ISA: Even a Brief Intermediary Role in Transferring Payment Funds Requires a Payment Services License

The Israel Securities Authority (ISA) staff recently responded to a preliminary query submitted on behalf of Hever Permanent Army Soldiers and Pensioners Organization Ltd and Hever Consumer Club Ltd. The query asked whether Hever’s prepaid card activities require a license under the Regulation of Payment and Payment Initiation Services Law, 2023. The ISA staff’s response clarifies the scope of the licensing obligation in the payment services sector, with implications extending beyond Hever’s case.

Hever’s Prepaid Card Activities

Hever operates a prepaid card program through IsraCard, enabling its members to make purchases at various businesses. IsraCard, which holds an appropriate license and is subject to regulatory supervision, carries out most of the activities, including issuing and operating the cards and holding funds until redemption.

Hever’s role is limited to a brief stage in the process, referred to in its query as the “brokerage stage.” After members complete their transactions, IsraCard transfers the corresponding funds from its account to Hever’s account. Hever holds the funds for one business day before transferring them to the beneficiary businesses.

In its query to the ISA, Hever argued that it does not manage a payment account, issue a means of payment, provide a payment initiation service, or provide a payment acquiring service. It therefore maintained that its activities should be regarded as purely operational and technical, involving limited risk.

ISA Staff Position: Even a Brief Payment-Transfer Stage Requires a License

The ISA staff’s position is that Hever’s activities constitute the provision of a payment acquiring service within the meaning of the Payment Services Law, 2019, and therefore require a license under the Regulation of Payment and Payment Initiation Services Law. Its main rationale is that Hever receives funds after members complete their transactions and transfers them to the businesses to which they are due. Hever thus forms a link in the chain transferring payment funds to beneficiaries.

The ISA staff rejected the argument that the transfer of funds from IsraCard to Hever, and then to businesses, falls outside the law’s scope. In its view, the licensing obligation applies when the activity has the characteristics of a payment acquiring service, even if it represents only a small part of the overall activities or involves holding funds for only a short period.

Alongside its determination in principle, the ISA staff informed Hever that it would not take enforcement action in relation to the activity until October 31, 2026. This decision reflects Hever’s ongoing efforts to eliminate the stage during which the funds are held in its account. The staff clarified that the decision does not constitute a determination that the activity is permitted without a license.

Implications for Entities Providing Payment Services

The ISA staff interprets the licensing obligation broadly. It looks beyond the entity performing the principal payment activities, such as issuing means of payment or holding and managing funds. An entity that holds payment funds and transfers them to beneficiaries may also require a license, even if its role is limited and brief and it operates alongside a licensed and supervised entity. In other words, one entity’s license does not cover the other links in the chain.

This position is relevant to many entities through whose accounts payment funds pass before reaching businesses. These include consumer clubs, membership organizations, benefit and gift card programs, online marketplaces, and operators of payment systems that rely on licensed payment service providers.

Preparing for the Licensing Requirement

The ISA assesses whether a license is required based on the actual flow of funds, rather than the allocation of roles in agreements or the volume of activities.

We therefore recommend the following steps for entities operating alongside licensed payment service providers:

• Map the flow of payments through your operations.
• Assess whether any stage involves receiving payment funds into your account and then transferring them to beneficiaries.
• Depending on the circumstances, consider restructuring your operations so that the licensed payment service provider transfers funds directly to businesses, or preparing to obtain a license.

As Hever’s case illustrates, an early review of your operating structure may help prevent significant regulatory exposure.

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Adv. Avihai Tal is an associate in the firm’s Regulation Department.

The firm’s Regulation Department advises payment service providers, fintech companies, consumer clubs, online marketplaces, and financial corporations on all aspects of compliance with financial regulatory requirements. The department helps clients assess whether they require a license under the Regulation of Payment and Payment Initiation Services Law and the Payment Services Law, guides them through licensing processes with the ISA and other regulatory authorities, and assists in designing operating structures and fund flows that comply with legal requirements and minimize regulatory exposure. The department also submits preliminary queries to supervisory authorities, represents clients in supervisory and enforcement proceedings, and helps them prepare for new regulations. Combining regulatory expertise with business insight, the department offers practical solutions that enable clients to develop new products and services with regulatory certainty.