The prompt today gets at something that's been simmering in Israeli economic policy circles for years now. We talk endlessly about the Startup Nation, but there's this weird shadow side where the very companies that prove themselves here, that get incubated in Tel Aviv or Herzliya, they leave. They scale in Europe, they get regulated in Europe, and then they look back at the Israeli market and just... don't come home. The question is why, and what Europe figured out that Israel hasn't.
Specifically, we're looking at fintech regulation, and this concept the EU developed called passporting. The prompt basically asks: if Europe has made it so easy that a single regulatory approval opens up a market of four hundred fifty million people, what exactly is Israel doing wrong that makes a market of ten million not worth the paperwork? And is there any way to fix that so Israelis actually get to use the technology their own country incubated?
This is one of those structural problems that sounds boring until you realize it explains why your banking app is five years behind what your cousin in Berlin is using. Let's start with the European side, because what the EU built is genuinely elegant. The basic idea is that if you get authorized as a financial services provider in any one EU member state, you can operate in all twenty-seven of them. One application, one regulatory process, and then you're free to offer your services across the entire single market.
Which, if you're a startup that just burned through eighteen months of runway getting regulated in, say, Lithuania, the last thing you want is to do it all over again in France, and then again in Germany, and then again in Spain.
That's the genius of it. The passporting framework was built into a series of EU directives. The first big one was the Markets in Financial Instruments Directive, MiFID, back in two thousand seven, but it really matured with the second Payment Services Directive, PSD two, which took effect in twenty eighteen. PSD two didn't just enable passporting, it also forced banks to open up their customer data to licensed third parties through APIs. So suddenly you had this flourishing of fintech companies building payment initiation services, account aggregation, all of it, and they could passport that license anywhere. The API mandate created the product possibility, and passporting created the market. You solve the technical problem and the regulatory problem in one package.
The EU has continued building on this. There's PSD three in the works now, plus the Payment Services Regulation, which will be directly applicable law rather than a directive that needs national transposition. They're also rolling out the Financial Data Access framework, FIDA, which extends open banking to insurance, pensions, investments. The whole architecture is designed so that if you can satisfy one regulator, you've essentially satisfied all of them.
That's the carrot. What's interesting is how this interacts with Israeli companies specifically. The prompt mentions this boomerang problem, where something gets developed here at the proof of concept stage, then it goes to Europe to scale, and then it never comes back. Walk me through why a company that started in Tel Aviv would rather sell to someone in Portugal than to someone in Petah Tikva.
Okay, so let's make this concrete. Imagine you've built an agentic wallet, like the prompt describes. It's AI-driven, it optimizes your spending, it moves money between accounts to maximize interest, it handles currency conversion intelligently. You prove the concept in Israel with a small pilot, maybe a few hundred users. Now you need to scale, and that means you need to be a regulated financial entity. In Europe, you pick your regulator. A lot of fintech companies choose Lithuania or Estonia because they've deliberately streamlined the process. You get your electronic money institution license there, and then you passport it. You can now operate in Germany, France, Italy, the Netherlands. Four hundred fifty million potential users. The math is absurdly good. You spent maybe eighteen months and a few hundred thousand euros on regulatory compliance, and your addressable market just expanded by a factor of fifty compared to Israel.
Then someone says, hey, what about launching back home? And you look at what that requires. You realize Israel has no passporting arrangement with the EU. So your European license means nothing to the Capital Market Authority here. You'd have to go through an entirely separate Israeli regulatory process. And Israel's financial regulation is fragmented across multiple bodies. The Bank of Israel supervises banks. The Capital Market Authority handles insurance, pensions, and some fintech. The Securities Authority covers investment services. So you might need approvals from two or three different regulators, each with their own requirements, their own timelines, their own interpretations.
For a market of ten million people. Many of whom already use your product anyway through the European entity, just with some features limited because you're not locally licensed.
That's the killer. The cost-benefit just collapses. The compliance cost per user in Israel is astronomically higher than in Europe. You might spend the same amount on lawyers and regulatory consultants to enter Israel as you did to enter the entire EU, but for a market that's two percent the size. And Israeli consumers are sophisticated. They'll find workarounds. They'll use the European version of your app if it's available. So you're not even losing all the Israeli users, you're just not serving them optimally. From a business perspective, Israel becomes a rounding error.
