Revolut's Entry into Israel: Competition Limited to Fees, Not Core Banking
Translated & summarized from Calcalist by baba
Fintech firm Revolut received a conditional banking license in Israel, but its impact is expected to be limited to fee-based services like currency exchange and international transfers, rather than core banking functions. Established Israeli banks generate most revenue from interest, while Revolut's model relies on fees. Attracting deposits for lending remains a significant challenge for new entrants, potentially increasing their operational costs. While regulatory efforts aim to boost competition, structural issues like the absence of deposit insurance and low customer switching rates persist.
The story in 6 lines · by baba
- Revolut received a conditional banking license in Israel on November 10th.
- Revolut's revenue primarily comes from fees, unlike Israeli banks which rely on interest.
- Revolut may lower costs for foreign currency and international transfers in Israel.
- Attracting deposits for lending is a major challenge for new banks like Revolut.
- Israel lacks statutory deposit insurance, potentially hindering new bank trust.
- A 2021 reform only slightly increased the annual bank customer switching rate.
Revolut received a conditional banking license from the Bank of Israel on November 10th. While the fintech firm's global operations show significant customer balances and revenue primarily from fees and subscriptions, Israeli banks rely heavily on net interest income. This fundamental difference suggests Revolut's initial impact in Israel will likely be on services like foreign currency exchange, international transfers, and payment cards, potentially lowering costs for consumers.
However, Revolut's experience in Ireland, where a majority of consumers use the app but only a small percentage manage their primary current account there, indicates a similar pattern may emerge in Israel. Israeli banks could see a reduction in fee-based income even if customers retain their main accounts and credit facilities with them. Local payment apps like Bit and Paybox, along with digital wallets, already cater to domestic payment needs, making it challenging for Revolut to displace existing credit card usage as a primary payment method.
The more significant challenge for new entrants like Revolut lies in attracting deposits to fund lending activities. Unlike established Israeli banks that benefit from interest-free current accounts, new banks may need to offer higher interest rates on deposits, increasing their cost of capital. The example of One Zero in 2025, which paid an average of 3.8% on interest-bearing deposits, illustrates this hurdle.
Regulators, including the Bank of Israel, have facilitated Revolut's entry, but deeper competition requires addressing structural issues. Israel lacks statutory deposit insurance, a factor that could bolster public confidence in new banks and aid their deposit acquisition. A 2026 law mandates a review of deposit insurance by the Finance Minister and the Bank of Israel governor.
While a 2021 "click-to-switch" reform increased annual bank switching rates from 0.6% to 1.4%, nearly 99% of customers still remain with their banks each year. Nevertheless, the reform did exert competitive pressure, leading to lower overdraft interest rates for customers who didn't switch. Revolut's entry is expected to reduce fees and erode some bank revenues, but achieving full banking competition will require enabling new players to compete for funding and comprehensive customer financial relationships.
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