Israel Fintech: Emerging Global Disruptors

Israel's Rise as a Global Fintech Hub

Initial assessments indicated that despite considerable local expertise, Israel faced significant challenges in establishing itself as a leading global fintech hub. However, I predicted in 2018 that these obstacles wouldn't hinder the emergence of groundbreaking Israeli fintech startups.

Validation of the Prediction

This forecast has demonstrably proven accurate. In 2019, Israeli fintech companies secured over $1.8 billion in funding. Despite the disruptions caused by the pandemic, they raised $1.48 billion in 2020.

The momentum continued into 2021, with $1.1 billion raised in the first quarter alone, as reported by the IVC Research Center and Meitar Law Offices.

The Emergence of Unicorns

Consequently, Israel now features more than a dozen fintech unicorns operating in diverse sectors. These include payments, insurtech, lending, and banking.

Notably, companies like Melio and Papaya Global achieved unicorn status early in 2021, securing funding rounds of $110 million and $100 million, respectively.

Investment Experience

Throughout my career, I’ve had the opportunity to invest in promising early-stage fintech companies. This includes ventures in the U.S., Israel, and emerging markets, such as Alloy, Eave, MoneyLion, Migo, Unit, and AcroCharge.

Drivers of Global Fintech Growth

The substantial growth of the global fintech landscape has been propelled by several key factors. These encompass advancements in AI-driven technologies, increased regulatory oversight, and a more collaborative approach from financial institutions towards fintech partnerships.

Furthermore, the COVID-19 pandemic accelerated the shift towards digital transactions, making fintech solutions essential for business continuity.

The Pandemic's Impact

The pandemic effectively positioned fintech companies as vital for survival, significantly contributing to the rapid adoption of digital payment methods.

What Sets Israeli Fintech Apart?

What distinguishes Israeli fintech startups from their counterparts internationally? Israeli founders consistently demonstrate a unique ability to identify gaps and unmet needs within their target industries.

Examples include Hippo and Lemonade in insurance, Rapyd and Melio in B2B payments, and Earnix and Personetics in banking data analytics.

A Unique Founder Profile

Interestingly, many of these Israeli founders didn't originate from traditional financial services backgrounds. Instead, they recognized these deficiencies, developed relevant expertise – often through strategic hires or advisory partnerships – and then created more innovative, customer-centric solutions.

A Maturing Ecosystem

As a result, the Israeli fintech industry has evolved into a robust ecosystem. It now benefits from a wealth of local talent, a growing network of global banking and insurance partners, and dedicated fintech-focused venture capital.

This combination is poised to continue fostering success for Israeli fintech entrepreneurs.

The Importance of Technology

Achieving unicorn status requires more than just back-end technology. A strong technological foundation is crucial, but it’s not the sole determinant of success.

Technological Infrastructure

Israeli fintech is likely differentiated by the robust technological infrastructure built from the outset. This allows for greater customization, compliance, and security.

I anticipate Israeli fintech startups will achieve market leadership in the following areas.

Voice-Based Financial Transactions

Significant advancements have been made in voice technology in recent years. Previously, interactions with voice systems were clearly identifiable as robotic; however, financial organizations and their applications now deliver automated experiences that closely mimic human interaction.

Israel is emerging as a prominent hub for voice technology innovation. Companies such as Gong.io are delivering valuable analytics to distributed sales forces.

Bonobo, now part of Salesforce, provides actionable intelligence derived from customer support interactions, including calls and text messages. Furthermore, Voca.ai, acquired by Snapchat, offers automated support agents, presenting a cost-effective alternative to traditional call centers.

As financial institutions gain confidence in the security and dependability of fintech solutions for voice-based interactions, and as consumer expectations for these solutions increase, Israeli fintech companies are well-positioned to pioneer advancements in voice-based transactions.

Applications in Voice Payments

In the realm of voice payments, voice recognition could serve as a biometric identifier. This would potentially be integrated into essential authentication protocols.

Moreover, voice activation could initiate fundamental financial operations, such as person-to-person transfers or specifying a preferred credit card for purchases – offering an alternative to services like Apple Pay.

The feasibility of voice payments for business-to-business (B2B) transactions remains uncertain. The answer likely depends on overcoming stringent security requirements and exceeding current limitations in natural language processing and artificial intelligence.

Should these challenges be addressed, Israeli fintech companies are poised to develop solutions capable of handling such transactions at scale.

• Biometric Authentication: Voice as a secure identifier.
• Transaction Initiation: Using voice commands to authorize payments.
• B2B Payment Security: Addressing the complex security needs of business transactions.

Israeli innovation in voice technology, coupled with a strong focus on security, positions the nation’s fintech sector to potentially lead the evolution of voice-based financial transactions.

Direct-to-Consumer Fintech

The rise of direct-to-consumer (D2C) fintech companies in Israel might seem unexpected, given the country’s historical strength in business-to-business (B2B) enterprise solutions, SaaS platforms, and broader internet technologies.

However, Israel’s evolving startup ecosystem demonstrates a capacity for nurturing companies into global successes exceeding billions in value, and is now extending into new sectors like business-to-consumer (B2C) markets.

Companies such as Waze, Gett, Via, Fiverr, JoyTunes, and Lightricks exemplify this expansion.

Within the fintech space specifically, Lemonade, Hippo, and eToro, alongside numerous emerging companies, have demonstrated significant scaling potential.

