Understanding the Israeli Banking System

The Israeli banking system has been known to cause more than a little aggravation and frustration to the average Israeli, never mind the new oleh. The banking system is incredibly innovative and strong in a number of areas, including security, apps, and international integration. However, the average customer doesn’t see these behind-the-scenes advances. While sophisticated tools are available online on a day-to-day basis, most people deal with inefficient bureaucracy and below-par customer service, which often leaves them with a negative impression.

One of the biggest challenges that olim face when moving to Israel is managing their day-to-day finances through the banks. Many financially competent individuals, who for many years have successfully managed their finances and cash flow, find it difficult to manage their money in Israel. In my experience, the Israeli banking system is responsible for a significant part of the problem. Few olim check their various payments after they’ve arrived in Israel (I’ve surveyed hundreds of them at my seminars). Why? Here are a few possible reasons:

Life changes dramatically when moving to a new country, and financial management gets put on the back burner while olim are busy integrating into a new culture and getting their family settled.

Managing money in a completely different financial system and new language can be such a large barrier that people simply give up. Receiving statements and letters in a technical language (which the average Hebrew-speaking Israeli finds difficult to understand) only increases the frustration.

Sometimes people think that there’s no way to logically make ends meet in Israel — so they give up trying to manage their finances.

At first, it’s not easy to stay on top of your finances in Israel. You might decide at some point to seek help. Financial professionals can help you learn the system, assist you in making the big decisions, and even sometimes help you with the day-to-day activities. Understanding the banking basics will help you better manage your finances, regardless of whether or not you choose to work with professionals.

Like so many elements that comprise the Israeli financial system, a big part of navigating the system is simply knowing how it works. So let’s go through the basics of the banking system in Israel to save you time, money, and aggravation.

Reduced Competition

The high level of concentration in the banking sector in Israel makes Israeli banks uncompetitive and thus expensive. The five largest banks account for well over 90% of the total banking activity in the country. The average consumer, as an individual, has few choices and very little bargaining power when working with the banks. Whenever possible, choose a bank as part of a group such as via your employer or with an organized consumer group. Banks often give preferential rates to companies and their employees, and this option sometimes even applies to professional groups.

A famous example of this principle can be found with Bank Yahav. Bank Yahav, currently a subsidiary of Bank Mizrachi, offers banking and financial service products largely to government employees or employees of government-owned companies — at significant discounts. The Postal Bank also operates as a discount bank, but with scaled-down accounts and services. While accounts at the Postal Bank cannot go into overdraft and it doesn’t pay any interest on balances, its fees for basic transactions are considered low.

Banks in Israel set up new accounts (or subaccounts) for each different currency and purpose. One account is for day-to-day current account activities, like checks and transfers, paying bills, and depositing and withdrawing money. A separate account is for investing (for more information see “Asset Management in Israel”). A third account is for savings deposits, and a fourth account is for foreign currency. Each account has its own costs and management nuances. It is the client’s responsibility to ensure he has the correct amount of money in the correct account. Banks will not automatically transfer money between your accounts to cover an outstanding check, unless you have arranged it with them.

Unfortunately, Israeli banks are notorious for charging some of the highest fees in the world. While many Western banks earn upwards of 80% of their income from lending money and only 20% from fees, some suggest that the situation in Israel is reversed, with the majority of revenue generated from fees. There are fees for almost every transaction you do, from depositing your money, to withdrawing your money, to paying a bill, to setting up a credit line … and the list goes on. Banks will often charge you for every line item on your bank statement, no matter what it is.

However, the Bank of Israel has forced the banks to offer a variety of tracks for banking fees that the customer pays per month as a global fee, rather than continuing to pay per transaction which generally results in much higher monthly fees. Everyone needs to contact their bank and sign up to benefit from these monthly savings. Just one online request or phone call and you will receive the same service for less money on a monthly basis.

Another very welcome addition to the banking services is the recent introduction of the “Banking ID Card”.  This document, which is available via the client’s online account is a concentrated report presenting the customer with all the activity conducted in the account, in a clear, direct and easy to compare form. The Banking ID Card is sent to all customers (individuals and small businesses) once yearly on February 28, through their online account on their bank’s website or through the mail (in accordance with each customer’s main means of communication with the bank). The report will be available at the online account on the bank’s website for 3 years. Likewise, a Banking ID Card may be requested at any time during the year, and through it to receive up to date account information.

