Brazil‘s Central Bank has published for public comment a proposal to “harmonize” the rules related to the interchange fee and the settlement period for prepaid card transactions with what is currently applied to debit cards. The proposal is to revise a 2018 resolution, which was created to stimulate competition, fintech startups, and encourage more businesses and people to adopt electronic transactions. Now that fintechs and neobanks have grown, the monetary authority thinks it’s time to rewrite these rules.
Amid this technical debate proposed by the Brazilian Central Bank, Getnet, Banco Santander‘s acquirer, is suing Nubank and Mastercard. According to Valor Econômico, the POS terminals provider claims it has suffered losses of at least BRL 62 million since 2018 because of a partnership between Nubank and Mastercard intending “to extract income from Getnet’s POS terminals without just cause.”
Sought by LABS, Getnet said it “is not commenting on this lawsuit” at the moment.
LABS then spoke with another acquirer who said that POS terminals providers in Brazil “took some time to realize that they were having losses on debit transactions” because, according to this acquirer, neobanks such as Nubank act “on the edge” of the rules, offering a prepaid card “with debit functionality,” which induces the customer to make a transaction in debit.
In 2018, aiming to reduce costs and lower the barriers for newcomers, the Central Bank determined that the interchange fee cap for debit transactions should be 0.5%. Thus, in the case in question, when the user selected the debit transaction, and the merchant accepted the Nubank prepaid card transaction as a “debit,” the interchange fee passed on to the card issuer should be the debit one, limited to 0.5 %. Still, as the card was actually prepaid, the interchange fee paid to Nubank exceeded this cap – in practice, the 2018 resolution imposes the cap on debit transactions only for those offering a deposit account, that is, banks.
“The transaction was processed through Mastercard as a debit one; it was agreed with the merchant to receive a certain MDR fee (Merchant Discount Rate, which is the amount charged by acquirers to merchants for processing card payments), and the interchange, which is a cost of the acquirer, was higher than the MDR,” said a spokesperson from an acquiring company heard by LABS who preferred not to be identified.
In a statement, Nubank said it “regrets that an acquirer is trying to distort the discussion [of the Central Bank] with judicial threats and false accusations by the press — all to increase its own profit (and the economic group of which it is part) and try to curtail competition in the financial sector, without thinking about the benefits for consumers.”
According to Nubank, payment institutions can only offer payment accounts with prepaid cards. “However, banks offer, with exclusivity, debit cards to checking accounts, in addition to prepaid cards. Fintechs have played an important role in promoting financial inclusion through the expansion of prepaid cards. This model strictly follows all regulations in force and has been the instrument for the inclusion of 5 million people to banking services, with savings of at least BRL 30 billion in fees for customers in eight years,” Nubank argued.
Why did the Central Bank propose to change the interchange fee for prepaid cards?
Brazil‘s Central Bank allowed fintechs to operate prepaid accounts and issue credit cards with brands, participating in payment arrangements through bilateral contracts with Visa and Mastercard, with a proportionally less onerous regulation than that of big banks precisely to foster the entry of these new companies in the market. But as these fintechs grew, the Brazilian Central Bank started to review its rules so as to prevent problems of solidity and risk competitiveness.
According to the Central Bank’s new proposal, the 0.5% cap on interchange fees could be applied to any prepaid transaction. Another measure proposed by the monetary authority is the prohibition of different maximum periods for making funds available — today, a shopkeeper takes longer to receive the money for a prepaid card transaction than with a debit card.
The interchange fee is the fee that the card network pays to the card issuer for bringing cardholders into the payment arrangement, i.e., connecting cardholders to merchants who accept the card. Within the payment arrangement, there are debit, credit, and prepaid products. In the case of credit purchases, the card-issuing bank needs to be paid not only for bringing cardholders to the arrangement but also for the risk of granting credit.
In the debit transaction, however, there is no such risk – this is one of the factors that also allowed the Central Bank to put a limit on this transaction back there.
The senior director of the German consultancy Roland Berger, João Bragança, explains that the fee cap on debit card transactions really helped to promote transactions by electronic means in the Brazilian economy. In 2018, this was important because there were still many people outside the banking system in Brazil.
“If you increase interchange fee too much, the discount fees at the end [of the chain], that is, the MDRs of the POS terminals, end up increasing. When you do a card transaction, the issuer earns this 0.5% – back in 2018, this 0.5% was turning into 0.7%. If the rate increased too much, you would inevitably encourage the use of cash,” explains Bragança, in an interview with LABS.
Bragança recalls that if the Central Bank somehow introduced a ceiling on debit and prepaid card fees in 2018, it would eliminate part of the revenue sources of new entrants that were promoting greater competition and using these revenue sources to maintain its business minimally sustainable.
Now, in 2021, the scenario is different. Newcomers are bigger. “I don’t think it’s bad that the Central Bank opens for public comment [a proposal to] somehow reduce the regulatory arbitrage conditions it created in 2018. It is a natural path given the evolution of the market.” And who is right in this dispute? For Bragança, everyone is doing their job of defending their interests from a business point of view, and the Central Bank is also protecting its interest in maximizing competition and developing the Brazilian banking system.
“When Getnet sues Nubank, when Nubank says Getnet is wrong, and when banks say that somehow fintechs have a regulatory advantage. Well, I think everyone is doing their job because they are effectively in a market condition where two relatively similar products are subject to slightly different regulations. That has an impact on the revenue of each of the players.”
And what should happen? For Bragança, the debit card and the prepaid card should be subject to the same type of regulation. “The cap that was introduced for the debit card should also be extended to the prepaid card, and I think this leveling should occur.”
However, he believes that this change should happen gradually, over time, and that credit card interchange fees should also have a cap.
“Today [credit card fees have no cap] in Brazil because effectively the miles business and the cashback business are very strong, but as somehow the credit card business gets bigger and more competitive, the incentive for the issuer to raise the fee to pay for the cashback it gives to the customer is getting bigger and bigger. In our [Roland Berger’s] view, we have to look at the credit interchange fee over the coming months. We feel that there is a possibility to increase the credit interchange fees, and this could naturally have an impact on the level of usage of these payment methods.”