This isn't unique to fintech. The prompt mentioned the Standards Institute of Israel, which has its own parallel story. You have products that meet EU safety standards, CE marking, all of that, and Israel still requires separate testing and certification. There's been consumer pressure for years to just recognize European standards and move on, because the double certification adds cost that shows up in retail prices.
The Standards Institute situation is a perfect microcosm of the broader problem. Israel has this instinct toward regulatory sovereignty, this belief that we need our own stamp on everything. And in some areas, maybe that's defensible. But when you're talking about electrical or food safety standards that are already among the strictest in the world, you're just adding friction for no gain. There was a major import reform package passed in twenty twenty-two, the "What's Good for Europe is Good for Israel" reform, which started automatically recognizing many EU standards for imported goods. But implementation has been slow, and financial services weren't really in scope.
The name of the reform itself tells you everything. "What's Good for Europe is Good for Israel." It's an admission that the previous approach was indefensible. Like putting up a sign that says "we've been overthinking this.
Yet, as of twenty twenty-six, the reform is still being phased in, category by category. The bureaucratic resistance is real. Every standards engineer whose job was testing imported products that already had CE certification has an interest in maintaining the old system.
Let's talk about the EU innovation side more specifically, because the prompt asks about that. Beyond passporting, what has Europe done that makes it attractive for fintech?
The big ones are PSD two and its successor PSD three, plus the eIDAS regulation for digital identity, which is huge for fintech. If you can verify someone's identity across borders using a recognized electronic ID scheme, you've solved one of the hardest parts of financial services. There's also the Regulatory Sandbox approach. Multiple EU member states have created sandboxes where fintech companies can test products with real customers under relaxed regulatory requirements for a limited time. The sandbox model lets regulators learn about new technology while startups get to prove their concept without the full compliance burden upfront.
Israel has been trying to do some of this. The Capital Market Authority launched a sandbox framework a few years ago. But the scale difference is the problem. A sandbox in Israel gets you a test market of ten million. A sandbox in Europe gets you, potentially, a test market of four hundred fifty million, and once you graduate, you passport.
Israel can copy the regulatory techniques, the sandboxes, the open banking APIs. And to some extent it has. The Bank of Israel pushed through open banking reforms. There's an API standard for account information and payment initiation. But the structural problem remains. Even if Israel's regulatory process were perfectly efficient, which it isn't, the market size is still ten million. The only way to make that math work is to reduce the regulatory friction to near zero. And the most straightforward way to do that is mutual recognition.
The question becomes: why doesn't Israel just sign a mutual recognition agreement with the EU for financial services regulation?
It's been discussed. There are a few obstacles. One is that the EU doesn't just hand out equivalence decisions lightly. The EU has a process for determining whether a third country's regulatory regime is equivalent to its own. It's a political process as much as a technical one. The EU wants to see not just equivalent rules on paper, but equivalent enforcement, equivalent supervisory practices, equivalent consumer protection. And Israel's fragmented regulatory structure doesn't map neatly onto the EU's framework. The EU has the European Banking Authority, ESMA, and EIOPA. They coordinate and set standards. Israel has separate authorities that don't always coordinate well. The EU looks at that and says, who do we even negotiate with? There's no single counterpart.
Which is ironic, because Israel's tech sector is famously agile and integrated, and the government that's supposed to support it is the opposite.
The Startup Nation brand was built on the military's technological spillover, on Unit 8200 and the culture of improvisation and problem-solving. But that culture exists despite the regulatory environment, not because of it. The government has been trying to rebrand toward Scale-Up Nation for several years now. The Israel Innovation Authority has programs aimed at helping startups scale without leaving. There are tax incentives, R&D grants, efforts to build local manufacturing capacity. But none of that addresses the core problem that when you succeed, the rational business decision is to incorporate abroad, get regulated abroad, and serve the Israeli market as an afterthought.
Let's dig into the latency problem the prompt mentions. This boomerang effect, where even if a company wants to come back to Israel eventually, the process is so slow that by the time they're approved, the technology has moved on. What's actually involved in getting a fintech license in Israel?