What information appears on the Banking ID card?

Assets in the customer’s account, including current account balances, deposits and savings.

Liabilities, such as loans and credit facilities.

Total fees paid by the customer.

Additional details such as standing bank orders and powers of attorney in the account.

If the customer is interested in examining the account activity more extensively, then in addition to the short-form report there is also a more detailed report.

How does the Banking ID card help the customer?

With the Banking ID card, the customer can:

Keep track of the account, manage it more easily, and in a more informed way.

Get to know the banking products that exist in the account, how much was paid for them, or the profit derived from them.

Compare the current terms of the customer’s account with proposals from other banks.  This comparison could lead customers to the conclusion that it pays for them to switch their account to another bank.

Save account management expenses.

Check Writing in Israel

Writing checks is still a commonly accepted form of payment in many sectors of Israeli society despite apps such as bit, paybox and pay. Before you start writing checks, postdating them and getting into potential problems, let’s review some essential facts:

Checks are considered valid for six months after the date written on them.

Stopping or canceling a check in Israel is considered a crime. While it might be standard practice in many countries, think twice before canceling a check in Israel — it might even be necessary to speak with a lawyer.

It’s common practice for checks to be used as tender in Israel, as they can be passed along to other people by signing the back. In order to protect yourself if you want to be able to cancel a check, “cross” your checks (by adding two lines to the top of the check) or write the check for the exclusive use of the person to whom you write it (by writing the words lamutav bilvad on the front). Otherwise, if a vendor passes on your check and you are unhappy with the service or the product and want to cancel the check, you won’t be able to. While commonly done, it’s a safe practice not to leave checks open.

Canceled and bounced checks result in high fees, so be careful.

Believe it or not, postdated checks can legally be deposited prior to the date on the check! If it bounces, it will cost money and can be the source of more serious credit issues.

If ten checks bounce over the course of one year, your account can become limited, or you won’t be able to write checks from the account for one year, and the black mark on your credit record can affect your ability to get a mortgage and obtain credit. This information gets reported to the central bank and the credit agencies, and is publicly available.

Keeping bank statements for seven years is advisable.

Prohibition Against Money Laundering

The Israel Money Laundering and Terror Financing Prohibition Authority (IMPA) operates as the Financial Intelligence Unit (FIU) for the Israel financial sector. All banking activities in your account can be reported without your knowledge to the IMPA. Bank transfers above approximately NIS 20,000 are reported to the IMPA, as well as to the Bank of Israel.

Banking restrictions have been more severe regarding the transfer of large sums of money as a result of the crackdown into funds from money laundering activities and to avoid harboring tax evaders. Transactions now require proof of the origins of the funds and in many cases a confirmation by lawyers or financial professional before they will release the money.

Israeli banks must now comply with the Bank of Israel’s draft procedure and ensure that their foreign clients sign a declaration that the funds in their Israeli bank accounts were declared and taxed in their country of residence. The client also has to sign that they agree that the information can be shared with any other banking jurisdiction.

September 2014 saw the publication of a New Voluntary Disclosure Program. Via this program the Israeli Tax Authorities are attempting to coax non-compliant tax payers to disclose their unreported income and settle the outstanding tax, irrespective of whether this income was accrued in Israel or abroad.

The results of these measures are being felt in foreign banks too. The Swiss have increased their requirements for account holders to ensure full reporting of their assets to the Israeli authorities.

The bottom line is that if you are about to receive funds you must ensure that you have documented proof as to the origins of the money to avoid being penalized as a result of the new tougher restrictions.

Banking Tips

Israeli internet banking security is very high. While the user interface and functionality in English is not on the same level as that of other countries, you can carry out most everyday banking functions online in English. This includes transferring money, allocating your money to savings instruments, viewing checks that have cleared, and many other regular activities. Often banks will offer reduced fees and higher interest payments if one conducts banking activities online, as it saves them money. Most banks have English-language versions of their sites, although not with complete functionality. Try to do as much banking as you can without the assistance of the teller, as it’s considerably cheaper.

