Four Major Israeli Banks Sued for Billions Over Unpaid Overdraft Interest

Four of Israel's five largest banks are facing a potential multi-billion shekel class-action lawsuit approved by the Central District Court. The suit targets Bank Leumi, Mizrahi Tefahot, Discount Bank, and International Bank of Israel, alleging they failed to pay interest on customer funds held in checking accounts. Bank Hapoalim was excluded from this specific lawsuit.

The plaintiffs estimate the damages to customers between 2022 and 2025 could range from NIS 3.6 to 5.1 billion. Their core argument is that the banks benefited from a very cheap source of funding: customer money left liquid in accounts, which the banks used for their credit operations, generating income while customers received little to no interest.

Judge Shmuel Bornstein ruled that there is a reasonable chance the claim of unjust enrichment will succeed. This approval does not mean the banks are liable for billions, but rather that the claim has passed the initial stage and will be heard on behalf of a large group of customers. The banks contend that during the relevant period, no legal or contractual obligation existed to pay interest on checking account balances.

Bank Hapoalim, however, has operated a different system for years, notably expanding its "offsetting overdraft" mechanism in 2023. This system doesn't pay interest on positive daily balances. Instead, positive balances accumulated during the month are used to offset days when the same account is overdrawn. For example, if an account has a NIS 1,000 positive balance for 10 days and then a NIS 1,000 overdraft for 20 days, Bank Hapoalim's system offsets 10 days of the overdraft, meaning interest is charged for only 10 days, significantly reducing costs compared to traditional systems where interest might be charged on the full 20 days of overdraft.

This offsetting mechanism, which can cover up to NIS 300,000 monthly and operates automatically for relevant private accounts with credit lines, is particularly beneficial for accounts that fluctuate between positive and negative balances, a common scenario for many Israelis. While Mizrahi Tefahot also employed some offsetting mechanisms in specific packages, Bank Hapoalim's system is described as more integrated and automatic within its checking account structure, predating the current legal dispute over interest on positive balances.