The Shtrum Commission for increasing competitiveness in banking and financial services has not yet completed its work; however, it seems that that the expected reforms will consist of several sections—amongst which, Bank Leumi and Bank Hapoalim, the largest banks in Israel today, will sell their two credit card companies—Leumi Card (Leumi) and Isracard (Hapoalim). In my opinion, the significance of this step must be thoroughly comprehended.
The credit card companies in Israel handle payments for the majority of businesses in the country that accept credit cards. It is common knowledge that a large section of the consumers carry credit cards and use them to perform payments. This activity is an operational one that brings in a variety of fees from both the cardholder and the business sector. An additional activity is the extension of credit lines to customers through their credit cards—that is, consumer credit for cardholders—as well as the execution of financial transactions with vouchers for businesses—financing mainly for small businesses.
The State’s intention is, of course, to cause an increase in competition in the field of payment and credit, inter alia, by bringing in new owners that will operate independent credit card companies, that are not under the control and management of the largest banks.
Examination of the Two Latest Grand-scale Reforms in Israel
If we take a moment to examine the two largest reforms carried out here over the last few years, the Bachar reform and the Cellular reform, one can deduct the following:
- Bachar Reform—On the one hand, the reform did not lower management fees for the final consumer. On the other hand, it transferred many assets from the banks to insurance companies. There are many arguments regarding whether or not the market benefited from the change, but this is not the forum to discuss the benefits and disadvantages that resulted from the process at length. In any case, if one reads the legislation of the Bachar reform, it is clear that a large part of the expected benefits did not occur in practice. For example: the entrance of international entities into the Israeli capital market.
- Cellular Reform—In this reform, the prices for the consumer decreased dramatically, and today, a portion of the cellular companies find themselves in financial straits. In practice, the reform enabled new companies in the cellular industry to use the infrastructure of the older companies, which was enforced upon the older companies by the State, even though it is in opposition to economic logic. Today, a few years after the reform’s implementation, it is still difficult to gauge the final result since Golan Telecom has encountered financial difficulties and is not in compliance with the terms of the license. We must examine how it will emerge from then. The Golan Telecom affair will have an effect on the cellular market’s final result.
Returning to the Credit Market
Around the world, consumer credit through credit cards is more expensive than consumer credit provided by banks. This is the situation throughout the Western world—and in Japan. In my estimation, there is an illusion that new ownership of credit card companies in Israel will reduce interest rates on consumer credit—however, the reality in the world shows us that this is not the case. With regards to the payment market, it is difficult to predict whether prices will drop, because one has to take into consideration that payment operations in Israel are carried out efficiently by all of the credit card companies. I expect that a certain decrease in tariffs will be applied, but there will definitely be no increase.
To summarize, if the goal of the reform is to reduce cost of consumer credit, I do not expect that it will happen; however, if the goal is to weaken the “big” banks—that, almost certainly, will be achieved.