How Israel Plans to Disrupt a $4.7 trillion Industry

The digitization of currency presents an incredible opportunity for the world’s incumbent financial institutions, from payment processing to credit and insurance products, wealth management, and currency transfer and exchange. Yet the regulatory, security, and risk management challenges faced by these institutions have paved the way for a flood of new entrants.  In 2015 alone, over $19B was invested in FinTech to disrupt the $4.7T financial services industry.

A successful bank robbery used to require careful planning, orchestration, weaponry, and a bit of luck.  Furthermore, the bank’s maximum loss was limited to its physical assets locked away in the vault. In 2013, Russian cybergang Cabarnak stole $1B from over 100 financial institutions, using nothing more than a few lines of malicious code.  How can today’s financial institutions, encumbered with bureaucracy, legacy systems, and regulatory burdens innovate ahead of tomorrow’s financial reality?

Enter Israel

With domain expertise ranging from enterprise software to information security, business intelligence, and the blockchain, Israel’s brightest engineers, technologists, and data scientists have started applying their knowledge to one of the hottest sectors in the world; FinTech.

Fintech, at its core, is the use of technology to eliminate market inefficiencies. To illustrate, let’s look at one of the biggest money markets in the world today; remittances. Remittances are expected to reach an estimated $610 billion in 2016, rising to $636 billion in 2017. As of the end of 2014, the global average cost of sending $200 was 8%. Let’s think about that for a second. Money is now data, sitting in the cloud, with virtually no cost to disassemble, redistribute, and reassemble. So why does sending $200 still cost $16? Due to the regulatory burdens combating money laundering and terrorism financing, international remittances sent via mobile technology accounted for less than 2% of remittance flows in 2013.  But as mobile phones reach critical mass in the developing world, this will change drastically, and Israeli technology will play a role.

Flavors of Fintech

Now let’s look at an emerging $6.5b market like bitcoin, which processes $110mm in daily transactions, but with pervasive fraud, wire/bank transfers have become the incumbent use case, leading to slow, cumbersome transactions that necessitate minimum purchase requirements. Imagine a system that uses sophisticated algorithms to enable bitcoin exchanges, brokers, and eWallets to accept credit cards with no risk of fraud. Enter Israeli Fintech company Simplex, which has already processed more than $4m in bitcoin purchases via credit card.

Next we have the marketplace lending industry, with a compound annual growth rate of 123% between 2010-2014, projected to grow to $490b globally by 2020. Companies like Lending Club, Zopa, and Prosper have led the charge, but the real innovation will come from inventing new methods of credit underwriting, rather than continuing to price risk using the decades old FICO score. Look at Backed which reverse engineered Lending Club’s underwriting model to discover a huge opportunity in mitigating risks for co-signers, thus reducing APRs for borrowers, or Cinch, which evaluates small business creditworthiness based on a reputation score, rather than the traditional credit score.

Take the $45B in pocket change carried by travelers each year, and turn it into digital currency with TravelersBox. Consider the global payments market expected to grow to $2T by 2020, and Zooz, the only agnostic technology layer that connects to any payment provider and provides business intelligence to benchmark and compare provider performance for enterprises. Finally, combine the global equity markets at an astounding $69 trillion and counting, and throw in eToro, which allows users to track the financial trading activity of top performing users and automatically copy their trades.

Investment Opportunities Abound

There are more than 400 fintech startups in Israel, covering more than a dozen business models, including crowdfunding, money management, financial advisory, banking, wallets, payments, point of sale, currency exchange, virtual currencies, small business funding, retirement, insurance, lending, security, blockchain, security, and investing. And at iAngels, we are seeing them all.

As more banks and financial service companies establish accelerators, R&D centers, and incubators in Israel, the number of investment opportunities will grow in parallel. In 2015, Israeli FinTech exit activity reached $1.3B, up from $700m in 2014, while 47 companies raised $241m. As your trusted partner in Israel, we continue to access and analyze Israel’s highest quality entrepreneurs, providing you with the best FinTech investment opportunities Israel has to offer. Take a deeper dive by browsing through our investment portfolio, here.

Max Marine
Max Marine is an iAngels Investment Analyst. Prior to iAngels, Max was a Junior Partner at Venture1st, providing marketing and communications support to Israeli start-ups. Max passed the three CFA exams consecutively, holds an MS in Investment Management, and a B.B.A. in Finance, Real Estate, and Risk Management and Insurance from Temple University’s Fox School of Business. Contact him at [email protected]

 

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