The Brazilian Central Bank has submitted proposals to change and tighten the regulatory and capital requirements for payment services, both by payment institutions, financial institutions, and fintechs in Brazil. With a resolution published in October and two public consultation notices issued last week, the financial authority is further expanding regulation on the sector amid the fintech boom in the country.
Last month, Brazil’s Central Bank approved a resolution that requires that from March 2021, payment institutions with at least BRL 500 million in transactions will be required to request authorization from the Central Bank to provide digital account services – from 2023 onwards, the rule will apply to institutions of any size.
The financial authority published the public consultation that proposes new rules for payment institutions with another public notice regarding foreign exchange transactions by payment institutions in the country.
In short, the proposal raises the bar for fintechs that want to become payment institutions without relying on a banking correspondent and creates other classifications for companies, taking into account whether they are payment institutions that operate with banks and financial institutions through conglomerates or if they act alone. The idea is that the regulatory demands will be focused on the conglomerate company that will provide the service.
The Central Bank wants payment institutions not integrated with authorized entities to be subjected to a “new definition of regulatory capital, which will move from the current net equity adjusted by the income accounts to the requirement of the payment institution’s reference equity.” What does it change? To become a payment institution regulated by the Brazilian Central Bank, the firm will need at least a BRL 2 million capital. For those who are payment services initiators – agents that receive the transaction’s command but do not execute it –, the minimum capital required will be BRL 1 million.
According to the Brazilian Central Bank, by raising the sector’s bar, the authority increases the quality of the services provided and reduces systemic risks for the tens of millions of fintech customers in Brazil.
In talks with LABS, Ingrid Barth, elected VP of ABStartups (Brazilian Association of Startups) and current director of ABFintechs (Brazilian Association of Fintechs), explained that the legislation on payment institutions started to be implemented in 2013 and that new proposals are a natural result of this regulation.
“Today, payment institutions may or may not offer an account; they may or may not offer a credit card linked to the account,” she said, mentioning the case of Nubank, which at the beginning of its operations offered only a credit card as its main service. It was only after Nubank obtained the license from the Central Bank to operate as a financial institution that the startup started offering its digital account, NuConta.
Until today, fintechs have managed to comply with payment institution legislation without necessarily having a specific license. “The Central Bank understands that as long as you do not bring any systemic risk, while you are small, this license is not necessary. But a partner bank is needed to custody these resources,” explained Barth. Institutions without a license from Brazil’s Central Bank necessarily had to leave 100% of demand deposits resources under a bank’s custody. “This minimally guaranteed the liquidity risk, and these values were obliged to focus on public securities,” explains Barth.
But then, when does the fintech need a license to be a payment institution? When it reaches a volume that makes Brazil’s Central Bank see it as a source of systemic risk. And this is not just measured by transactions. If the institution already has one million customers, it is already relevant to the market and the Brazilian Central Bank.
Barth stressed that it remains easier to be a payment institution than a commercial bank in Brazil since a bank license depends on a BRL 40-50 million minimum capital. “In the public consultation, a minimum of BRL 1 million was mentioned for the license. The same amount that is required to become an SCD (Direct Credit Society, in Portuguese). So it remains much more flexible than when you compare it with the license of the traditional banking system, but obviously with product limitations,” she said. “BRL 1 million for those who are offering a payment account minimally guarantees the necessary infrastructure and the necessary care for technology, risk, compliance, and general responsibilities to accommodate all of this.”