Israel: Opening Access to Payment Systems and Allocation of Identification Codes to Payment Service Providers

As part of its actions to increase competition in the payments market, and alongside the entry into force of the Regulation of Payment Services and Payment Initiation Law, 2023, the Bank of Israel has opened access to supervised payment systems to new participants.

These participants include payment service providers, licensed financial asset service providers, and licensed credit and deposit service providers. Entities that receive access to Israel’s supervised payment systems will be able to interface directly with SHVA and MASAV and other payment systems, thereby reducing their dependence on banks.

In light of the move to open access to supervised payment systems to new participants, and in order to promote this initiative, the Bank of Israel’s Payment Systems Oversight Division has published the Access Guide to Supervised Payment Systems in Israel and presented a flexible model allowing for several levels of participation. Such participation models will allow new entities to examine the model that suits them best and ensure that access to Israeli payment systems does not constitute an excessive barrier.

How to Access the Payment System?

Access to payment systems is based on the principle of fair and open access to payment systems and includes nine stages for obtaining access:

1. Initial Approach

As part of the initial approach, an introductory meeting will be held with the applicant to understand its needs and advise on the relevant type of participation. The Bank of Israel emphasizes the importance of dialogue with the market and new entities. Therefore, there is great importance in the initial approach, even in cases where the decision will be not to connect to the payment systems.

2. Receiving Non-Sensitive System Rules

Each applicant must visit the website of the payment system to which it intends to request access and download the public access rules. There are currently six payment systems:

1. RTGS (Zahav) – A system for making credits and transfers in high amounts, with finality and in real time. The system also serves for final settlements of all financial activity in the economy. Operated by the Bank of Israel.
2. Masav batch – A system for executing deferred transfers between payment accounts. Operated by MASAV.
3. Masav online – A system for executing immediate transfers between payment accounts. Operated by MASAV.
4. Payment card services – A system for executing payment card transactions. Operated by SHVA.
5. ATM – A system for cash withdrawals and information retrieval at ATMs. Operated by SHVA.
6. EMV protocol – A technological specification and message structure in the EMV standard used to transfer transactions and information between entities in the chain of executing a credit card transaction in the segment between the terminal and the acquirer. Operated by the Association for Management of the EMV Terminal Protocol in Israel.

3. Determining the Participation Model of Access

There are three layers to assessing the payment system: transaction settlement rules between parties, technical interface rules, and settlement in RTGS. Each layer has two options. The combination of each option in all three layers constitutes an access model.

For example, in payment systems operated by MASAV and SHVA, there are four participation models:

1. Direct and connected participant – A participant that signed the system rules and bears financial and operational responsibility vis-a-vis the system operator, that is directly connected to the system on the technical layer, and that settles its activity in its settlement account in the RTGS system or through another participant’s settlement account.
2. Direct and unconnected participant – A direct participant whose technical connection to the system is made through another participant, and who may be a participant or represented in settlement.
3. Indirect and connected participant – A connected participant who has not signed the system rules and is represented by another participant who bears financial and operational responsibility for its activity vis-à-vis the system operator and is represented in clearing.
4. Indirect and not connected participant who is represented in clearing.

4. Documentation of Licensing Exemption

Entities operating as payment companies that are exempt from licensing under the exemption regulations will also be able to receive access even before receiving a payment services license, in accordance with the established rules.

5. Receiving a Recommendation for Access

At this stage, the applicant’s financial regulator will provide the Oversight Division with a recommendation for granting access to the payment system based on the documents submitted by the applicant, including a business plan. For entities in the process of obtaining a license, the financial regulator should provide approval of initial suitability for a license or a conditional/temporary/in-formation license.

6. Obtaining Sensitive System Rules

The Oversight Division will update the system operator on meeting the conditions for obtaining the sensitive system rules, and the applicant will sign a confidentiality document to receive the sensitive system rules. Within five days of receiving the confidentiality document, the system operator will provide the sensitive system rules to the applicant.

7. Approval of Allocation of an Identification Code

If the applicant requires an identification code:

1. The applicant must submit a request for an identification code according to the Bank of Israel’s policy. According to this policy, the applicant must demonstrate compliance with two cumulative conditions:
   • The applicant must have a license, be in the process of obtaining a license, or be exempt from licensing. The applicant must also attach, among other things, a recommendation from its supervisor.
   • The code is necessary for participation in a supervised payment system or a payment system with a direct interface to a supervised payment system that requires the use of an identification code. The Bank of Israel may determine, in special circumstances, not to entitle certain entities to an identification code.
2. The Oversight Division will confirm the applicant meets the policy conditions for receiving an identification code within three months of the application’s submission. Subsequently, it will grant the identification code and issue a press release.
3. The applicant will provide the system operator with all required details set by it for implementing the identification code with the operator and participants.
4. The system operator and participants will implement the new identification code in their systems no later than three months from the completion of all required details from the applicant for code implementation.Entities that receive an identification code become recognized and identified bodies in the financial system, which allows for a direct technological connection to them.

8. Approval of Successful Completion of Tests

The applicant will present to the Oversight Division the agreements authorizing its operation in the payment system. It will collaborate with the system operator to formulate a detailed business specification for its activity. The system operator must add the participant, including developments, trials, tests, and execution dates, and send confirmation of compliance with all technological and legal requirements to the Oversight Division.

9. Completion of the Access Process to the Payment System

The applicant must present a final license to the Oversight Division, which will update the system operator regarding the possibility of elevating the applicant to the production environment.

What Is the Access Route for Foreign License Holders?

For foreign license holders, the access route is as follows:

1. As part of the approach, the supervisor will meet with the applicant to understand its needs and advise regarding relevant types of participation.
2. The applicant will send a comfort letter from its supervisor to the Oversight Division, in accordance with the selected track.
3. Declaration by the foreign license holder, attesting to its compliance with the terms of the license issued abroad, that it has at least two years of experience from the time it received the foreign license, and that it provides services to at least five million customers.
4. Receiving non-sensitive system rules as detailed above.
5. Determining types of participation in each of the three layers as detailed above.
6. Notice of non-objection from the Governor of the Bank of Israel.
7. Receiving sensitive system rules as detailed above.
8. Approval of identification code allocation as detailed above.
9. Approval of successful completion of tests as detailed above.
10. Completion of the system access process as detailed above.

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Barnea Jaffa Lande’s Regulation practice has extensive experience in providing ongoing legal counsel to clients on financial regulation matters, including guiding licensing procedures with the various regulators, in particular the Israel Securities Authority and the Capital Market, Insurance and Savings Authority.

Adv. Anat Even-Chen, a partner and head of the firm’s regulation practice, and Adv. Ori Rodriguez are happy to assist with any questions regarding these matters and other regulatory issues.