The onset of the pandemic undeniably accelerated consumer demand for alternative financial services.

This resulted in a 15% increase in finance app downloads, with mobile fintech applications exhibiting performance levels up to 10.8 times greater than traditional banks.

Future Israeli consumer fintech companies will face the dual challenge of constructing a more advanced B2C operational framework.

This will necessitate the integration of cutting-edge technologies, alongside the development of marketing and product strategies that position their offerings as essential financial resources for consumers.

A strategy centered on a single financial product, initially branded and subsequently expanded, may prove insufficient.

Instead, a more effective approach could involve establishing a comprehensive, customer-focused infrastructure from the outset.

Prioritizing a deep understanding of consumer needs and market dynamics will be crucial.

Plaid’s 2020 fintech report highlights how technology empowers consumers to explore new financial avenues.

Increased access to fintech tools correlates with heightened consumer engagement.

This presents a significant opportunity for Israeli consumer fintech to flourish.

Israeli startups have already proven adept at creating solutions that effectively target, interpret, and genuinely understand consumer behavior.

Leveraging Israel’s reputation as a technological leader, coupled with a growing base of local expertise in branding and strategic growth marketing, and increased capital investment, will likely foster further success in the D2C fintech arena.

Autonomous Finance

The notion of “self-driving money,” often likened to “Google Maps for your finances,” has been gaining traction for several years. This concept was first popularized by robo-advisor Wealthfront and venture capital firm Andreessen Horowitz.

The core principle involves an automated advisor that determines optimal investments based on an individual’s risk tolerance. Leveraging technology to execute these investment decisions results in significantly reduced fees compared to conventional financial advisory services.

Initially focused on financial planning, particularly retirement objectives, this automation expanded to include automated savings platforms like Acorn. It has also addressed more challenging financial concerns, such as credit card debt management through services like Tally.

Essentially, the application of AI and machine learning algorithms facilitates the delivery of sophisticated, personalized financial services by autonomously managing a user’s funds.

Israel is well-positioned to become a hub for successful fintech companies in the realm of automated financial services. A leading fintech firm in this space would develop a completely automated system.

This system would continuously analyze a user’s profile, encompassing their risk profile, total asset allocation, and both short-term and long-term financial objectives.

It would then formulate a strategy and recommend the most advantageous financial actions and investment choices, dynamically adjusting to market changes and prevailing trends.

While complex in its execution, several factors suggest Israel’s potential for success. These include the early adoption of open banking within the country.

Furthermore, the emergence of innovative embedded-finance solutions – exemplified by companies like Unit and Rapyd, both founded in Israel – contributes to a favorable environment.

Israel’s deep expertise in AI, machine learning (ML), and deep learning (DL) further strengthens its capacity to cultivate disruptive fintech innovators in this rapidly evolving category.

The Transformation of Regtech

Navigating the regulatory landscape presents a significant hurdle for fintech companies. Over time, this area has become a complex network of rules, limitations, and substantial potential penalties.

With policymakers introducing new regulations at both the federal and state levels – exemplified by developments in California and Washington – compliance challenges are intensifying. This necessitates the adoption of novel strategies and approaches.

The increasing acceptance of Bitcoin and other cryptocurrencies by traditional financial institutions has further complicated the regulatory environment. Discussions in May between the U.S. Treasury and the Federal Reserve regarding greater involvement in the cryptocurrency space, encompassing taxation and the potential creation of a central bank digital currency, illustrate this point.

What is required to ensure ongoing compliance for financial institutions and fintechs within this evolving regulatory framework? A likely solution involves a combination of automation, big data analytics, and machine learning algorithms – used for data collection, analysis, and learning – alongside robust encryption and cybersecurity measures. An innovative business model that effectively manages risks and responsibilities is also crucial.

Israel’s thriving cybersecurity sector is well-positioned to address these emerging challenges. A growing number of entrepreneurs, transitioning from backgrounds in the Israeli Defense Forces with a focus on cybersecurity, are now applying their expertise to new areas, including fintech.

The discipline and “compliance-first” approach essential for developing effective regtech solutions – and indeed, any fintech solution – are already ingrained in cyber professionals. Coupled with the disruptive mindset of crypto entrepreneurs emerging from Israel, which now boasts almost 100 native crypto startups, this will likely foster a new generation of regtech companies focused on data privacy, regulatory compliance, and advanced identity verification.

One might reasonably ask, “Why Israel and fintech?” This is a valid inquiry. Israel lacks a dominant banking infrastructure, with a market largely controlled by two major banks. Local regulations have also presented some limitations to innovation, and the country’s demographics differ significantly from the United States in terms of small businesses, enterprises, and consumer behavior.

However, when considering the elements necessary for successful fintech ventures, Israeli entrepreneurs and the maturing tech ecosystem possess the required attributes. These include global fintech knowledge, an understanding of financial institution and insurance carrier operations, a talent for creating innovative business models, and, crucially, technological expertise in maintaining data security.

In many respects, the Israeli cybersecurity industry has established a model for building an ecosystem that consistently cultivates talent, innovation, and expertise within a connected environment. This is now being replicated within the local fintech industry. We can anticipate increased venture capital investment in Israeli fintech startups, as well as the global expansion of established Israeli fintech companies, in the coming years.