If you're doing payment services, you're looking at the Payment Services Law, which was updated a few years ago to align partially with PSD two. You apply to the Capital Market Authority. The application requires detailed business plans, risk assessments, IT security audits, anti-money-laundering procedures, capital adequacy calculations. The review process can take anywhere from six months to over a year, and that's assuming everything goes smoothly. During that time, you're burning money on compliance and legal costs while generating no revenue from the Israeli market. Compare that to Lithuania's central bank, which reportedly processes fintech license applications in three to six months. And once you have that license, you're live across the entire EU. An Israeli fintech could be operational in twenty-seven countries before it can get approved in its home country. That's not an exaggeration. I've seen cases where the European license came through and the company was live in multiple countries while the Israeli application was still pending.
There's something almost perverse about that. The country that produced the technology becomes the last to benefit from it.
It's not just about the initial license. Ongoing compliance is also more burdensome in a small market. The fixed costs of being a regulated entity don't scale down with market size. The compliance department you need for Israel isn't one-twentieth the size of the one for Europe, it's maybe half the size. So the cost per user is wildly disproportionate.
What would actually fix this? The prompt asks whether there's anything that can reduce the latency of the boomerang effect. Let's be concrete.
I think there are three levels of solution. The first, and most impactful, would be an equivalence agreement with the EU. If Israel could get the EU to recognize its financial regulation as equivalent, then an Israeli license would effectively passport into Europe, and vice versa. That would instantly make Israel an attractive place to get licensed, because you'd get European market access plus the Israeli market. But the EU equivalence process is slow and political. It's not happening next year.
Israel would need to harmonize its regulatory structure first, which is its own political challenge.
The second level is unilateral recognition. Israel could simply decide that any fintech company licensed in the EU, the UK, or the US is deemed compliant with Israeli requirements and can operate here. No separate application, no separate review. Just register and go. This would instantly solve the boomerang problem for Israeli companies that already have European licenses. The downside is that it's politically difficult. Domestic incumbents would oppose it because it invites competition. And there are legitimate consumer protection concerns. If a company is regulated in Lithuania and something goes wrong for an Israeli customer, which regulator handles it?
That's a solvable problem. You require the foreign-licensed entity to appoint a local representative, to submit to Israeli consumer protection law, to participate in a compensation scheme. The UK has a model like this for some financial services. Singapore has something similar. So there are templates.
The third level, which is more incremental, is to streamline the existing Israeli licensing process to the point where it's fast and low-cost. Digital application processing, clear timelines with automatic approval if the regulator misses the deadline, standardized requirements that map directly onto EU requirements so you can reuse your existing documentation. The Capital Market Authority has been working on some of this, but it's not there yet.
The automatic approval thing is interesting. You set a statutory deadline, say ninety days, and if the regulator hasn't raised specific objections by then, the license is granted by default. It flips the incentive. Suddenly the regulator has a reason to be fast.
Estonia does something like this for some business registrations. It's a powerful tool. But it requires political will, because regulators don't like giving up discretion. Their institutional instinct is that more review means more safety, even if the evidence doesn't support that. And in Israel, there's a cultural dimension to this. The regulatory ethos is often suspicious of market forces. There's a belief that things need to be checked and double-checked, that foreign approvals can't be trusted. It comes from a place of wanting to protect consumers, but the practical effect is to protect incumbents from competition.
Consumers pay for that protection in higher prices and fewer choices. The prompt mentioned this in the context of the Standards Institute. Every imported toaster that needs separate Israeli certification adds cost that the consumer ultimately bears. Multiply that across every product category, including financial products, and you get a meaningful drag on the cost of living.
Which is already one of Israel's biggest political problems. The cost of living here is famously high, and regulatory protectionism is a significant contributor. And the irony, as the prompt points out, is that some of the products that could reduce costs for Israelis—innovative fintech solutions, better banking, cheaper international transfers, automated savings optimization—those are the very products being kept out by the regulatory burden.
Let's talk about what Europe got right culturally, because I think there's a mindset shift here that's worth naming. The EU, for all its bureaucracy, made a conscious decision that market integration was more important than regulatory perfection. They accepted that a license from Lithuania's central bank might not be quite as rigorous as one from the German BaFin, but the economic benefits of passporting outweighed that concern.
That's the tradeoff. Regulatory harmonization always involves some compromise. The EU decided, correctly in my view, that the benefits of a single market for financial services were enormous. Cross-border competition, innovation, consumer choice, lower costs. They were willing to accept that some regulators might be more lenient than others, and they built supervisory cooperation mechanisms to manage that risk, rather than letting the risk prevent the whole project.
