How Israel’s startup culture is revolutionizing payment security

November 23, 2021 | By Deborah Lynn Blumberg

We’ve all been there. We’re traveling abroad or trying to make a big purchase and the charge is initially declined. This sort of overzealous payment protection isn’t just an inconvenience for consumers, it’s a major problem in the payments industry, says entrepreneur Chanan Lavi.

His Israel-based startup, Kipp, aims to fix this problem. The trouble starts when credit card issuers automatically decline a transaction if there’s too great a risk. But the customer leaves frustrated and the merchant loses out on a sale.

Kipp has developed an artificial intelligence model that precisely assesses transaction risk in real time. The startup leverages its relationship with merchants and their willingness to participate in the cost of the risk, allowing issuers to approve more transactions. “We’re trying to revolutionize payments,” Lavi says. “Issuers will benefit from happy consumers.”

Kipp is part of a generation of new Israeli fintech startups that have cropped up in recent years as the Mediterranean nation has become a hub for fintech and cyber startups. Israel added to that trend with the opening last week of the new FinSec Innovation Lab, licensed by the Israeli government and owned by Mastercard and Enel X to give startups the equipment, expertise and support to help fortify the digital world. By the end of 2020, Israeli tech firms had raised a record $9.93 billion, up 27% year over year, according to the annual Israeli Tech Review 2020, in areas including cybersecurity, fintech, AI and the Internet of Things.

Belying its geographically small size, Israel has been a heavyweight in the tech industry for decades, due in part to a mix of an entrepreneurial culture and an emphasis on tech and engineering in education. The country has now minted many serial startup founders and gained international recognition for its engineering talent.

“It’s inherent in the culture in Israel to not be afraid to try what might seems nearly impossible,” says Omer Unger, Mastercard’s country manager for Israel. “This creates a culture that helps innovation.”

Israeli entrepreneurs also benefit from government support. The fintech industry gained traction in the 1990s on the heels of the Yozma program, which offered tax and other incentives for foreign venture capital investments. Soon after, major tech companies like Google and Microsoft set up accelerators and R&D centers in the country.

Now, Israel has a dedicated agency that looks after the needs of its tech sector — the Israel Innovation Authority. The IIA gives out grants to young entrepreneurs and connects companies abroad to local ones working on innovative projects. The agency most recently partnered with Mastercard and Enel X on the FinSec Innovation Lab in the desert city of Beer-Sheva as part of an ambitious plan to turn the city into a cyber capital.

“The physical proximity will create what we hope will be an innovation reactor. We want these people to meet all the time, to exchange ideas, to collaborate without barriers.”
Roi Yarom

Beer-Sheva is about 70 miles from the glittering high-rises of Tel Aviv, where Israel first earned the nickname of “Startup Nation.” But the city, already home to Ben-Gurion University of the Negev, is rapidly becoming a new center for tech innovation for cross-industry players like the Israel National Cyber Directorate, where Roi Yarom is the director of economy and growth.

“The physical proximity will create what we hope will be an innovation reactor,” Yarom says. “We want these people to meet all the time, to exchange ideas, to collaborate without barriers.” Mastercard’s global expertise and market outreach, he says, will help turn homegrown innovations into commercially viable products and services.

Early-stage fintech startups that join the lab will conduct a proof of concept project over the six-month program. They will receive business and technology support and mentoring from Mastercard, while the IIA helps fund them. The hope is that the lab’s startups will transform the fintech industry, and payments in particular, with innovative ideas.

Lab CEO Sidney Gottesman wants to focus on startups addressing needs in cybersecurity, digital identity, authentication, open banking, fraud detection, anti-money laundering, and cryptocurrency.

The payments and related industries are constantly changing and are doing so at an accelerated pace, he says. “You have bad actors looking to disrupt to take advantage, and you have good actors looking to disrupt and add value,” he says. “The goal of the lab is to assist early-stage startups accelerate their products to protect against the former and advance the latter.”  

Kipp was one of the first startups to join the lab, and Mastercard has already helped Lavi and his team design a simulation they can use to fine-tune their model.

“The consumer cannot wait,” Lavi says. “Sometimes in the startup world, you feel like you’re on your own. The lab has been providing valuable support to help us make our platform more secure and robust, so we always meet the high standards of banks worldwide.”

Deborah Lynn Blumberg, contributor