Israel: A leader in fintech innovation in the Middle East

Today, there are around 6,000 startups and scaleups in the tech sector in Israel, of which approximately 500 operate in fintech. According to a 2018 report by CB Insights, five per cent of the world’s top fintech startups are from Israel. With a total population of only 8.5 million, the Middle Eastern nation is definitely punching above its weight.

Fintech Junction is one of the most significant events in the tech calendar in Israel, bringing fintech entrepreneurs and investors together with banks, financial institutions, and government institutions from across Europe and the Middle East. Ainhoa Campo, Global Head of Open Innovation; David Martín de Nascimento, Global Retail, Open Innovation; and Marcela Zetina, Head of Open Innovation & Open Banking (Mexico) represented BBVA at the event.

BBVA’s Global Head of Open Innovation delivered a keynote address, talking about how the bank is using technology to improve the customer experience. She spoke about how Open Innovation’s strategy has shifted from simply making connections with the external fintech ecosystem to working with fintechs with the potential to impact the core of the bank. In 2018, BBVA developed 29 proof-of-concept projects with startups including Change, Fintep and Nummularii, 11 of which went onto be scaled across the bank globally, with a further two securing investment from BBVA’s venture arm Propel.

For David Martín, who spoke on a panel about unleashing the potential of fintech and corporate collaboration, the Fintech Junction event was the icing on the cake. Ahead of the event itself, David and his colleagues spent some time in the country, meeting other global banks, fintech startups, investors, and accelerators.

An entrepreneurial mindset

For Ainhoa Campo, who attended the Fintech Junction event, explained why in her view Israel is one of the best countries to be an entrepreneur. It’s a nation where entrepreneurialism is ingrained in the culture and even part of the national identity.

This can in part be explained by the technical training that both men and women receive in the army during the two to three years spent doing military service. David Martín explained that within the army, there is a specific unit dedicated to developing cyber security solutions to ensure the Israeli defense systems are robust enough to withstand external threats from hostile nations. Once they’re out of the army, many will come away with ideas for their own software businesses and develop new products. Rather than seeing Israel as a competitor, both Spain and other European nations should get closer to this thriving ecosystem and tap into some of their expertise, particularly in areas like cybersecurity.

Marcela Zetina, from BBVA’s Open Innovation unit, met with a company called Kovrr during her visit to the country. Yakir Golan, Kovrr’s founder, started his career in the army and has since built a cyber risk modelling company that helps insurers to understand, quantify, and manage cyber risk. Kovrr is a great example of some of the exciting innovations in cyber security that are being spun out of the army in Israel.

From a startup to scaleup nation

Up until recently, Israel would have described itself as a ‘startup nation’. Today, it is a nation committed to scaling its home-grown tech companies, as Ainhoa Campo explains further.

“Previously, the government focused on supporting early-stage companies. More recently, there has been a shift towards supporting companies with the potential for global scale. To enable these companies to fulfil their potential, there is a recognition that support from foreign investors and corporates is needed.”

Home grown talent

What was clear to all three BBVA representatives that visited the country was the commitment to fostering homegrown talent. According to David Martín, for many years the government in Israel has put its weight behind the technology sector in the country.

“As part of its strategy to develop tech talent within Israel, the government helps startups to broker partnerships and commercial agreements with foreign companies. Israel is a great test-bed for startups to establish product-market fit, test for cost efficiency, and grow their customer base. But then they need to scale, and as part of this, they need to engage with foreign organisations.

With this goal in mind, the government set up an R&D Fund, that provides conditional grants of 20-50 percent to Israeli companies and subsidiaries of multinationals alike, as long as it’s used for the development of innovative, competitive products and technologies. It is an initiative that has already attracted global institutions from across Europe, the Middle East and the United States such as Citi and Barclays.

As the ecosystem becomes more established, Israeli startups are beginning to look further afield, to open up trading opportunities with countries like Spain. Historically, the United States was their primary go-to market, but the country has increasingly been looking at Europe and Australia.

The geographical proximity of Israel to Europe makes collaboration relatively easy. From a cultural point of view, we found all the Israeli’s that we met very open and warm, which is helpful on both sides.”

The opportunity for corporates

When BBVA first embarked upon its digital transformation 20 years ago, collaboration between corporate institutions and startups was uncommon. The ambition was to put innovation and technology at the heart of the bank.

Today, collaboration is the norm, even in highly-regulated industries like financial services. There are many ways for corporates and investors to engage and connect with this undoubtedly thriving centre of innovation. This could be through indirect investments in Israeli startups and scaleups via local VCs such as Viola Fintech or scouting agents such as global open innovation platform SoSa.