Israel never had to make that tradeoff because it doesn't have internal borders. It's one jurisdiction. So the regulatory culture never developed the muscle of mutual recognition. Everything is domestic, everything goes through the same process. And that works fine until you realize you're part of a global economy and your companies are leaving.
This is the Scale-Up Nation dilemma in a nutshell. Israel has about seven percent of global venture capital investment in cybersecurity and significant shares in other tech sectors, but the companies that reach scale almost always do it through a US or European corporate structure, with US or European regulatory approvals, and their primary markets are abroad. The Israeli economy benefits from the exits, the acquisitions, the tax revenue from the R&D centers that stay here. But Israeli consumers don't get the products.
There's a specific example I keep thinking about. International money transfers. Israel has a huge immigrant population, lots of people sending money to family abroad or receiving it. The traditional banks charge high fees and give poor exchange rates. There are fintech companies, some founded by Israelis, that solve this beautifully in Europe. And using them from Israel is often a degraded experience because they're not fully licensed here. So Israelis, who arguably need these services more than most Europeans, have worse access.
That's the perversity the prompt is getting at. The technologies that could most benefit Israelis, precisely because of Israel's unique economic circumstances—high cost of living, small market, international connections—those are the technologies that the regulatory system is slowest to embrace.
What about the argument that Israel's regulatory caution is justified by security concerns? Financial regulation intersects with anti-money-laundering and counter-terrorism financing, which Israel takes very seriously for obvious reasons. Is there a legitimate case that Israel needs its own process because the stakes are higher?
That's the argument that's always made, and it's not entirely wrong. Israel does face elevated money laundering and terror financing risks. But here's the thing. The EU also has robust AML standards. The EU's Anti-Money Laundering Directives are among the strictest in the world. The sixth AMLD harmonized criminal penalties across the EU. The EU is not a regulatory lightweight on financial crime. So the idea that Israel can't trust an EU license because of security concerns doesn't really hold up. The EU's standards are comparable to, and in some areas more developed than, Israel's.
The security argument is mostly a cover for institutional inertia.
I think that's fair. It's not that the security concerns are fabricated, it's that they're used to justify a process that goes well beyond what security actually requires. You could have mutual recognition of financial licenses while still maintaining your own AML monitoring and enforcement. Those are separable issues. A company's license to provide payment services is about its operational soundness, its capital adequacy, its consumer protection measures. The AML compliance is a separate set of requirements that can be enforced locally regardless of where the license was issued.
Let's zoom out for a moment. The prompt frames this as Israel being a case study in how to make your geography off-putting, and Europe being the case study in how to make it attractive. But there's a broader lesson here for any small country. If you're a market of five or ten or fifteen million people, you can't afford regulatory uniqueness. The fixed costs of compliance will always outweigh the market opportunity unless you either harmonize with a larger bloc or unilaterally recognize their standards.
That's the structural reality. Switzerland isn't in the EU, but it has bilateral agreements that provide significant market access, and its financial regulation is closely aligned with EU standards. Singapore positioned itself as a fintech hub for Southeast Asia by being fast, efficient, and internationally oriented. The UK post-Brexit has been working on its own regulatory model, but it started from deep alignment with EU rules. The common thread is that small, sophisticated markets need to be regulatory bridges, not regulatory islands.
Israel has been a regulatory island. And the Startup Nation mythology has masked that problem, because the startups kept coming anyway. The talent, the military tech spillover, the venture capital ecosystem, those were strong enough to overcome the regulatory drag. But as the industry matures, as the goal shifts from founding companies to scaling them, the drag matters more.
There's a timeline issue here too. In the early two thousands, when the Startup Nation brand was being built, fintech wasn't what it is now. The regulatory burden was less relevant because most startups were in software, cybersecurity, semiconductors. They didn't need financial licenses. Now, with fintech, insurtech, healthtech—anything that touches regulated industries—the regulatory environment becomes a primary factor in where you incorporate and where you launch. Israel's regulatory infrastructure was built for a different era and a different kind of company.
What does the next five years look like if nothing changes?
