Regulated payment services and financial services in Israel – summary and outlook for 2025

2024 was characterized by a multitude of regulatory directives to payment companies and to payment initiation companies as part of the preparations for the licensing obligation that came into effect in June 2024. This year was also characterized by legislative initiatives and regulatory directives in tangential and complementary segments designed to create harmonization and further develop the payments market in Israel.

This trend, which began in 2023, is expected to continue in 2025, when the first entities receive payment service licenses and the interpretation of the Payment Services Law and the positions of the regulatory authorities become clearer, which will also affect entities operating in tangential segments.

Besides new players entering the market, we expect that the division of powers between the Israel Securities Authority (ISA), which supervises payment services, and the Capital Market, Insurance and Savings Authority, which supervises financial asset services other than payment services, will also become clear.

Regulation of payment services

Licensing obligation

In June 2024, the Regulation of Payment Services and Payment Initiation Law of 2024 (“Licensing Law”) came into effect, which regulates the licensing requirements for entities engaging in the provision of payment services, while the substantive-consumer aspects were already regulated under the Payment Services Law of 2019.

Over the year, the Israel Securities Authority published numerous directives to payment companies and to payment initiation companies addressing various aspects, including:

• Ÿ   equity, insurance or other collateral;
• Ÿ   license application submissions;
• Ÿ   technological means and information security;
• Ÿ   managing and protecting customers’ funds;
• Ÿ   outsourcing;
• Ÿ   compliance and risk management;
• Ÿ   the provision of ancillary services;
• Ÿ   reporting obligation to the Israel Securities Authority.

Furthermore, in accordance with the transitional provision in the Licensing Law, the ISA has published a directive applying to providers of financial asset services and credit providers that engaged in the provision of payment services prior to the entry into force of the Licensing Law, which allows them to continue their activities until December 2025, provided that they issue a notice to the Israel Securities Authority by January 30, 2025 and submit an application for a license to provide payment services by December 31, 2025.

The Israel Securities Authority staff also published two legal positions: the first addressed activities according to a reseller’s model not requiring a license by virtue of the Licensing Law, while the second addressed activities with trusts/escrow accounts, which are subject to the Licensing Law.

Reporting obligations

On December 1, 2024, the Israel Securities Authority published a directive to payment companies and to holders of a basic initiation license or permit regarding reports to the ISA, after the receipt of public comments about the draft published in September 2024.

The directive obligates payment companies and holders of a basic initiation license or permit to submit annual, biannual, quarterly and immediate reports on various topics, such as audited or reviewed financial data, activity data, compliance with equity requirements, technological means, corporate governance, compliance and more.

The reporting obligations will apply to payment and payment initiation service-providers immediately upon receiving a license from the ISA.

Foreign service-providers that received relief by virtue of sections 21 and 26 of the Regulation of Payment Services Law may apply to the ISA for relief from the reporting obligations specified in the directive.

Prohibition of money laundering

In November 2024, the Prohibition of Money Laundering Ordinance (Payment Companies’ Obligations to Identify, Report and Maintain Records to Prevent Money Laundering and the Financing of Terrorism) of 2024 was promulgated. The wording of the order is essentially similar to the ordinance applying to financial asset service-providers and credit service-providers due to the fact that these activities have similar characteristics, and accordingly, obligations were imposed that are similar to those in the Prohibition of Money Laundering Ordinances applying to supervised entities in the financial sector, with adjustments for the unique characteristics of payment service-providers, including adjustments to the obligations regarding the provision of online payment services.

On November 6, 2024, the ISA also published a proposed directive to payment companies to fulfill AML obligations using online identification technology designed to enable payment companies to identify and authenticate customers online without having to meet face to face with them, while ensuring the reliability of the identification and mitigating the AML/CFT risks entailed in the use of these alternative means.

This directive is based on regulated financial service-providers’ online remote engagement contracts with service recipients and it contains provisions regulating, inter alia, the following topics:

• Ÿprerequisites and principles for the use of online identification technology (including the obligation to perform a risk assessment in this regard,  the obligation to set a policy governing the    use of online identification technology, etc.);
• the responsibilities of the service-provider’s board of directors;
• the obligation to appoint an online identification officer and related directives;
• internal audits;
• the possibility of performing online identification and authentication of service recipients using video conferencing technology or facial recognition technology, as well as specific provisions relating to the various types of service recipients (including incidental service recipients, individuals, corporations and recognized institutions);
• the possibility of obtaining an online declaration of a beneficiary and controlling shareholder;
• the possibility of online identification through a third party (outsourcing);
• Ÿthe possibility of performing the “Know Your Customer” procedure using various technological means;
• data retention, security and backup;
• risk management, monitoring and control measures;
• the obligation to obtain the approval of the Israel Securities Authority’s chairperson to implement facial recognition technology for the purpose of providing services to service recipients.