Although online banking services can be efficient and satisfy most regular banking needs, many individuals and small businesses need to develop close working relationships with their banks. The better a client you are considered by the bank, the easier it will be for you to receive the wide range of banking services that are available.  For this reason, while holding your investments at a brokerage house might be cheaper and easier in many ways, it is advantageous to hold some of your savings and investments at your bank in order to improve your status and allow you more flexibility in attaining credit. If you don’t have savings yet, bringing in a steady stream of income from a job will improve your status.

Technology has opened more routes to a cashless society. The apps, such as bit, paybox and pay, are convenient and easy to use. You set them up on your smartphone and have the option to link them to a credit card and/or your bank account. There are limits to the amount that can be moved each month, so examine the conditions if you plan to use them for your business.

In the past, the banking system controlled the credit card market in Israel, but recently the Bank of Israel separated credit cards from the banks. Credit cards in Israel are really a misnomer, as they operate like American debit cards. Unless you negotiate different terms of business, all credit card usage during the month will be withdrawn from your bank account monthly, though you do have the flexibility to determine on which day of the month your account will be debited.

Credit cards charge you standard monthly fees, so it doesn’t usually pay to hold extra cards. However, if you call the credit card company and tell them you’ll cancel the card because of the fee, they will waive it. Just make sure that if they waive the fee for a limited time, you set yourself a reminder to call again to cancel. Israeli credit cards carry a degree of insurance, though not all losses and damages are covered, especially not when compared to other Western countries where purchases can be canceled easily.

The most important bit of advice regarding banking in Israel is to negotiate! While it seems strange, banks operate in the Middle Eastern environment that surrounds them. Most, if not all, fees, charges, and terms for opening and operating your account are negotiable (especially as your account size grows). The key is to know who to talk with and how flexible they can be. The highly time-consuming activity of negotiating with your banker is a well-known reality. Try and find an English-speaking banker with whom you can communicate directly, turn him or her into your guide and protector, and he or she can save you countless hours — and lots of money. Different branches within the same bank often offer different rates, fees, and even different rules than other branches of the same bank.

Remember, negotiating is not always playing hardball. Sometimes, all it takes is asking (and asking again) for a discount. Try it and you might be pleasantly surprised.

An important and basic way to reduce your bank fees is to reduce the number of transactions that go through your account every month. If you write many checks and pay bills using automatic withdrawal or direct debit (hora’at keva), you can instead use a credit card for all your transactions for a fixed monthly fee and avoid being charged a line fee for every check. Sometimes the banks offer plans that encompass all monthly transactions in your account, or a basket of transactions that are covered by the monthly fee. While this might sound like a good idea, verify that you actually use all the items in the basket of services, or you may end up paying a global fee for services not used. Limit your monthly transactions by taking out larger sums of money less often, or depositing checks together. Even small steps like these can make a big difference in the long run.

Although this is slowly starting to change, traditionally Israeli banks have not paid interest on current account deposits. The amount of interest they currently pay is negligible, especially given the current low rate of interest in Israel. Research the market rates, and you’ll have an easier time negotiating a better deal. Obviously, the banks are very happy to charge you large fees for using their credit services through your overdraft (or, as it’s commonly referred to in Israel, your “minus”), through personal loans, and through bank-issued credit cards. The credit spreads can be very high, and it’s not unusual to see rates of 5–10% above the prime rate. Often banks will offer their customers the ability to convert their overdraft into a two- or three-year loan at a lower rate of interest. Be careful— restructuring your debt allows you to spend more than you earn without feeling the pressure of the overdraft (which in this case can be positive in helping you control your spending).

A recently enacted change in Israel’s credit system requires all bank accounts to have a formal overdraft facility defined between the client and the bank. This means that you need to request the overdraft facility and approve its renewal every year. Generally you’ll pay more interest on your overdraft at successive credit levels. For example, if you have a NIS 15,000 framework, you might pay prime plus 5% on the first NIS 10,000, and prime plus 6% on the next NIS 5,000. Not only will you be charged when you actually use the overdraft framework, but the banks will even charge you an annual or quarterly fee, based on the agreed credit line.

Currency Transfer

Bringing money to Israel in the most efficient manner is a major concern to many olim. Getting money into the country can be accomplished in one of three main ways:

1. Bring cash in physically

Beyond the obvious risks involved with transporting cash physically (theft, loss), there are international foreign currency restrictions that prevent you from doing this with large sums of money.

