OpinionIsrael Can Cook Up the Next Big Thing in Fintech
While it is unlikely that the country will become a global fintech hub, exciting technologies are giving rise to a bevy of fintech startups in Tel Aviv, writes venture capitalist Adi Levanon
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As an Israeli who has invested in Israeli startups, I became curious to learn if Israel has the ability to produce global successes in the fintech industry and become a global fintech hub.
To properly answer this question, I spent the past few years meeting with fintech-oriented Israeli investors, entrepreneurs, banks and accelerators, after which a few things became clear.
Despite the global connectivity and technological breakthroughs, Israel still has a limited banking, regulatory and financial infrastructure. This has a lot to do with its relatively small population (currently roughly equivalent to the number of people living in Manhattan) and market size.
From a banking perspective, Bank Hapoalim and Bank Leumi lead the industry in a duopoly with support from the local regulator. From a capital markets perspective, the Tel Aviv Stock Exchange (TASE) has a market cap about 30 times smaller than Nasdaq (even with global enterprises like Teva Pharmaceutical Industries Ltd., Check Point Software Technologies Ltd. and NICE Systems Ltd. traded on the floor).
On the flip side, the minimal market size is probably what caused Israel’s human capital to seek global financial expertise overseas. This in turn may have been the catalyst for the creation of many successful global fintech companies. Israelis who have held positions in financial institutions in New York, London, or Asian financial centers, utilized their financial background as the driving force to build fintech startups like alternative financiers Behalf Inc. and FundBox Inc. Israelis who have held roles at global fintech enterprises like PayPal have later ventured onwards to build new and more agile businesses like fraud prevention company Forter Ltd.
The former employees and executives of success stories like FundTech Ltd. (sold to D+H), Traiana Inc. (sold to ICAP, now the NEX Group), Mint Bills Inc. (Sold to Intuit), Fraud Sciences Ltd. (sold to PayPal) and Actimize Inc. (sold to NICE), have gained strong industry expertise and now reap the fruits of obtaining such expertise by building new disruptive fintech-focused ventures.
Several leading financial institutes such as J.P. Morgan, Citibank and Barclays have opened development centers in Israel in recent years, looking to tap local expertise and talent. The latter two have also set up fintech-oriented accelerators, looking to court some of the country’s home-grown fintech startups, which number around 500 according to estimations made by the Israeli Ministry of Finance in 2017.
Lastly, and perhaps most importantly, Israel has become globally known for its successes in various industries such as unmanned aerial vehicles, cryptography, data manipulation and cyber security, all of which already have and will continue to have a huge impact on global financial institutions, including insurance carriers, who are in need of disruptive solutions to improve their legacy systems.
After assessing all the input I have gathered from industry leaders and fintech founders over the past few years, I believe the following technological advancements currently coming out of Israel will be the backbone behind the next generation of Israeli fintech companies.
• Big data aggregation and data manipulations can significantly enhance risk modeling, false claim detection and insurance underwriting, impacting how policies are priced, how risk is calculated and how an insurance carrier can make sure it has the necessary reserves to fill claims.
• Artificial intelligence and computer vision expertise can help build strong automated systems, understand who the customer is and what financial products are most relevant. Let’s not forgot autonomous vehicles, who will utilize computer vision technologies, providing critical data for insurance carriers as they assess immediate and ongoing risks.
• The quantum computing developments that are coming out of Israel’s leading universities in the fields of medicine and data algorithms can disrupt capital markets and certain types of trading, by executing more complex algorithms than today’s computers, in a much faster way.
• Targeting, retargeting and NLP technologies that have been used to market to e-commerce purchasers and website visitors can be utilized as a strong marketing tool to reach new insurance policy holders and provide them with the most relevant and customized products.
• Anti-malware, anti-phishing and security technologies that have been used in defense systems can be utilized to recognize potential cyber attacks and mitigate damages. It’s clear that insurance companies need updated defense mechanisms to match evolving cyber threats.
• Cryptography and blockchain-based technologies that have been used to cryptographically store and transfer sensitive information can be utilized to secure massive amounts of customer data, authenticate transactions, verify transacting parties as part of “know-your-customer” standards and connect the unbanked/underbanked to new banking and payment systems they could not access beforehand.
• Unmanned aerial vehicles, smart sensors and other connected device technologies can bring a new generation of drones, autonomous vehicles, smart homes and other IoT devices; all of which continue to be a substantial disruptor in the insurance industry.
Even with its vast local talent, it seems Israel still has many hurdles to overcome in order to become a global fintech hub. The geography, demographics, regulatory restrictions, a majority of local-based capital and the limited global financial industry expertise, can all hinder Israel’s ability to reach that goal.
Having that said, I don’t believe any of these obstacles will prevent Israel from generating disruptive global fintech startups that will become game-changing businesses. As financial markets continue to evolve and embrace new business models, Israeli fintech startups will be sure to adapt to those changes as well. We are already seeing it happening in the world of blockchain and digital currencies, where three of the largest ICOs (initial coin offering) to date were performed by Israeli startups.
Thus, Israel has advantages and disadvantages in its pursuit of becoming a global fintech hub, and time will tell if regulations and capital markets will help or hinder Israel in that goal. In the meantime, I believe we are just beginning to see the potential that lies within Israel’s human capital, bringing forth the next wave of successful global fintech companies.
Adi Levanon is a venture partner at New York-based venture capital firm Symmetrical Ventures and acts as an advisor to several Israeli startups. She holds a bachelor of law and business from IDC Herzliya, and has previously been the director of investments at FinTech Collective, a New York-based venture capital fund focused on global early stage fintech startups.