IsraCard Deal to Buy Digital Bank esh Falls Through, Delaying Competition Boost in Israeli Banking

IsraCard's planned acquisition of the new digital bank esh has collapsed, delaying its entry into the Israeli banking sector as a licensed small bank. Despite this, esh is still expected to join other digital banks like One Zero and Bank of Jerusalem in competing against the five major banks. The deal's failure is a setback for competition, especially following the recent finalization of Bank of Israel's "thin bank" reform, which allows financial entities to obtain a slim banking license to accept deposits and extend credit.

IsraCard, along with credit card companies Max and CAL, were seen as primary candidates to become small banks under the new regulation, which also includes non-bank players like Phoenix Gamma and Maimon Yeshi. Acquiring esh was supposed to be a shortcut for IsraCard to secure a banking license, providing esh with significant financial backing to strengthen competition. However, the reform's liquidity requirements and capital rules have been criticized by industry players for imposing heavy costs and potentially worsening their capital ratios.

Bank of Israel likely hesitated to ease regulations further because Revolut, a digital bank, is already preparing to launch in Israel under the new framework. The IsraCard-esh deal would have been a second success story for the reform, encouraging other credit card companies to overcome regulatory concerns and enter banking. Although IsraCard still aims to become a small bank, the path is now longer and more complex, reducing the momentum Bank of Israel hoped to generate.

While the reform remains intact and competition is expected to increase eventually, the collapse of this deal means the banking sector faces more delays and challenges before the promised benefits of enhanced competition materialize.