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The Brazilian Central Bank (BCB) has introduced a cap for interchange fees on prepaid cards, a payment instrument largely provided by fintechs that has helped bring millions into the traditional financial system.
Last week, the BCB announced a number of changes to its interchange fee regulations, including establishing a cap on prepaid card fees and simplifying the rules for debit cards.
Under the existing rules, the interchange fee on debit card transactions requires firms to comply with the dual requirement that it must not exceed 0.8 percent of the individual transaction value and 0.5 percent of the weighted average value of their overall transactions on a quarterly basis.
The new regulations, which will come into effect next April, simplify debit card interchange by capping them all at 0.5 percent.
In addition, they bring prepaid cards into the scope, which was previously excluded, establishing a 0.7 percent cap for transactions and harmonising the settlement cycle of prepaid cards with that of debit cards.
Media reports estimate that prepaid card transactions typically have a 28-day settlement cycle, while debit card payments are transferred to merchants within two days, according to the central bank.
The move follows the rapid growth of prepaid card transactions in Brazil, mostly as a result of fintechs entering the space. Under Brazilian regulations, payment institutions can offer payment accounts only with prepaid cards.
During the first half of 2022, the total value of prepaid card transactions climbed to BRL99.4bn ($18bn), equivalent to around 20 percent of total BRL488bn ($90bn) debit card transactions.
This represents an impressive 138 percent growth in the value of prepaid card value, according to Abecs, the Brazilian association of credit card companies and services. By contrast, debit cards grew 17 percent during the same period.
Prepaid cards are an important tool to bring more people into the traditional financial system, according to Zetta, a fintech association whose members include Google, Mercado Pago and Nubank.
These products enabled fintechs to offer more than 90m free digital accounts last year, the association spokesperson told VIXIO, emphasising that “interchange fees were instrumental in enabling [it]”.
Fintech growth to detriment of acquirers
Brazil’s interchange fee regulations date back to 2018. At that time, policymakers took the decision to reduce costs and lower the barriers for fintech newcomers, encouraging innovation in the industry, Anca Bogdana Rusu, cLabs’ head of public sector, explained to VIXIO.
“More recently, arguments have been made in the public space that many of the fintech players are now well established and rules might need to be changed,” she added.
Meanwhile, merchant acquirers and POS terminal providers have started to complain that rapidly growing prepaid card usage means many of these firms incur losses on accepting prepaid cards.
These arguments culminated in a lawsuit last year, when GetNet, Santander’s merchant acquirer, filed for damages of BRL62m ($11.5m) from Nubank and Mastercard for its losses.
In its complaint, GetNet alleges that Nubank promotes its prepaid card as a card with a debit function. Therefore, when the customer pays the merchant and chooses the “debit” function, the network processes the payment with a 0.5 percent interchange fee. However, Nubank in fact charges the acquirer a 1.2 percent interchange fee, causing the acquirer losses on each transaction.
The cap on prepaid cards may address a part of this problem. As such, acquirers and POS terminal providers come out as the partial winners of the regulatory change, according to Rusu.
“On the other hand, a number of up-and-coming fintechs which work mostly with prepaid cards will now have to pay higher fees for their customers to use the terminals, cutting into their margins,” she noted.
Market reaction to the news
Following the regulatory announcement, Reuters reported that Brazilian fintech stocks fell.
Nubank issued a statement saying that the interchange cap was “widely expected” and it may affect the company’s revenue to a certain extent.
Interchange fees on prepaid cards represented 7 percent of Nubank's revenue in the 12 months ending June 2022. If the changes were in effect during this period, the fintech's revenue would have suffered a 2.9 percent loss, Nubank said.
PagSeguro, which operates both as a card issuer and acquirer, said the impact of the regulations on the bank’s revenue will be “relatively negligible”.
The company explained that “the potential cost savings in PAGS’s merchant acquiring unit related to the interchange cap on prepaid and debit cards, combined with the lower settlement period, are expected to be offset by the lower revenues in PAGS’s card issuance unit”.
According to Rusu, the prepaid card cap “is fairly balanced compared to the debit card cap".
Card association Abecs criticised the move, saying that it is “in favour of free competition” and “against any type of price setting by the regulator”.
The imposition of a price cap generally restricts innovation and can generate costs for the consumer, as affected companies seek alternatives to make up for the revenue loss, “even more so when dealing with the same fee for transactions in environments with very different risks”, the association told VIXIO.
