Payment Card Transaction Chain

Principles and complementary steps in the development and use of a protocol


As part of the promotion of competition in the payment card market, the Bank of Israel is taking an additional step today and publishing a document that presents principles for the development and use of a payment card transaction protocol as well as complementary steps. This protocol reflects the business and technical logic by which payment card transactions are conducted, and its publication will enable additional entities to operate in the various segments of the market. This step is a significant pillar in the opening of the payment card market to competition. The document was compiled by the Bank of Israel, in joint work with the various payment card market participants, within the framework of the Payment Card Committee that was established in accordance with the recommendations in the Interim Report published on August 3, 2015 on “The Payment Card Transaction Chain”. The final report is being published today.
Director of the Accounting, Payment and Settlement Systems Department Irit Mendelson said, “The implementation of the Principles Document and the recommendations of the report on the Payment Card Transaction Chain will enable the entry of new entities and will lead to significant changes in the payment card market. Businesses and payment card holders will benefit from the competition and from the changes in the payment card market that may lead to, among other things, reduced transaction costs, improved availability and service, personalized solutions, innovation, and implementation of advanced technologies and services at international standards.”
The Bank of Israel is taking operative steps to remove barriers to the payment card market, which will allow the entry of additional entities to the market. These steps are in line with the objectives of the Committee to Increase Competition in Common Banking and Financial Services (the Strum Committee).
1.    A Payment Card Committee was established, which serves as a platform for promoting professional and technological issues related to the methods of activity and the rules for carrying out transactions in the payment card market. The Committee, headed by Payment Systems Oversight at the Bank of Israel, is made up of representatives of various participants in the payment card market, including Shva (Automated Banking Services), banks, distributors, manufacturers, acquirers, and issuers.
2.   Since it was established, the Payment Card Committee has dealt with principles and rules for the development and use of a protocol for conducting a payment card transaction (hereinafter, the “Principles Document”), in a manner that will reflect the needs of the market players while balancing participants’ business needs and systemic considerations.
The Principles Document creates the conditions that will allow the entry of new entities across the entire chain of conducting a payment card transaction. Following are the main points of the Principles Document:
·     Policy decisions regarding the contents of the protocol will be made within the framework of the Payment Card Committee, while decisions regarding the manner of implementing the policy decisions will be made by a designated professional committee that will include the acquirers, issuers, processors and switches operating in Israel.
·     The protocol will be accessible to system participants, authorities, and the general public.
·     Use of the protocol in every segment across the chain, based on the business and technological needs of each stakeholder.
·     Adoption or support of international standards.
·     The protocol will be modular, with implementation of compulsory and optional components at the protocol level and at the terminal/remote server level. This principle will allow participants to choose to partially implement the protocol, in accordance with their needs.
b     The protocol will have a uniform central design, which will allow easy interoperability among participants at every segment across the payment card transaction chain—such as among processors, acquirers, and switches.
The Principles Document also contains recommendations for complementary steps to implementation of the principles, with the goal of easing the entry of new players to the payment card transaction chain, in light of how the market is structured and how the payment card market operates.
3.      Within the framework of a directive for acquirers[1] published by the Bank of Israel, it was established that new terminals will only be connected if the terminal—both hardware and software—fully supports the EMV (Europay MasterCard Visa) standard[2], supports contactless transactions, and has the relevant PCI (Payment Card Industry security standards) authorizations.
4.      End to end encryption services will be supplied by Shva in a manner that does not adversely impact the ability of a business to deal with various aspects of payment card transactions, on its own or via a service provider of its choice, and which does not prevent a business from meeting PCI standards independently or through another authorized provider of end to end encryption services, if it so chooses.
In addition to the abovementioned points, the Bank of Israel is promoting additional steps that will allow the opening of the market to competition and the entry of new players. In the coming weeks, the Bank of Israel will publish additional notices regarding:
A Principles Document that serves as a basis for a legislative memorandum that regulates payment services in Israel based on the European PSD directive, including regulating issuing services, acquiring services, and management of a payment account. Based on the Principles Document, a legislative memorandum will be written that will allow the entry of nonbank players into the payment services area, and will enable any company in Israel that receives a license in accordance with the Law to open payment accounts for its customers and to allow them to carry out payment transfers, to issue means of payment and to acquire payment transactions. These companies will meet low licensing requirements that are in line with the level of risk, provided that they maintain a low level of risk and keep customer’s funds in trust.
Defining terms of access to controlled payment systems that serve as the threshold for participating in payment systems. These terms of access will enable new entities to operate in payment systems as direct or indirect participants, in accordance with their appropriate business model.

[1] Proper Conduct of Banking Business Directive #427—Acquirers and clearing payment card transactions.
[2] An accepted international standard for securing payment card transactions.