Israeli Banks Face Class Action Over Unpaid Interest on Checking Accounts

An Israeli court has approved a class-action lawsuit against four major banks: Leumi, Mizrahi-Tefahot, Discount, and International, concerning the non-payment of interest on checking account deposits. The lawsuit is based on the legal principle of "unjust enrichment," arguing that banks profit from the use of customer funds in checking accounts without providing any return.

According to the court's reasoning, banks utilize these deposited funds for investments and to issue loans to other customers, including the account holders themselves, generating significant profits. However, they do not pay interest to depositors for the use of their money, leading to a situation deemed unfair and potentially illegal enrichment. The article criticizes the Bank of Israel's Supervision of Banks, the industry's regulator, for opposing the regulation of interest on checking accounts, despite evidence of banks profiting unfairly.

The author, Dr. Iris Soroker, a retired judge and head of the Hat Center for Research on Competition and Regulation, urges the regulator to reconsider its stance and allow the class-action suit to proceed. She highlights that the Bank of Israel's governor had previously requested banks to consider paying interest in June 2023, but this was rejected. The article points to the Israeli banking sector's high concentration and coordinated behavior, as noted by the Competition Commissioner, as a reason for anti-competitive practices that harm consumers.

Further evidence cited includes a March 2025 report by the Supervision of Banks, which acknowledged low competition in retail banking services and noted that banks did not significantly increase the interest paid to customers in 2022 despite rising market interest rates. This disparity led to a surge in bank profits. The article contrasts the Israeli situation with Europe, where banking is more competitive, and banks generally pay interest on deposits, with rates increasing in more competitive markets.

Dr. Soroker argues that unlike in Europe, Israel's banking market lacks competition, necessitating regulatory intervention. She references studies from the US and Europe indicating a correlation between market structure, bank size, and the interest paid on deposits, with smaller banks and more competitive markets offering higher rates. The article concludes that after two decades of failed attempts to foster competition, the Supervision of Banks must intervene, including in pricing, to address the banks' monopolistic and exploitative practices.