Financial information services

Financial information services, also known as open banking, constitute a key component of the efforts to promote competition in the banking and financial services markets. The regulatory authorities assess that entities engaging in financial information services will naturally evolve and begin engaging in payment initiation services. As a result, new regulatory provisions also updated the guidelines for submitting license applications and the requirements imposed on financial information service-providers with regard to equity, insurance or other collateral.

The Capital Market, Insurance and Savings Authority published a circular specifying required actions and obligations imposed on sources of financial information that are financial service-providers licensed to provide credit or to operate a credit brokerage system (peer-to-peer) for the purpose of implementing the second stage of the Financial Information Services Law. Inter alia, the circular states that information sources are obligated to allow access to financial information about a “credit basket,” which includes, inter alia, details about the credit balance, interest and fees agreed upon with regard to the credit, repayment dates and the liens provided against the credit.

In light of the technological complexity, these information sources are obligated to obtain services from service-providers specializing in data transfers using API technology and to establish an API system to obtain any missing financial information. 

Theobligations are expected to be postponed until May 14, 2025, considering the technological complexity and the Swords of Iron War.

Draft Financial Information Services Regulations (Exceptions to the Financial Data Access Obligations) of 2023

The regulations propose to exempt financial information service-providers from the obligation to provide access to information sources that are institutional entities whose volume of credit activities does not exceed ILS 500 million, or if they are long-standing funds, as this term is defined in the Control of Financial Services Law (Provident Funds) of 2005. The draft regulations also propose to exempt information sources that are licensed to provide credit or to operate a credit brokerage system whose credit backlog does not exceed ILS 500 million.

The Financial Information Services Order (Low Volume of Activity by an Information Source that is Licensed to Provide Credit, to Operate a Credit Brokerage System or to Provide Deposit and Credit Services) of 2023

Section 39 of the Financial Information Services Law obligates information sources to provide financial service-providers access to their customers’ financial data. Section 41 of the law lists the exceptions to this obligation and the conditions under which information sources may refuse to allow access to financial data. The Minister of Finance, after consulting with the regulatory authority of the relevant information source and with the approval of the Economic Affairs Committee, may define additional exceptions that will exempt information sources from the obligation to provide access to financial data (“general exemption”) or a specific full or partial exemption for a fixed period, for reasons relating to the cost involved in implementing the provisions of the law or relating to competition in the financial system (“specific exemption”).

Section 1 of the law defines “low volume of activity” in relation to each information source applying for a specific exemption. For information sources licensed to provide credit or to operate a credit brokerage system, the law defines “low volume of activity” as a credit backlog not exceeding ILS 250 million. Section 69(b) of the law authorizes the Minister of Finance, after consulting with the regulatory authority of the relevant information source (which, for the aforementioned licensees, is the supervisor of financial service-providers) to issue an order specifying volumes other than those in section 1’s definition of “low volume of activity.”

The Financial Information Services Order proposes to update the definition of “low volume of activity” with respect to the aforementioned information sources to a credit backlog not exceeding ILS 750 million.

This order was promulgated concurrent with the publication of the Draft Financial Information Services Regulations (Exceptions to the Financial Data Access Obligations) of 2023, which specify the qualification criteria for the general exemption. This order effectively opens a channel for licensees to receive a specific exemption if their volume of activity exceeds ILS 500 million but is lower than ILS 750 million.

Directives to financial information service-providers and to payment initiation service-providers (amendment)

This circular regulates financial service-providers’ activities within the framework of open banking in conformity with the Financial Information Services Law. The circular also extends its application to licensees to provide deposit and credit services and credit and credit brokerage services that will be operating as payment initiators.

The directives state that a payment account manager supervised by the Bank of Israel must allow payment initiators (supervised by the Capital Market, Insurance and Savings Authority ) access to customers’ accounts, provided that they present a digitally signed certificate and comply with the requisite standards.

The circular specifies the conditions for granting access, the requirements in order to obtain approval from the regulatory authority and directives with regard to the provision of payment initiation services to customers.