If nothing changes, the pattern continues. Israeli fintech entrepreneurs will incorporate in Europe or the US, get licensed there, build their user base there, and maybe, eventually, get around to Israel if the business case somehow justifies it. The Israeli market will continue to be served by European or American subsidiaries of companies that were founded in Tel Aviv. Israeli consumers will get these products years late, with limited features, at higher cost. And the Israeli economy will capture some value from the exits and the R&D employment, but miss out on the consumer welfare gains.
If something does change? If the unilateral recognition path gets traction?
Then Israel becomes a much more interesting proposition. If a European license gets you into Israel automatically, then Israeli fintechs that get licensed in Europe—which they're going to do anyway for the market size—can serve Israeli customers from day one. The boomerang latency drops to zero. Israeli consumers get access to cutting-edge financial products at the same time as Europeans. And Israel becomes a more attractive place to base a fintech company, because you can test products in a sophisticated, tech-savvy market of ten million while building toward your European launch.
The testing ground argument is interesting. Israel already serves as a beta market for some technologies because the population is tech-literate and willing to try new things. If the regulatory environment were frictionless, that advantage would be amplified.
Israel could position itself as a fintech sandbox for the EU. Get your initial traction here with minimal regulatory friction, refine your product, then passport into Europe once you're ready. That's a coherent economic strategy that plays to Israel's actual strengths rather than fighting against them.
The political obstacles to unilateral recognition—who actually opposes it and why?
The main opponents would be the domestic financial incumbents, the banks and insurance companies, who don't want competition from European fintechs. The regulators themselves, who would lose some authority and whose institutional instinct is to maintain control. And there's a general political tendency, across multiple parties, that's skeptical of deregulation and market liberalization, especially when it involves trusting foreign regulators. The supporters would be consumer groups, the tech industry, the Finance Ministry which has been pushing for more competition, and ultimately, the public, if they understood what they're missing.
The public mostly doesn't understand what they're missing, because they've never had it. That's the classic problem with regulatory protectionism. The costs are diffuse and invisible. Everyone pays a little more for banking, everyone has slightly worse service, but nobody sees the counterfactual where they'd have better options.
The benefits of protectionism are concentrated. The banks know exactly how much they gain from limited competition. They're organized, they're influential, and they show up to Knesset committee hearings. The consumer interest is diffuse and unorganized. So the political economy favors the status quo, even though the net social cost is large.
Let's bring it back to the specific case the prompt raises. An agentic wallet, AI-driven, that a company has developed and proven in Israel, then taken to Europe for regulatory approval and scaling. Under the current system, bringing that back to Israel means a separate, costly, slow regulatory process. Under unilateral recognition, it would be available to Israelis immediately. Under an equivalence agreement, the Israeli license might even be the first one they get, and then they passport to Europe. That's the spectrum.
The equivalence agreement is the ideal endpoint, but unilateral recognition is the pragmatic next step that could happen relatively quickly if the political will existed. It doesn't require EU negotiation. It doesn't require changing the entire Israeli regulatory structure. It's a policy decision. The Knesset could pass a law saying that any entity licensed to provide financial services in the EU, the UK, or the US is deemed qualified to provide those services in Israel, subject to local consumer protection and AML requirements. That's it. That's the whole reform.
The pushback would be, what about regulatory arbitrage? Companies shopping for the weakest regulator in Europe and then using that to access Israel?
That's a reasonable concern, but it's manageable. You don't have to recognize every EU license from every member state. You can start with a whitelist of jurisdictions whose regulatory standards you've reviewed and found acceptable. The UK, Germany, France, the Netherlands, the Nordics. Most fintechs of any quality are getting licensed in those jurisdictions anyway. And over time, as you build confidence, you can expand the list. The perfect doesn't have to be the enemy of the good.
There's also the question of enforcement. If a European-licensed fintech mistreats Israeli customers, what's the recourse?
You require them to appoint a local representative, to maintain a local customer service presence, and to participate in an Israeli dispute resolution mechanism. This is standard practice in cross-border financial services. The EU itself requires third-country firms to have similar arrangements. These are implementation details. They're not reasons not to do it. The core question is whether Israel wants to be part of the global financial services market or whether it wants to remain a regulatory island. And for a country that prides itself on being a global technology leader, the answer should be obvious.
