New Brazilian fintech regulations require large payment firms that engage in deposit-taking and lending to meet the same standards as traditional banks.
In mid-March, the Brazilian Central Bank (BCB) updated the regulations governing large payment institutions to make sure that the rules are “proportional to their size and complexity”.
The new rules will impose stricter requirements on large payment institutions regarding regulatory capital and risk management, with a view to levelling the regulations applicable to payment firm-led conglomerates with those applicable to bank-led conglomerates.
The changes, which will have to be implemented by January 2025, are expected to affect large Brazilian fintechs such as Nubank, PagSeguro, Mercado Pago, StoneCo or PicPay.
There aim is to address the issue of asymmetric regulation, which has been raised several times by existing players in the Brazilian market, Pedro Eroles, a partner with expertise in banking and finance at law firm Mattos Filho, told VIXIO.
The South American country adopted the legal framework for electronic payments and payment institutions in 2013 with the intention of encouraging new players to enter the payments market, Alexandre Vargas, senior associate in fintech and payments at Cescon Barrieu Advogados, explained.
Since then, however, many fintechs have reached a point where they are now competing with large incumbents for the same clients, offering similar products, such as credit, payment accounts or deposit accounts, but are not subject to the same set of regulations, Vargas added.
As large fintechs expand from offering payments to increasingly moving into banking and lending, the stricter rules are the “natural evolution” of the central bank’s regulatory agenda, he noted.
The central bank understands that the regulatory advantage could no longer be justified in cases where there is an intersection between the payments and banking segments within the same economic group. With these changes, the BCB has adjusted the regulations to the risks involved in these additional products.
“The goal of the central bank is to bridge the gap between the regulations, which incumbents have to comply with, and the lighter regulations that the [fintechs] are subject to,” according to Vargas.
Meanwhile, the amendments also introduce new rules to facilitate new market entrants’ compliance with capital requirements “in order to increase competition in the system and financial inclusion”.
Although the new regulations will invariably increase the compliance burden for large fintech companies, they will increase the stability and robustness of these firms, which could ultimately allow them to expand to a level comparable to incumbents.
“Fintech companies should perceive these new regulations as an opportunity,” Vargas said.
The updates come at a time when payments modernisation and digital banking are soaring in the country.
Brazil has the highest number of fintechs in Latin America, is home to a dozen unicorns and around 58 percent of all venture capital deals across the continent take place in the country.
This vibrant payments landscape is evident by the success of the country’s retail instant payment system, PIX, which is helping solve two pain points in the country’s payment ecosystem: financial inclusion; and efficiency.
By offering free payments between individuals and low charges for merchants, PIX has already signed up 67 percent of adults in the country, processing 9.5bn transactions in 2021, its first full year of existence.
According to the Bank for International Settlements, this success is due to two key ingredients: the mandatory participation of large banks that kick-started network effects for users; and the central bank's dual role as an infrastructure provider and rule setter.
The country has also recently moved to expand its open banking reforms to include open finance.
Open finance allows third parties to offer a broader set of financial services, such as those related to accreditation, foreign exchange, investments, insurance or pensions, and will give fintech companies “more leeway and flexibility towards offering new products that they had not had the access to until recently”, Vargas added.