“Even with its vast local talent, it seems Israel still has many hurdles to overcome in order to become a global fintech hub. [ … ] 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.”
I wrote that back in 2018, when I was determined to answer whether Israel had the potential to become a global fintech hub. Suffice to say, this prediction from three years ago has become a reality.
In 2019, Israeli fintech startups raised over $1.8 billion; in 2020, they were said to have raised $1.48 billion despite the pandemic. Just in the first quarter of 2021, Israeli fintech startups raised $1.1 billion, according to IVC Research Center and Meitar Law Offices.
It’s then no surprise that Israel now boasts over a dozen fintech unicorns in sectors such as payments, insurtech, lending, banking and more, some of which reached the desired status just in the beginning of 2021 — like Melio and Papaya Global, which raised $110 million and $100 million, respectively.
Over the years I’ve been fortunate to invest (both as a venture capitalist and personally) in successful early-stage fintech companies in the U.S., Israel and emerging markets — Alloy, Eave, MoneyLion, Migo, Unit, AcroCharge and more.
The major shifts and growth of fintech globally over these years has been largely due to advanced AI-based technologies, heightened regulatory scrutiny, a more innovative and adaptive approach among financial institutions to build partnerships with fintechs, and, of course, the COVID pandemic, which forced consumers to transact digitally.
The pandemic pushed fintechs to become essential for business survival, acting as the main contributor of the rapid migration to digital payments.
So what is it about Israeli-founded fintech startups that stand out from their scaling neighbors across the pond? Israeli founders first and foremost have brought to the table a distinct perspective and understanding of where the gaps exist within their respective focus industries — whether it was Hippo and Lemonade in the world of property and casualty insurance, Rapyd and Melio in the world of business-to-business payments, or Earnix and Personetics in the world of banking data and analytics.
This is even more compelling given that many of these Israeli founders did not grow within financial services, but rather recognized those gaps, built their know-how around the industry (in some cases by hiring or partnering with industry experts and advisers during their ideation phase, strengthening their knowledge and validation), then sought to build more innovative and customer-focused solutions than most financial institutions can offer.
Having this in mind, it is becoming clearer that the Israeli fintech industry has slowly transitioned into a mature ecosystem with a combination of local talent, which now has expertise from a multitude of local fintechs that have scaled to success; a more global network of banking and insurance partners that have recognized the Israeli fintech disruptors; and the smart fintech -focused venture capital to go along with it. It’s a combination that will continue to set up Israeli fintech founders for success.
In addition, a major contributor to the fintech industry comes from the technological side. It is never enough to reach unicorn status with just the tech on the back end.
What most likely differentiates Israeli fintech from other ecosystems is the strong technological barriers and infrastructure built from the ground up, which then, of course, leads to the ability to be more customized, compliant, secured, etc. If I had to bet on where I believe Israeli fintech startups could become market leaders, I’d go with the following.
Voice-based transactions
Voice technologies have come a long way over the years; where once you knew you were talking to a robot, now financial institutions and applications offer a fully automated experience that sounds and feels just like a company employee.
Israel has shown growing success in the world of voice tech, with companies like Gong.io providing insights for remote sales teams; Bonobo (acquired by Salesforce) offering insights from customer support calls, texts and other interactions; and Voca.ai (acquired by Snapchat) offering an automated support agent to replace the huge costs of maintaining call centers.
As financial institutions continue building trust in the ability of fintechs to offer secure and reliable voice-based solutions, and consumers continue to expect these voice solutions to be part of everyday life, we may very well see Israeli fintechs lead the way on voice-based transactions.
In voice payments, for example, voice would be used for biometric purposes and potentially be part of necessary authentication processes and would also act as the trigger to carry out basic financial activity like peer-to-peer payments or stating which credit card to use at checkout (versus using Apple Pay).
It’s hard to tell if voice payments would be a valid option for B2B payments. The answer most likely lies beyond natural language processing or AI capabilities in the tight security measures that would need to be implemented in order for those transactions to work at scale. If that is the case, Israeli fintechs could rise to the occasion.
Direct-to-consumer fintech
This may raise an eyebrow because Israeli startups have shown the greatest successes in B2B enterprise solutions, general SaaS or internet platforms across different industries and markets.
But the beauty of Israel’s maturing ecosystem is that it has expanded beyond the ability to grow startups into global enterprises worth billions by also entering new verticals such as business-to-consumer (B2C). The proof lies in companies such as Waze, Gett, Via, Fiverr, JoyTunes, Lightricks and more. More specifically within fintech, we’ve seen the successes of Lemonade, Hippo, eToro and an array of newcomers scaling nicely.
There is no doubt that the pandemic led consumers to search for alternatives for their financial needs, leading to a 15% spike in finance app downloads, with mobile fintech applications outperforming banks by a factor of up to 10.8x.
