The Embassy of Brazil, partnering with the Department of International Trade, organised a webinar titled “Opportunities in Brazil’s Fintech Market: The Digital Transformation in the Brazilian Banking System” to further internationalise the Brazilain fintech ecosystem and spread awareness in the UK. The banking regulations in Brazil have changed and been modernised, including the implementation of open banking, bringing more competition to a historically highly concentrated sector – one with high service tariffs and limited access to financial services and availability to a large portion of the population. The webinar aimed to promote the ever-growing business opportunities in the fintech sector in Brazil, and discuss the positive developments that have taken place.
The panellists taking part in the webinar were João Manoel de Mello, Deputy Governor Licensing and Resolution, Central Bank of Brazil; Bruno Balduccini, Partner at Pinheiro Neto Advogados; and Bruno Magrani, Global Head of Public Policy at Nubank. The panel was moderated by Lisa Weedon, her Majesty’s Minster-Counsellor for São Paulo, Department for International Trade.
PIX and Open Banking
João Manoel de Mello kicked off the webinar by giving an overview of the Brazilian banking sector by saying the primary mission of the Brazilian Central Bank is to maintain price stability. “Over the past 30 years, the Brazilian Central Bank has been successful in achieving this goal. Despite going through two major emerging market crises, the Brazilian banking sector has gone almost unscathed. After achieving its true goals, society has been ever more vocal in demanding for improved efficiency and increased competition.”
When discussing incentives for competition and efficiency, João Manoel de Mello said that a prudential regulation proportional to the ability to size and risk profile had been introduced – clarifying that the regulations were not being lenient but that the regulatory burden was proportional to risk.
He continued by showing a timeline of the payment market stemming from Law 12,865 in 2013, through to the introduction PIX and open banking in 2019, and how the banking system developed.
João Manoel de Mello went on to discuss the 2019 initiatives by saying, “PIX was built to be open, interoperable and competitive. The Central Bank does not provide any direct payment services – it only provides the infrastructure. PIX was built to solve coordination problems; it was built to make any payments you want: P2P, P2G, P2B, G2G, G2B, B2B.
“PIX replaces bank wires and transfers as a cheap, convenient alternative, so P2P users were expected, but now there is the onboarding of B2B users as once the QR code standards were finalised, SMEs were able to onboard QR code reading.”
The open banking initiative was introduced to foster competition, efficiency and data security, whilst simultaneously, striking a balance between incumbents and new players. “We were able to observe what others did, and adjust accordingly.”
João Manoel de Mello concluded by summarising the incentives of open banking for SMEs and larger companies:
- Mitigate information asymmetry
- Broad digitisation of the economy
- Enhance credit data outreach
- Reduce barriers to enter the market
- Financial stability through innovation
- Empower clients
Sociedade de Crédito Direto, SCD, and Lending
Bruno Balduccini was then given centre stage to discuss the opportunities that had arisen as a result of the changes in regulations spoken about by João Manoel de Mello. He began by saying, “We have gone through a tsunami of regulations as almost every day the Central Bank has issued new rules or regulations that completely change the market. But a few things are clear. Firstly, the changes proposed by the current administration are substantially disruptive in several aspects. The second clear thing when you look at the open banking initiative is that concern has been raised to allow fintechs to have the same voting powers as incumbent banks. The third point is that things are now being imposed on incumbents, even though they were not happy with them. Pro competition and pro-technology is the bank’s clear path.”
One cannot lend in Brazil unless it has been approved by the central bank. One cannot act as a financial institution without approval from a regulator constitutes a crime, hence why it has historically been a very closed market.
Balduccini discussed how technology has enabled two new types of regulations for financial institutions, focusing on the demands of fintech players engaging in online and P2P lending activities. “We helped create two new financial institutions. One is a direct lending model (Sociedade de Crédito Direto, SCD), and the other is a P2P model (Soceidade de Empréstimo entre Pessoas, SEP). We are a financial institution, so you can lend without going to jail. They are free to set their interest rates as they do not have to follow usery laws. The logic is, it’s an elaborate entity – in other words – you cannot obtain funding through deposits, and has to use its own founder’s capital to perform the loan.
“The B2B model is a simpler system in the sense that the financial institution in the middle, the SCD cannot lend its own money, but it can connect lenders and borrowers, acting as a market place, people that would like to use their funds to lend money to people that need to take this money. The SCD model has grown sustainably.”
The minimum requirement to set up an SCD is R$1million whereas a commercial bank start-up needs R$17.5million. “An unwritten rule within the central bank is that to create a new commercial bank, your business plan must show R$150million, otherwise you will need to revise it. With an SCD you just need R$1million. It’s up to you to put in the capital, but we need you to show the ability to put in R$1million as capital. In roughly six months, 26 SCDs have been approved which is extremely fast.
“All SCDs are classified as low risk as there’s no leverage. As a consequence, they are classified as under S5 which means low systemic risk in opposition to S1, which is high systemic risk where all the major banks are connected. This means there is, in addition to a simpler audit system, and a simple process to control and check the company, and therefore, lower regulatory costs to operate.”
In order to maintain a constant working company, and not solely rely on loans to mature, Balduccini explained how funding from foreign investments enable SCDs to function. FIDC (Fundo de Investimento em Direitos Creditórios) is bought by investors, both national and international, and these shares allow trades to be made with the SCDs. The money owed by borrowers returns to the FIDC, before being distributed back to investors and the SCD. “The FIDC acts as a tax deferment vehicle – you accumulate your profits and losses there. And then when the investor decides to take their investment away, there will be a capital gains tax for foreign investors that is limited to 15%. Because of the way interest rates are in Brazil, it is still a very interesting and profitable model.”
Bruno Magrani rounded out the webinar by discussing NuBank, the digital challenger bank, and a newly created trade association, founded by Mercado Libre, Nubank and Google, to properly represent fintechs in the market. “The growth that Nubank has seen has been as a result of the change in the market. Previously banks relied heavily on branches. We introduced a product that customers could only access through our credit card using their cellphones.”
“We were created originally as a payment solution, not an SCD or SEP. We relied a lot on our ability to get funds using our lightweight entity to grow our customer base. In Brazil, it had been the case until recently, that big banks had poor customer service. New competition in the field has probably helped big banks improve their services.
Magrani explained how Nubank invested in customer service where others had to invest in physical branches, causing it to have a better Net Promoter Score than companies like Apple, Netflix, or Amazon. Between 2019 and 2021, Nubank saw tremendous growth. This enabled more services to be offered to Nubank’s customers and diversify its offerings. He concluded by discussing the extreme success of the digital banking experience.