Directives to financial information sources that are financial service-providers licensed to provide credit or to operate a credit brokerage system

Over the past year, the Capital Market, Insurance and Savings Authority has been preparing to implement the second stage of the Financial Information Services Law, which obligates information sources to allow access to financial information about a “credit basket,” which includes, inter alia, details about the credit balance, interest and fees agreed upon with regard to the credit, repayment dates and the liens provided against the credit, as defined in the Financial Information Services Law.

This circular issues directives to financial information sources that are financial service-providers licensed to provide credit or to operate a credit brokerage system and specifies their obligations to comply with the provisions of the Financial Information Services Law.

These information sources must implement the directives using a combination of new technologies, particularly API (Application Programming Interface) technology. The selection of API technology for information transfers and reliance on the Berlin Group standard as published by the Bank of Israel are designed to create a harmonized technological environment and make it easier for all players in the financial information market. This course of action will contribute to the creation of an innovative ecosystem that facilitates the development of new services and products based on quick and easy access to up-to-date and reliable information. All of these will enable the public to receive financial services tailored to their needs, and thus, will optimally achieve the goals of the Financial Information Services Law.

Nevertheless, it is important to note that three drafts have been published recently that are looking to reduce information sources’ obligation to provide access to financial information service-providers and to postpone the law’s inception date. Therefore, we recommend that companies should examine the obligation to grant access and the applicability of this circular.

Regulated financial services

Updates to existing circulars after the Licensing Law came into effect

After the Regulation of Payment Services and Payment Initiation Law came into effect, the Capital Market, Insurance and Savings Authority published updates to several circulars applying to financial service-providers so that they also apply to financial service-providers operating as payment initiators:

• Ÿ   risk management by regulated financial service-providers;
• Ÿ   cyber risk management by financial service-providers;
• Ÿ   management of AML/CFT risks by regulated financial service-providers.

Investments of own funds by operators of credit brokerage systems and by related parties through the system

On February 12, 2024, the Capital Market, Insurance and Savings Authority published Financial Service-Providers Circular 2023-10-4 regarding investments of own funds by operators of credit brokerage systems and by related parties through the system (“Fund Investment Circular”).

Section 38F of the Supervision of Financial Services Law (Regulated Financial Services) of 2016 prohibited credit brokerage systems from engaging in the provision of credit, unless they received special approval from the supervisor of financial services providers. This situation created difficulties for system operators, such as an imbalance between the supply and demand for loans, difficulties in diversifying risks and liquidity constraints.

Since March 12, 2024, system operators have been allowed to invest their own (nostro) funds in the system, subject to particular conditions, inter alia, in order to promote underwriting and loan processes and to increase competition in the credit market.

However, the Capital Market, Insurance and Savings Authority imposed several restrictions on the volume of use of nostro funds. Primarily, the Capital Market, Insurance and Savings Authority defined an upper limit on the volume of nostro funds that may be injected into a credit brokerage system, inter alia, due to its concern about conflicts of interest deriving from financial service-providers’ dual capacities operating a credit brokerage system as well as operating as a credit-provider, which could undermine the functioning of the entire system.

See our previous client update.

Draft circular to licensed operators of credit brokerage systems – reports to the supervisor

This draft circular specifies the reports and information that licensed operators of credit brokerage systems are obligated to submit to the supervisor, including the mode and frequency of these reports (biannually and annually).

Licensed operators of credit brokerage systems will be obligated to issue reports to the supervisor about the following information:

• Ÿ   the licensee’s financial data;
• Ÿ   new loans provided during the report period;
• Ÿ   loan balances;
• Ÿ   debts in arrears;
• Ÿ   lenders in the system and the credit backlog;
• Ÿ   credit provided segmented by economic sector;
• Ÿ   credit data segmented by interest rates.

Enforcement of regulated financial services laws

In 2024, we witnessed a trend of enhanced enforcement by the Capital Market, Insurance and Savings Authority , which has announced the fines that it imposed in recent years. It seems apparent that we will see stricter enforcement in 2025 in relation to those entities that will remain under its supervision.

In addition to announcing the fines it imposed in the past, in April, Capital Market, Insurance and Savings Authority also published the draft Control of Financial Services Regulations (Regulated Financial Services) (Reduction of Fines) of 2024, which seeks to enable the authority to reduce fines in appropriate instances, thereby affording it flexibility and enabling it to achieve more effective enforcement.