The next generation of Israeli consumer-focused fintechs will have the challenge of not only building a more sophisticated B2C operating model, which can only be possible through the adoption of next-generation technologies, but also developing a marketing and product approach that conveys their solution as the financial lifeline for the consumer.
It may no longer be a winning approach to build a business on one focused financial product that pushes its own brand forward and over time expands its offering. Instead, the win-win approach may be to lay the infrastructure for a broader customer-centric solution from day one, such that understanding the needs and uncertainties of both the consumer and the market will be like oxygen.
According to Plaid’s 2020 fintech report, technology makes it easier for consumers to try new financial areas, and the more fintech tools they have, the more engaged they are.
Keeping that in mind, there is a real moment for Israeli consumer fintech to shine. Israeli startups have already created strong solutions that target, read and truly understand the consumer. Being known as a technological powerhouse, together with an expanding pool of local expertise in branding and strategic growth marketing, and with more capital flowing into the ecosystem that already has a large B2C portfolio, will allow for more Israeli direct-to-consumer fintech winners.
Autonomous finance
The concept of “self-driving money” or “Google Maps for money” is not new, and was coined initially by the robo-adviser Wealthfront and Andreessen Horowitz in the past couple of years.
The idea is that an automated “self-driving adviser” would choose what the user should invest in based on the risk appetite. By using technology to reach and carry out the investment decision, the fees were substantially lower than traditional advisory services.
From robo-advisers targeting financial planning (including retirement goals), the concept spread to automated savings solutions like Acorn and then to more detrimental financial issues such as paying off credit card debt through solutions like Tally. Basically, the use of AI and machine learning algorithms help provide advanced and customized financial services by managing the user’s money for them.
Automated financial services could potentially be where we will see successful Israeli fintechs emerge. Such a fintech company would build a fully automated system that continuously learns you, your risk appetite and total distributed assets, and financial goals in the near and far future, and would structure the strategy and most beneficial financial steps and investment decisions needed to get there by following market fluctuations and trends.
Sounds complicated? It is. But, with the initial signs of adopting open banking locally; new embedded-finance solutions (such as those built by Israeli-founded startups Unit, Rapyd and more); and the in-depth expertise in AI, machine learning (ML) and deep learning (DL) , Israel has a strong chance of creating fintech disruptors in this category.
Regtech makeover
Perhaps one of the most challenging areas for fintechs to overcome is the regulatory arena, which over the years has grown into a branched web of rules, restrictions and yes, enormous fines.
As policymakers begin to deploy a slew of new regulations at the federal and state levels (as we have seen in California and Washington), a whole new level of compliance obstacles is present, which demands new approaches and tactics.
Bitcoin and general crypto adoption from financial institutions over the past few years have added yet another aspect of complexity in the regulatory sphere. Just in May, the U.S. Treasury and the Federal Reserve discussed how they plan on becoming more involved in the cryptocurrency craze, from taxes to deploying an actual digital coin.
So what is needed in order to keep financial institutions and fintechs compliant with the evolving regulatory landscape? It’s most likely a combination of automation; big data and ML algorithms (to collect, understand and learn the information); encryption; world-leading cybersecurity capabilities; and an innovative business model that shifts the risks and responsibilities.
The Israeli cybersecurity ecosystem is ripe to take on such new challenges with a growing number of entrepreneurs who have decided to pivot out of their Israeli Defense Forces background focused mainly on securing the cybersphere into new territories — including fintech.
The discipline and “compliance-first” mindset that is needed to build the best solutions in regtech (and any fintech, for that matter) is already inherent among cyber experts. That, together with the “wall-breaking” mentality of crypto-focused entrepreneurs coming out of Israel (now boasting nearly 100 locally grown crypto startups), will most likely grow a new breed of regtech startups that will present innovative business models around data privacy, regulatory adherence and advanced identity authentication.
You still may wonder, “But really, why Israel and fintech?” and it is a fair question. Israel does not have a world-leading banking infrastructure (there is essentially a duopoly between two local leading banks); local regulations have somewhat limited innovation; and the demographic is small and very different from the United States as it relates to small businesses, enterprises and consumer engagement.
Yet, when it comes to the ingredients that make a successful fintech, Israeli entrepreneurs and the maturing tech ecosystem now have what it takes — global fintech expertise, an understanding of how financial institutions and insurance carriers work and operate, an eye for innovative business models that tip the scale, and, of course, technological talent that knows how to keep data secure at the highest levels.
In many ways, the Israeli cybersecurity industry created the “playbook” for building an ecosystem that continuously nurtures talent, innovation and expertise in a connected environment, and this is now happening for the local fintech industry as well. As time goes by, I believe we will see more thesis-driven venture capital investments in Israeli fintech startups along with the global expansion of Israeli fintech giants.