\Fintech Analysis/

Why Israeli fintechs are becoming a hot prize for investors — and big banks

Israeli fintech startups are tapping into the country's cybersecurity prowess and are prepped to go global

By Isabel Woodford

Israel’s startup scene is best known for its pioneering — often controversial — security and artificial intelligence projects; several of which boast international governments and multi-nationals as clients.

But the fintech segment inside Israel’s Silicon Wadi (‘Valley’) is also beginning to take the limelight.

Some of the country’s biggest fintech success-stories include recently-listed insurtech Lemonade, trading app eToro, and the payments group Melio, which recently raised $144m.

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“Israel is a fintech powerhouse already,” says Amir Mizroch, former EMEA tech editor at The Wall Street Journal and now a consultant for Israeli tech firms.

“It punches way above its weight [for its size].”

Indeed, the country now boasts around 500 fintechs, including 12 fintech unicorns, according to a 2019 report by Startup Nation Central.

The report also estimates that Israeli fintechs raked in as much as $1.8bn in funding last year — amounting to 5% of the sector’s global investment (Dealroom puts Israel’s funding figures closer to $480m, using a narrower definition of ‘fintech’).

Meanwhile, it’s not just investors taking a stake in Israel — major global banks are also getting in on the action.

Citi, Barclays and Santander all have fintech innovation labs in Tel Aviv, while RBS used an Israeli fintech to build the underlying tech for its recent spinout, Esme.

Separately, Santander Ventures has made several fintech investments in Israel over the last five years, starting with local mobile-payments firm MyCheck. 

Bank Leumi also launched Israel’s first digital challenger bank, Pepper, in 2017.

Fresh activity

One of the drivers behind Israel’s fintech boom is their ability to leverage the country’s expertise in fraud and data analytics.

As a result, fintechs that have tapped into the synergy between security and finance, like BioCatch, are leading the pack — focused on weeding out bad financial actors for major overseas banks like RBS.

But while Israel’s fintech ecosystem is strongest in data and fraud prevention, there’s now a new generation branching into the consumer space, according to Mizroch.

“What’s new in Israeli fintech is startups are starting to target the consumer market. Instead of just targeting banks, governments, big marketplaces… I would say the next trend is B2B2C,” he told Sifted.

Moreover, Israeli startups are often prepped for international expansion from the outset, given the domestic market has a population of just 8.5 million.

That means Israeli fintechs are well placed to enter new hotspots like South-East Asia, which could be a new battleground for Israeli-born financial startups.

A new trade deal between Israel and the UAE may also create a fresh market for the country’s fintechs.

A new era?

Despite Israel’s success in the fintech space, it’s so far been overshadowed by its sister in cybersecurity.

But that’s about to change, according to the country’s most prominent banking leader, Rakefet Russak-Aminoach — the former chief executive of Israel’s largest bank.

“I wouldn’t call Israel number one in the world for fintech, but it’s very significant… If Israel is already leading in cybersecurity, I think [fintech is] heading there in the next few years,” she told Sifted.

Russak-Aminoach is now putting her money where her mouth is and, this week, co-launched a new fintech VC accelerator in Tel Aviv. The foundry, Team8 Fintech, will spin out five fintech companies focused on corporate innovation, helping cofound, run and finance them, with a starting capital of around $5m each.

Some of the companies’ cofounders will be Israeli, to capitalise on local talent, but the fund said it was open to having a diverse range of nationalities.

When asked if the new fintechs would be focused on issues like ‘banking the unbanked’, Russak-Aminoach said:

“We don’t have any unbanked in Israel at all.”

The founding team at Team8 Fintech, including Rakefet Russak-Aminoach (pictured front-left). Galia Beer Gabel, PayPal’s former head of business development for Eastern Europe, Israel and Africa, is also joining Team8 Fintech’s founding team.

 

Isabel Woodford is Sifted’s fintech correspondent. She tweets from @i_woodford

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