of payment.
In this regard, attention should be paid to the provisions of the law pertaining to protection of customers’ funds. The law prescribes that a licensee must hold funds received from or for its customers for the purpose of providing payment services in a segregated account, and if a licensee also wants to provide interest, it must do so in another designated account at the bank, separately from the company’s funds (from which, for example, it can provide credit incidental to a payment transaction as stated above). The law also prescribes that the funds in the designated account must be invested in a separate investment account and in assets with a low level of risk and a high level of liquidity.
Acquirers and Issuers Are Obligated to Engage
The law updates and expands the provisions designed to prevent anti-competitive tactics by market players.
A licensee for the provision of payment services who is a major payment card acquirer must not refuse to engage with a consortium and must not prevent an engagement between an aggregator and a merchant for unreasonable reasons. The law also prescribes that if the parties fail to reach understandings about the consideration and the terms of engagement, the Minister of Finance is allowed to decide them.
Sections 30 and 32 of the law prescribe that the Minister of Finance may order acquirers and issuers with extensive activities to engage with each other if he decides that their refusal to engage was for unreasonable reasons.
In this regard, the law updates the definitions and adds a new definition of a “major payment card acquirer” – an acquirer accounting for at least 10% of the total number of payment card transactions acquired in Israel or of the overall consideration paid to suppliers in Israel. This definition is added to the familiar definitions of “acquirer with an extensive volume of activity” and “issuer with an extensive volume of activity,” i.e., a market share of 20%. The law also adds the definition of “aggregators” so that it will also include a prudential payment service provider and not only payment service providers operating as aggregators and coordinating merchants’ charges and credits.
Connectivity Obligation – P2P
The law prescribes an obligation of connectivity on operators of P2P applications with extensive volumes of activity offering service to customers of all banks. These operators will be obligated to allow money transfers to customers or to beneficiaries who are customers of another P2P application, based on an identifying detail. The same obligation will apply to payment account managers for beneficiaries, and they will be obligated to transfer money directly to the payment account not through a competing universal application.
The transfer of a customer’s funds from another P2P application will be carried out in the manner and under conditions similar to those provided to customers of the transferring P2P application, i.e., the provision will not allow the operator of an application to charge other fees or to define other conditions for transferring funds of a customer of another application.
The goal of this provision is to allow additional applications to enter the Israeli market and diminish the net effect such incumbent applications have in the market.
Adding an Acquiring Basket
The law includes an indirect amendment to the Financial Information Service Law, which prescribes the obligation to forward information regarding a new basket of information – acquiring. The law also prescribes that the obligations in the Financial Information Service Law will also apply to licensees for the provision of payment services. This is intended to extend open banking services to the acquiring market.
Prohibition of Unreasonable Refusal to Participate in Payment Systems
In order to promote competition in the payment service provider market, the Regulation of Payment Services Law includes an indirect amendment to the Payment System Law. The amendment prohibits licensees for the provision of payment services, licensees for the provision of deposit and credit services, licensees for the operation of a credit brokerage system, licensees for the provision of prudential payment services, banking corporations, and auxiliary corporations to unreasonably refuse to participate directly or indirectly in controlled payment systems.
Elimination of an Issuer License
Upon the transfer of the supervision of payment services to the Israel Securities Authority, and in light of the broad definitions of payment services, the chapter in the Supervision of Financial Services (Regulated Financial Services) Law pertaining to an issuer license was eliminated.
Initial and Transitional Provisions
The law will come into effect one year after the date of its publication. Regarding basic initiation service, the law prescribes that the provisions will apply six months after the inception date. Please note that the law prescribes special provisions regarding the inception of the provisions pertaining to the obligation to provide access to a payer’s payment account to providers of basic initiation services.
The law also prescribes transitional provisions for corporations engaging in the provision of financial services that are expected to be affected by the law’s inception:
- A corporation engaging in the provision of payment services prior to the inception date and not holding a license to provide financial asset services (for example, a corporation that was exempt from the licensing obligation by virtue of the exemption regulations) may continue its activity if it files a license application within three months of the inception date and received the ISA’s acknowledgement of the filing of its application, until a decision is rendered.
- A corporation engaging in the provision of payment services and in the provision of credit incidental to a payment transaction prior to the inception date and holding a license to provide credit or a license to provide financial asset services, shall be allowed to continue its activity, even though it does not have a license to provide payment services in conformity with this law, until 24 months after the inception date, provided that it issues notice about this to the ISA and files an application for a license to provide payment services within 18 months of the inception date and receives acknowledgement of the filing.
- A corporation holding an acquirer license, as defined in the Banking Law, prior to the inception date, will be allowed to continue its activity, even though it does not have a license to provide payment services, until 18 months after the inception date, provided that it issues notice about this to the ISA and files an application for a license to provide payment services within six months of the inception date and receives the ISA’s acknowledgement of the filing of its application.
- A corporation engaging in a basic initiation service prior to the inception date that is now obligated to obtain approval from the regulatory authority, may continue its activity until six months after the inception date, provided that it files an application for approval for a basic initiation service by the inception date and received the regulatory authority’s acknowledgement of the filing of its application.
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Barnea Jaffa Lande’s Regulation Department is able to help businesses from all sectors prepare for the enforcement phase of the law, as well as with other issues.
Adv. Anat Even-Chen is a partner and leads the firm’s Regulation team.
Adv. Tamar Ivri Stern is an associate in the department.