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VIXIO sat down with PagBrasil’s CEO to discuss the implications of the upcoming changes to Brazil's prepaid card interchange fee regulation. He argues new rules are down to prepaid success in the market, while also discussing potential threats to credit cards from new Pix services to be launched next year.
At the end of September, the country announced that it had updated its interchange fee regulations by establishing a 0.7 percent cap on prepaid card transactions and reducing their settlement cycle, which previously could take up to 28 days, to be inline with 2-3 days taken on debit cards.
It also simplified debit card interchange, capping it at 0.5 percent as standard rather than as an overall weighted average.
However, it is with prepaid cards where these changes will be mostly felt and is expected to have the largest impact on neobanks, which have become the main issuers of these cards.
Fintechs’ stock fell following the announcement, although at this point it is uncertain how much their revenue will be affected. For instance, neobank PagSeguro said the impact on its revenue will be “relatively negligible”, while Nubank expects a 2.9 percent loss.
However, according to Ralf Germer, CEO of PagBrasil, the regulation has been fine-tuned correctly.
PagBrasil is a Brazilian online payment processing service that supports local and international merchants and e-commerce platforms. As well as card acceptance, PagBrasil also supports a range of other local payment options, including Pix, Boleto and even cash payment acceptance for e-commerce.
“Acquirers are happy. Banks are happy. The impact on neobanks is not clear yet, but altogether the level [of the prepaid card interchange fee] is fair and correct,” Germer said.
The changes amend Brazil’s 2018 interchange fee regulations with the chief goal in mind to reduce costs for merchants and shift Brazilians from using cash to digital payments, according to Germer.
Prepaid cards have so far been left out of regulations thanks to their important role in this mission.
For instance, debit cards are used by all parts of the population, while prepaid cards are the ones more present in the lower-income segment.
In addition, the prepaid card market is much more competitive than the debit card market, which is dominated by the top five largest issuers. There is stronger competition for prepaid cards, not only in terms of the number of issuers but also in terms of the technological solutions they provide, Germer stressed.
Prepaid cards grew an impressive 129 percent in the value of spend in 2021, according to the Central Bank of Brazil (BCB), which also brought to light a regulatory deficiency that caused card acquirers to incur losses on each such transaction.
The regulatory change comes as a response from these groups, while it seeks to ensure it does not discourage their use.
Although the prepaid interchange cap is still higher than debit cards, a significant feature of the new rules is the reduction of the settlement cycle on prepaid cards to bring it in line with debit cards.
With a traditionally high central bank interest rate of 13.75 percent, reducing the time it takes merchants to receive funds from the acquirer from up to 28 days to just two, could provide an incentive for merchants to accept prepaid cards. It will also enable merchants to better improve their liquidity management, Germer pointed out.
As a result of the cap, acquirers will pay less for prepaid card acceptance, which could be “theoretically” passed on to merchants, according to the CEO.
Large merchants will likely negotiate new fees with the acquirers in April when the amendment enters into force, which could in time affect the costs of smaller merchants, he added.
The fate of credit cards
A significant omission from Brazil’s card regulations is credit cards, whose interchange fees remain outside the scope of regulations.
This is due to the fact that Brazilian credit card schemes “are much more complex” and “practically not relevant for driving financial inclusion”, Germer said.
In August, BCB president Roberto Campos Neto made news with a statement predicting that credit cards would cease to exist in Brazil.
Despite the grandiose statement, the evidence does not seem to support his argument. As VIXIO pointed out at the time, card transactions overall grew by 33 percent in 2021, up from 7 percent in 2020, while credit cards specifically increased by 32 percent.
In addition, from the consumer's point of view, cards are still the easiest, fastest and smoothest way to pay in-store.
To pay by card, the consumer simply needs to swipe the card over the POS terminal. By contrast, Pix, Brazil’s popular instant mobile payment service, requires the consumer to open an app, authenticate themselves, choose a payment option and maybe scan a QR code, Germer explained.
There are now solutions on the market that allow for a two-step Pix transaction but this is still one step more than what cards require, he stressed.
There is nonetheless one new feature that could shake up competition for credit card schemes.
“The most significant opportunity in the Brazilian payment space is probably guaranteed Pix,” Germer said.
The feature, which is expected to launch later this year, allows merchants to accept payments at a later date in 12 to 24 interest-free instalments.
The guarantee is provided by the bank, which is liable for making the payment even if the consumer does not have sufficient funds.
The buy now, pay later (BNPL)-like product will bring more competition for credit card schemes, according to Germer, and may potentially enable spending for those that currently do not have access to credit cards.
