Barter, cash, card, PIX. The payment industry in Brazil has already undergone some revolutions. But the new technologies did not eliminate previous practices because the different realities of each region of the largest country in Latin America did not allow it. While in the largest metropolis in the country, São Paulo, the penetration of cards in the daily expenses of families (credit, debit, and prepaid) exceeds 60%, in regions such as the South and North of the country, the use of cards does not reach 30%.
These differences, however, do not prevent Brazil from moving towards a new payments revolution. Big techs, retailers, and new technologies that pave the way for new entrants and regulations are forces that will continue to change the way Brazilians pay for a product or service in 2021, according to Edson Santos, founding partner of CoLink Business Consulting, advisor, and angel investor.
Santos, who is also a partner at Confrapar, a manager of funds that invest in technology companies, has been working in the electronic payment market since 2000, for companies such as First Data and Redecard, and entities such as the Brazilian Association of Card Companies Credit and Services (Abecs).
The specialist wrote his first book on the sector, Payments – The evolutions of means of payments, in 2014. At the end of 2020, Santos wrote his second book on the topic, alongside Luis Filipe Cavalcanti, also a partner at CoLink Business Consulting, director of investments by MIT Alumni Angels, and vice president of MIT & MIT Sloan Alumni Brazil. Called Payments 4.0 – As forças que estão transformando o mercado brasileiro (or something like “Payments 4.0 – The forces that are transforming the Brazilian market”), the second book has not yet been translated into English.
The two authors talked to LABS about the main trends in the Brazilian payments sector for the coming years:
LABS – Have the predictions of the first book been fulfilled?
Santos – The first book does not necessarily make predictions but shows trends. We focused on what we identified as happening at the moment. We identify forces that act independently to bring about change.
The current competition acts differently. There is a part of the participants (from the ecosystem) that looks at means of payment as a commodity; others that advance in the (payments) chain and modify the previous value proposal—a classic difference from that competition that causes friction and change.
The new entrants come from three sources: technology companies that want to get into the financial sector; other companies that are already somehow providing some service (to a part of the ecosystem) and want to expand, and the big techs, which come from outside this market.
Retail itself is advancing in the value chain and changing format and offer. And there are the regulators, with the Brazilian Central Bank being the main one. It acts independently, causing a reduction of barriers, an improvement in competition, and legal stability so that fintechs can work smoothly.
Also, there are new technologies, which are brought by several different participants.
LABS – How do you evaluate the regulations of the Central Bank?
Santos – The Central Bank has always been very technical, but it did not have the power to regulate; it did not have authority over payment companies, although it had authority over all banks and financial institutions. It was only from October 7, 2013, that law gave the Central Bank the power to regulate the payment system.
From that, the legal framework was established, which made the market start to be understood differently. Every time it launches a new regulation, the Central Bank talks to the market, learn from other markets. In the case of the PIX, the Central Bank went further. It built the engine that provides instant financial settlement 24/7. And, on top of that, it built the rules to which the market is adhering. PIX is in fact a new payment platform and has all the characteristics of an exponentially growing business.
Because it is digital, it has the ability to dematerialize plastic and POS. Consequently, it has the ability to disintermediate participants from the normal market. When this happens there is a tendency of demonetization, that is, the transaction cost drops significantly for everyone. And that brings democratization. PIX has all the potential to be a disruptive platform in the market, but that doesn’t mean it will happen immediately.
LABS – What are the trends for the future of the sector in Brazil?
Cavalcanti – What we talk about a lot in the book is the issue of creating platforms and ecosystems. This has been widely recognized in retail, mainly due to the performance of retailers such as Magalu and MercadoLibre, but it has also happened in other areas, such as the movement of (the Brazilian acquirer) Stone buying other companies, strengthening itself, expanding its value chain.
Another issue is the concept of card dematerialization and payment credentials. This is a movement that is already underway due to tokenization, which solves a huge problem in the industry, replacing the card with a digital identity. Tokenization and new technologies like the 3DS 2.0 protocol tend to increase online transactions’ security because they are combined technologies.
These changes in habit come from how commerce will seek to deliver something, the way that new generations want to consume something. The new generation is more concerned with experience than possession. There is no concern about owning the car, you want to use the car to get around, but you don’t want to own it. These changes end up transforming the way you pay. And it naturally tends to be increasingly digital, increasingly automatic, and increasingly invisible. It will be something built-in (in other actions or services).
LABS – Do you believe in a fintechrization of the market?
Santos – I wouldn’t call it fintechrization. In fact, the experience comes from the Chinese market. In China, there is no consumer credit. You don’t have a credit card. A credit card is for when the consumer travels and uses outside the country, as a kind of purchase card. In China, there was also the problem of trust. I wanted to buy something on the internet but I don’t trust anyone on the other side. Then, the two companies, Alibaba and Tencent, created instruments that would generate trust between buyer and seller. They did it using something very simple that here in Brazil we know with MercadoLibre, saying to you that is safe to buy from merchant because they will intermediate the payment and the product’s delivery.
Creating this trust relationship, they began to understand and improve the experience of the Chinese who pay in cash. And the ability to produce technology using e-wallets, using e-commerce payment, creating that trust, ended up producing two very interesting platforms that later became ecosystems.
While WeChat functioned as WhatsApp, it started selling games and adding services until it entered the retail sector. At the end of the day, it became a platform with a marketplace with messaging and financial services. To a point that you are able to do more than just sending and receiving messages through WeChat; you can move your account, buy things, check prices, or even buy in the physical environment.
LABS – The big battle there is to have a single gateway to an ecosystem in which you do everything you need. Here, MercadoLibre is already a platform, with marketplace, payment services (MercadoPago), and logistic services (Mercado Envios). This platform has the ambition there to become an ecosystem.
Both MercadoLibre and Magazine Luiza are following very similar paths, they only started from different places. MercadoLibre arose from the idea of a marketplace and Magalu, I would say, has a more complete ecosystem because it has a physical store. And this is an important component in the strategy, which is the point where you interact with the consumer.
So it’s something that goes beyond being a fintech. Fintech is one of the components within the process of creating a platform and an ecosystem.
LABS – What can happen in the payments market if Google and Apple start operating in Brazil?
Santos – We have one of the most sophisticated banking systems in the world. Not because we are smarter or have more money, but because we lived for decades under high inflation. So moving money fast was even more important than moving the product fast. Because of that, we have a sophisticated system, even when we didn’t have so much technology.
Compared to other countries, in payment methods we are one of the first countries to implant the smart card, the smart card with a password, what we call a chip and PIN. When I combine means of payment with financial services, we are far ahead of other countries.
We believe that Google, Apple, WhatsApp Pay, Facebook and others will play a more important role in countries where it is still necessary to build a lot of infrastructure and provide basic services to the population. Maybe they have a mission there to become an important player, maybe a fintech, maybe an accreditation. In Brazil, I think they come to complement.
Cavalcanti – Big techs have an extraordinary know-how in the user experience. They would have much to contribute in this aspect of improving the shopping experience and complementing financial services that are already provided in the country today.
I think the concern of our legislator is the issue of the General Data Protection Law (the Brazilian version for GDPR), because when you gather all the information from the web, everything you do on your cell phone and include payments and financial services, you have a recipe to know everything about the consumer. We think that the Central Bank is very attentive to this and we believe that big techs will enter the market complementing questions of experience and moving the chain, providing a way to pay more intelligently and more appropriate to each type of consumer.