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AmericasOctober 27 2022

Fostering fintech the Brazilian way

As instant payments, cross-border improvements, and open banking and open finance develop around the world, Brazil is steadily growing as a fintech hub and learning lessons from other jurisdictions along the way. Liz Lumley reports.
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Fostering fintech the Brazilian wayImage: Getty Images

Creating an environment where innovation and new businesses can develop and grow has long been studied by trade organisations and government entities. Many factors need to be in place, and adequate access to talent and capital is paramount. However, of equal if not greater importance for the financial services industry is the availability of modern payments rails and a progressive regulatory environment. 

Brazil has been steadily working on creating a more supporting fintech ecosystem through these necessary factors for some time. There are three main areas fuelling the development of a modern financial services network in South America’s largest economy: real-time payment rails, new foreign exchange (FX) regulation and the introduction of open banking, and now open finance, mandates. 

The central bank, Banco Central do Brasil (BCB), has recently approved a series of changes to its FX policy, aimed at supporting international payment and transfer operations. These changes led to the creation of eFX, launched in October, which can be either an institution authorised by the BCB or an authorised legal entity that offers digital payment solutions. Fintech companies will be able to operate in the FX market digitally, assisting international companies to pay and receive payments in Brazil.

eFX is an international service of payments or transfers in the FX market that aims to harmonise the regulation on the use of international credit cards and international payment facilitation businesses. With this, the regulator expanded the payment services for international transfers, consolidating the rules for its provision, specifically for the acquisition of goods and services in person or by electronic means, remittances, transfers between same ownership and international cash out in the country or abroad, and allowing the use of bank slips. 

The eFX service is the first overhaul of Brazil’s FX market in decades. Many in the region feel this will transform the sector by offering payment institutions in Brazil more autonomy in the cross-border payments industry.

Bank of America (BofA) has already responded to the new FX regulations, which it feels will be a “game-changer for clients” in Brazil, with the launch of a new platform. 

The BofA FX platform allows clients to execute their cross-border payments on-demand. In 2022, the bank onboarded its first client to the online quotation platform, CashPro FX, and is in the process of onboarding additional clients. The bank’s CashPro FX Trade and Pay will offer the full capability of the eFX service to Brazilian clients.

In addition to the digitalisation of BofA’s FX business, the bank has identified other opportunities from the legislation where innovations could add further value.

According to a spokesperson for the BCB, the recent improvements of the FX regulation promoted improvements in the regulation of the FX and international capital flows to increase competition, enable new business models and reduce costs for making cross-border payments and transfers. 

“The fintechs that are licensed as payment institutions (IPs) will become eligible to apply for an authorisation to offer FX services directly to their customers,” says the spokesperson. “The IPs authorised to operate in the FX market will be able to carry out FX transactions with their customers for any legal purpose and up to the amount equivalent to $100,000.”

There are currently 182 institutions authorised to operate in the FX market, including banks, securities brokerage companies, securities distributing companies and FX brokerage companies. In August 2022, there were 54 IPs licensed by the BCB, some of them with relevant international operations and millions of customers in Brazil.

Paying by PIX

However, prior to eFX, the BCB launched PIX, an instant payment solution, in November 2020. It now boasts almost 135 million registered users out of a population of 213 million. A total of approximately 985bn reais ($190.5bn) has been transacted via PIX so far. 

PIX allows instant payment between individuals, companies and government bodies. To make a payment, the payer needs the payee’s PIX alias or key. For individuals, the keys/aliases can be personal data, such as an email address or mobile phone number, random keys or a QR code.

Part of the success of PIX lies in three actions from the central bank: it made it mandatory for certain institutions to participate and took a central seat in the process; it made it free to use; and it allowed fintech companies to participate, rather than have the service restricted to banks. Users must have an account (current, savings or prepaid payment) with a payments service provider, financial institution or payments institution that is participating in the PIX scheme.

The BCB designed PIX to enable multiple use cases — not only low-value transactions, but also large-value payments, embracing business-to-business (B2B) and government transactions — that faced gaps with the means of payments available before PIX, says a spokesperson for the BCB. 

According to the BCB, Brazil had a high use of cash before PIX — a 2019 BCB payments survey showed that 77% of payments were in cash.  

“For those reasons, it was expected that low-value transactions that were usually made by cash, interbank transfer and debit card would migrate to PIX, because of its availability, lower costs to companies and free [use for] individuals, convenience and easy user experience,” adds the BCB spokesperson.

Now you can do peer-to-peer (P2P) transactions for free, real time, seven days a week. That was a clear innovation that will change people’s lives

Nathan Marion

“It’s worth mentioning that PIX median value of transaction is as low as $17, and a quarter of transactions are lower than $5, meaning a high usage of PIX by low-income consumers in their day-to-day payment transactions, substituting for cash and other retail payments instruments.” 

Before the launch of PIX, Brazilian banks charged money to support electronic transfers, says Nathan Marion, general manager for Latin America at Volt.io, a fintech company in the real-time payments space. 

“Now you can do peer-to-peer (P2P) transactions for free, real time, seven days a week,” says Mr Marion. “That was a clear innovation that will change people’s lives.”  

Because every institution was mandated to enable PIX, e-wallets and neobanks were given the opportunity to participate and offer a better service. Because of this mandate, most of the market felt they were represented in the PIX project, says Ricardo Figliolini, co-founder and managing director of Marvin, a provider of B2B payment solutions that uses merchants’ card receivables to enable payments for their suppliers.

“It wasn’t something like a regulation that just dropped from the sky,” he says. “It was something that everybody built together with the central bank. It amazed me on how they did that and how committed they are to building this ecosystem of fintech.”

