Digital Bank esh Explains High Interest Rates Amid Purchase Deal Cancellation
The digital bank esh is facing challenges after the cancellation of its planned acquisition by Isracard, initially valued at 400 million shekels. The deal was called off following due diligence that concluded the bank is not yet ready to operate as a full commercial bank. Currently, esh is in a pilot phase inviting a limited number of customers, with plans to open fully to the public by the end of the year. Now, esh must independently prove the viability of its economic model in the market.
Esh’s unique model involves equal revenue sharing with customers, returning 50% of the bank’s income from current account funds and up to 80% from deposits. This "Equal Sharing" principle aims to resolve the inherent conflict between banks seeking to minimize interest paid and customers wanting higher returns. Interest is paid weekly at a fixed rate regardless of deposit size or conditions. The bank emphasizes radical transparency, sharing the mathematical formula behind its model in its app.
The formula is based on a credit portfolio constituting 62.35% of total assets, generating an average gross interest rate of 8.64%, minus a 2.14% provision for credit losses. The remaining 37.65% of assets are held as deposits with other institutions and the Bank of Israel, earning a lower average interest of 3.48%. After deducting a 6% liquidity requirement, the weighted return translates to a current expected interest rate of 2.52% on current account funds, half of which is paid to customers.
However, these parameters are dynamic and reflect the bank’s current asset composition, which will evolve over time. Building a profitable and stable credit portfolio with an average gross interest of 8.6% and moderate losses is a complex task, especially for a new bank, and typically takes years. Esh’s pilot interest rates, 2.6% on current accounts and 4.5% on annual deposits, are unusually high compared to traditional Israeli banks, where current account interest is usually negligible and benefits often require strict conditions.
Notably, the guaranteed interest rate currently offered to customers is significantly lower at 1.25%, meaning actual returns could be much less than the forecasted 2.52% if market conditions or portfolio weights change. Despite this, the rates remain attractive compared to most traditional banks.