2. Write foreign currency checks

This method can often be the least expensive way to bring money into your Israeli bank account. Banks will typically charge a small fee to deposit the check and then they will charge you a conversion fee (approximately 0.2%) to exchange the money into shekels. The bank will also make money from the exchange rate that they give you, as they receive more money trading the foreign currency than they pay you. All of these fees are negotiable. The major disadvantage of depositing a check is that most banks will make you wait several weeks before the funds are deposited and accessible to you. This delay in accessing your money also increases your currency risk, as you are exposed to fluctuations in the exchange rate during this time. So if you have the time, the wait might not be an obstacle, but if you need the money quickly, this option is undesirable.

Writing foreign currency checks directly to a money changer is often the simplest way to get immediate access to money from abroad. Checks for larger sums will often need days to clear with a money changer before you get access to the money. The ease of use and near immediacy of access to your money is balanced by the higher fees involved, as most money changers charge between 0.5 and 1.5% of the value of the check, in addition to the exchange differential (the difference between the exchange rate they convert the money at and the rate they pay the customer). (See below for a more extensive discussion of money changers.)

3. Sending wire transfers

The most common and quickest way to transfer money internationally is through a wire transfer. Wire transfers usually arrive within a few days (it can take up to a week in some circumstances), at which time the money is immediately available to you. Most wire transfers are made in foreign currencies and then converted into shekels in Israel. (Using overseas banks to convert money into shekels prior to transferring the money to your Israeli bank is generally considered more expensive, but if your bank offers you this option, research it carefully.) Banks in Israel will generally charge a fee to accept the money (a fixed percentage of the amount transferred) and then a conversion fee and exchange rate differential on the conversion to shekels. In most cases, this route is not the most inexpensive one, as fees are paid both in Israel and in the originating country for the service.

Wires can also be made directly to a money changer, to whom you only pay a fixed fee (similar to the check writing percentages described above). However, by transferring your money to a third party as opposed to directly into your account at a bank, there is additional third party risk involving an independent business. (For more information see below.)

Prior to making Aliyah, arrange with your bank the ability to transfer potentially large sums of money from your overseas account to Israel. Often branch protocol will require you to be physically in the branch when making large transfers, which can be a very large inconvenience if you’re not planning a trip to your home country anytime soon. If your bank doesn’t allow you to make such transfers when you’re abroad, ensure that you have other ways to transfer your money. Brokerage accounts can also be used to transfer money overseas if they don’t have this restriction. Otherwise, make sure that you have a trusted person added as a cosignatory on your account prior to making Aliyah. It’s highly recommended to keep a low-cost foreign account abroad if you continue to have financial interests outside of Israel. These accounts will allow you the ability to maintain foreign currency, accept deposits, and access foreign banking services (like credit cards and checking) as necessary when traveling abroad.

Money Changers

Many people use money changers to convert their money, whether as cash, check, or wire transfers. Their user-friendly structure and ease of use allows you to cut through all the red tape that the banks entail. Shopping around for different money changers can be quite profitable, but like many other banking activities, it takes time. However, using money changers comes with dangers as well. The most minimal due diligence you can do is to ensure that the money changer is licensed. The money changing industry is regulated, so you can easily ensure that the company you are working with is licensed by going to the Israeli Finance Ministry’s website .

Beyond the actual license, do some checking to make sure that the company and people you’re working with are honest, straightforward businesspeople, as fraud and business failure in this industry is common. While transferring money though money changers is quite accepted, do not deposit money with them long term, as they aren’t regulated and licensed to be a bank — their license is limited to money changing. Unfortunately, many good people have lost their savings because of this mistake. Caveat emptor!

Those who have been using the services offered by money changers in order to cash their checks have found themselves paying substantially more over the past few years. The regulatory environment and the mechanism that moneychangers use, have changed over this period of time making the entire service much less dependable.

Your Banking “To Do” List

Change your mindset. Banking in Israel will be very different (and more frustrating) than what you have been used to.

Don’t be embarrassed to ask questions until you really understand what’s being offered.

Find a banker you feel comfortable with, who speaks your language (literally and metaphorically).

Fees and commissions can be negotiated. Try it!

Shop around until you find the most competitive rates for any financial services you may need.

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