01 June, 2023
The Knesset has recently concluded the legislation of the Regulation of Payment Services and Payment Initiation Law 2023. Under the new law, the Israel Securities Authority was appointed to oversee payment services in Israel and a complex licensing regime was established for Israeli and foreign companies that currently provide or will provide in the future all types of payment services in Israel, such as payment applications, electronic wallets, and payment clearing services for businesses. The law also regulates and allows for an additional type of payment service not yet available in Israel: payment initiation services.
The new law establishes a regulatory and licensing regime similar to that in the European Revised Payment Services Directive (PSD2). In Israel, the payment services framework was split into two laws: the first is the Payment Services Law, 2019, which deals with the interface between the service and its customers – the payers and payees – but imposes no licensing requirements nor designates a regulator for such services. In the complementary law now enacted, licensing requirements are established, regulatory authorities are designated, and instructions are provided regarding the interfaces between payment service providers themselves and other financial institutions.
The new law reinforces Israel’s fragmented financial services regulation structure. Although the Israel Securities Authority is ostensibly appointed as the field regulator, other Israeli regulators will also oversee payment services. Most importantly, The Bank of Israel will continue to oversee all payment services provided by banking corporations as well as veteran credit card companies (“stability related payment service providers”), as well as the operation of designated payment systems (such as MASAV and SHVA, which manage and clear transactions between banks and credit card companies in Israel). Certain payment services will be overseen by the Capital Market, Insurance and Savings Authority, which regulates Regulated Financial Services. On the other hand, the Israel Securities Authority will not only regulate payment services but also supervise certain credit activities related to payment transactions (i.e. BNPL), even though it is the Capital Markets Authority that regulates credit providers in Israel. Some financial services companies will need licenses from more than one regulator. To make matters even more complicated, the definition of “payment services” in the law is circular and open, adding to the complexity of the law and raising many questions that will need to be clarified as this new legislation is implemented. According to Ministry of Finance officials, this division of regulatory powers is not optimal and the Ministry of Finance is looking at options for the future arrangement of financial regulation in Israel.
In the new law there is a requirement for shareholders and senior management to obtain licenses and approvals (“fit and proper”); a requirement to maintain a minimum amount of own funds; limitations on service providers’ ability to provide non-payment services; requirements for data security and business continuity; and more. Additionally, customer funds will be separated when held by a payment service provider. As part of the law, payment services companies are required to cooperate with other license holders. This includes receiving instructions from licensed payment initiation services for transferring payments. Another significant provision grants payment services companies the right to participate in designated payment systems (such as MASAV and SHVA).
Government offices expressed hope that the new law will facilitate the penetration of innovative international and local payment services in the coming years. Adapting to the new law will present a challenge for companies already operating in the field, and will create new business opportunities for advanced payment services in Israel. In order to promote international services penetration, the law streamlines licensing and permitting procedures, based on regulations already in place for foreign service providers in their countries.
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