According to a spokesperson for the Brazilian challenger bank Nubank, the introduction of both eFX and PIX allows new business models to flourish. “PIX had an initial hyper growth with P2P transactions, but we already see an increasing penetration on e-commerce and initiatives from open finance that can allow even better checkout process, with third-party payment initiation allowing an even better solution,” adds the spokesperson. 

Official launch

Brazil took the next step towards open finance when the monetary council, Conselho Monetário Nacional (CMN), approved a resolution that officially launched the country’s open finance project last year. 

This resolution ushers in the Brazilian Open Financial System model, which will evolve from a traditional open banking initiative focused on traditional banking products into a broader strategy, encompassing other financial services, such as accreditation, FX, investments, insurance and pensions.

According to the BCB spokesperson: “Although regulations regarding the new eFX entity and PIX were born outside the open finance perimeter, they are equally part of the BCB’s efforts in modernising the financial market. PIX operations through open finance are already in place, with some institutions offering the service to customers in specific use cases, and it is expected to be fully available in the first half of 2023.”

Operations by eFX entities are already part of the open finance scope. Initially, FX operations will be available in an open data format aggregated by participating institutions to enhance the comparability of costs in such operations. After that, the sharing of transactional consumer information about these products will also be available, adds the BCB spokesperson. 

The BCB and CMN are updating the regulatory treatment for the new nomenclature with a joint resolution, which is expected to enable a greater understanding of open banking and open finance. As well as further promoting application programming interface-based products and services, it is hoped that this move will accelerate the migration from open banking to open finance.

we have regulation unlocking innovation, which is counterintuitive to a certain degree

Andre Faria

The central bank’s proactive stance in Brazil is “super important”, says Andre Faria, founder and CEO at Lara, a provider of consumer credit for the dental market — or, as the company markets itself, a start-up in the ‘care now, pay later’ space.

“Usually regulation comes after innovation, right? You have innovation, you screw everything up, and then the government comes in and regulates everything,” he notes. “In this specific case, we have regulation unlocking innovation, which is counterintuitive to a certain degree, but I think it makes sense when we’re talking about banking regulation. What we’re seeing with this [central bank president] is that things are moving really fast.”

One of the characteristics of the Brazilian financial system is that institutions licensed by the BCB are responsible for providing not only credit products or payments services, but also distributing investments, insurances, open pension funds, acquiring and FX products. “Therefore, open banking in Brazil was already born with an open finance mindset, given that its scope foresaw from the beginning the inclusion of data on the aforementioned products as part of the implementation project,” says the BCB spokesperson.  

While the goal of open finance is to generate benefits for consumers, the new mandates also add technical complexities and challenges.

“It is not a trivial technical process, as standardisation is extremely complex, especially when other regulators and institutions enter the process,” says the BCB spokesperson. 

In Brazil, insurance and pension funds products are regulated and supervised by the Superintendência de Seguros Privados (Susep), which is developing an open insurance project like the open finance initiative. The BCB and Susep are working together to allow the interoperability between the two ecosystems.

The central bank learned lessons from other open finance initiatives around the world. One of these lessons was around raising public awareness. 

“In this sense, the BCB has carried out actions in its social media, events with digital influencers, among other measures, to clarify the subject,” says the spokesperson. “Open finance is not meant to be taken as a static model, but rather an evolutionary one. Although defining the technical standards is a challenge in the short term, the scope should be understood as dynamic in nature, enabling new solutions in the long run.”

Early days

The central bank stresses that open finance in Brazil is still in its early days “but there are already some impacts in terms of use cases, such as in data aggregation, upgraded models considering shared data, more accurate credit card limits, automatic customisation of interest rates on credit products, and streamlining processes regarding onboarding and faster credit portability”.

While open finance is primarily being used by big banks, says the BCB, the Brazilian experience is “very new” and its impacts on the fintech industry will be seen in the long run. 

Over the past few years, the BCB has enacted several important rules regarding fintech in the payment and credit sectors, as well as digitalisation of trade receivables, that aim to modernise the financial system and encourage innovation and new business models. Aligned to other regulatory bodies and with the government agenda, BCB monitors technological innovations and assesses their potential impacts on operations conducted within the National Financial System and the Brazilian Payment System.

The fintech Marvin is taking advantage of the new open finance framework in Brazil. “What we did here was very different from what the central bank first expected,” says Mr Figliolini. “Now they’re happy with us, but it was totally unexpected to the targets of the regulation. We saw this as an opportunity to build a B2B payment method in Brazil.”

Mr Figliolini adds that the financial ecosystem is made up of several players he calls “life banking”, which lends itself well to the new open finance environment. Such players include direct credit companies and B2B institutions. “Many institutions that are not actually banks or financial institutions can benefit from it,” he adds. “The concept of open finance now is very comprehensive in terms of insurance, tax and all the other life banking-regulated companies that are in Brazil.”

With open banking and finance, the consumer is the owner of their data and can choose where they want to share it — this in turn allows institutions to offer more competitive products.

Nubank embraced open finance in 2022. “Financial technology has been a great ally for the consumer,” says a spokesperson for the fintech. “For customers, [open banking and open finance] brought more agility, accessibility and freedom. As a result, fintechs had to improve with personalised products, such as investment boxes, cryptocurrencies, insurance, more accessible applications and better usability.”

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Read more about:  Americas , Brazil , Digital journeys , Fintech
Liz Lumley is deputy editor at The Banker. She is a global specialist commentator on global financial technology or ‘fintech’. She has spent over 20 years working in the financial technology space, most recently as director at VC Innovations and architect of the Fintech Talents Festival, managing director at Startupbootcamp FinTech London and an editor at financial services and technology newswire, Finextra. She was named Journalist of the Year for Technology and Digital Finance at State Street’s UK Press Awards for 2022.
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