Yet here we are, in twenty twenty-six, still having this conversation. The "What's Good for Europe is Good for Israel" reform was a step in the right direction for physical goods, but financial services haven't followed. The Standards Institute reform is still phasing in. The Capital Market Authority's sandbox is operational but small. The open banking APIs exist but haven't spawned the ecosystem they were supposed to.
The open banking point is worth dwelling on. Israel did pass open banking regulation. Banks are required to provide APIs for account information and payment initiation. But the standard is domestic. A fintech that's built on PSD two APIs in Europe can't just plug into the Israeli system. They have to build a separate integration. So even where Israel has done the right thing technically, it's done it in a way that's incompatible with the European standard, which means it adds cost rather than reducing it. It's the regulatory equivalent of inventing your own charging cable. Technically it works, but nobody else uses it, so you're just creating friction.
What's the one thing a listener should take away from this? If you're an Israeli fintech founder, or a policy person, or just someone wondering why your banking app is worse than what your friends abroad are using?
The takeaway is that market size isn't destiny. Singapore has a smaller population than Israel and it's a global fintech hub. Switzerland has eight and a half million people and it's a global financial center. What matters is regulatory posture. Are you a bridge or an island? Europe built bridges between its member states and created a single market that's greater than the sum of its parts. Israel has the option to build bridges too—not by joining the EU, which isn't on the table—but by recognizing that in financial services, the standards that matter are global or at least regional, and the sensible thing for a small country to do is align with them and recognize those who've already met them.
The cost of not doing that isn't just inconvenience. It's real economic drag. Higher prices, less innovation, fewer choices for consumers. And it's a strategic liability for the tech sector, which is supposed to be Israel's economic engine.
The Scale-Up Nation vision requires a regulatory environment that's compatible with scaling. You can't scale in a market of ten million if the regulatory cost per user is twenty times what it is in Europe. The math doesn't work. So either Israel fixes the math, or it accepts that its most successful companies will always leave, and their products will come back, if at all, as an afterthought.
That's the paradox the prompt started with. A country that's brilliant at creating technology and terrible at creating the conditions for its own citizens to use it.
It's a very Israeli paradox, honestly. The creativity and the improvisation and the problem-solving on one side, and the bureaucracy and the suspicion of markets on the other. They coexist in the same country, often in the same institution. The question is whether the creative side can win out in the regulatory space the way it has in the technology space.
I suspect it eventually will, because the pressure is building. More and more Israelis are experiencing better financial services when they travel or when they use international versions of apps, and they're asking why they can't have that at home. The consumer demand is growing. The tech industry is pushing. The Finance Ministry understands the issue. It's a matter of political will and overcoming the concentrated interests that benefit from the status quo.
The EU example shows it's possible. The single market in financial services didn't happen overnight. It took decades of directives, negotiations, compromises, and institution-building. But they did it, and the result is a market where a startup in Vilnius can serve customers in Paris and Berlin and Madrid without ever talking to the French or German or Spanish regulators. That's an extraordinary achievement, and it's the model Israel should be looking at—not copying the structure, because Israel isn't a union of twenty-seven countries, but adopting the principle. Regulatory recognition as a tool for market access. The idea that you don't have to reinvent the wheel, you just have to verify that the wheel was built properly somewhere else.
The prompt's specific example, the agentic wallet, is a perfect test case. That technology is coming, whether Israel is ready or not. AI-driven financial management is going to be a standard consumer expectation within a few years. The question is whether Israelis will get it through a properly regulated, competitive market with Israeli companies participating, or whether they'll get it through workarounds and foreign apps and degraded experiences. The regulatory choices Israel makes now will determine which version of the future arrives.
On that cheerful note.
Now: Hilbert's daily fun fact.
Hilbert: The Mongolian yatga, a plucked zither dating to the early fifteen hundreds, was traditionally played only by men in court settings, and its strings were historically made of twisted silk that reflected candlelight in a way audiences described as "singing light.
I'm going to pretend I understand what that means.
It's very on-brand for Mongolia to show up in this segment.
It always finds a way. This has been My Weird Prompts. Thanks to our producer Hilbert Flumingtop for keeping the ship pointed vaguely forward. If you enjoyed this episode, leave us a review wherever you get your podcasts, it helps. You can find every episode at myweirdprompts dot com. I'm Corn.
I'm Herman Poppleberry. We'll catch you next time.
