Israeli Banks Face Class Action Over Unpaid Interest on Checking Accounts

A central district court has approved a class-action lawsuit against four of Israel's five largest banks, alleging they failed to pay customers interest on their current account balances. The lawsuit seeks to recover interest on these balances for a three-year period, from April 2022 to May 2025, with an estimated value in the billions of shekels. While a final ruling is still distant, the court's decision to recognize the case as a class action is considered a significant development.

The banks contend that paying interest on current accounts is at their sole discretion, a condition customers agree to upon opening an account. However, the court, citing the legal principle of unjust enrichment, appears unconvinced by this argument. The core of the claim is that banks profit from customer deposits by earning interest from the Bank of Israel, currently at 3.25%, while not passing any of this benefit to the customer. During the period in question, interest rates were even higher, reaching 4.75% for seven months between May 2023 and January 2024, leading to estimated annual profits of over 10 billion shekels for the banks from these balances alone.

District Court Judge Shmuel Bernstein stated in his ruling that banks holding customer funds do not credit them with any interest, yet use these funds to generate income from loans. He noted that the bank's profit exceeds what it would earn by paying reasonable interest to customers, constituting unjust enrichment that warrants judicial intervention.

This ruling has sparked debate, with some arguing that banks will pass on any resulting costs to the public through increased fees and interest rates. Critics of this view suggest it's a recurring argument against any legislation aimed at increasing competition or taxing bank profits. The article posits that the fundamental issue is a system where customer exploitation has become a significant revenue stream for banks, even if customers agree to leave funds in their accounts without earning interest.

Recent regulations have introduced some measures to inform customers about alternatives. For instance, a year ago, banks were mandated to display "money market products" like cash-backed funds in their apps and websites, which often yield higher returns than current accounts. Since December, banks must also notify customers monthly about current account balances exceeding 15,000 shekels that do not earn interest. The article concludes that the public is often unaware of their ability to earn interest, and banks are unlikely to proactively encourage such actions without regulatory compulsion.