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BRAZIL: An Introduction

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FINTECH IN BRAZIL: AN OVERVIEW  

Current political and economic scenario 

After a long period of administrations led by the left-wing political party PT, amidst a turmoil involving corruption scandals and increasing political polarization that seems to be the tone worldwide these days, Brazil elected President Jair Bolsonaro, a conservative candidate, with a mandate from 2019 to 2022.

With a liberal economic agenda, the main proposals of the current government are based on broad reforms. The first of them, a labour reform aiming at modernizing the highly protective labour relations in Brazil, was actually approved a couple of years ago, under President Michel Temer, who replaced Dilma Roussef, removed from office after an impeachment process.

At the end of 2019, following intense debates in Congress, a pension system reform has been approved in order to equalize the rules for granting of benefits and reduce the current fiscal deficit. Next in line are the changes to the amazingly complex Brazilian tax system, the restructuring of the government administrative system and the political reform.

Economy-wise, Brazil is still trying to recover from the 2015-2016 recession and has been pretty much stagnated since 2017, with a slight improvement in 2019. Even though economic growth is still at low levels, investments are increasing once again and expectations are optimistic for 2020. The Brazilian annual interest rate (SELIC) was reduced by the Central Bank to the lowest ever rate – 4.5% - and unemployment rates are dropping, showing signs that the economy is slowly recovering.

Fintech activities, trends and developments 

The fintech market started being more deeply studied by Brazilian regulators such as the Central Bank and the Antitrust Authority (CADE) in 2010. Three years later, Federal Law No. 12,865/13 was enacted to attribute authority to the Brazilian Monetary Council (CMN) and the Brazilian Central Bank – CMN’s prudential and financial institution supervision branch – to regulate the payments market, including fintechs.

Since that first piece of legislation in 2013 the payments market has grown exponentially and more and more players are entering the market, bringing technological improvements, fomenting competition and promoting financial inclusion. Regulators as CMN, the Brazilian Central Bank, the Stock and Exchange Commission (CVM) and the Antitrust Agency (CADE) have been actively engaged in supervising anticompetitive activities and are constantly improving regulation to keep up to date with the latest market developments.

In the early 2000s, card payments were basically restricted to the largest merchants and big cities. Nowadays, pretty much everyone everywhere has access to card payment equipment.

The exponential growth of the payments markets was followed by improvements to the securities and financial markets as well, with the issuing of new regulations regarding equity crowdfunding and peer to peer lending, with a more simplified structure for low risk financial institutions, aiming at increasing competition in the Brazilian credit market. Foreign investors were also benefited, as the Brazilian government authorized P2P lending fintechs to be wholly owned subsidiaries of foreign companies.

Digital banks seem to the next big thing in Brazil. And that encompasses not only a more technological approach to standard bank accounts, but also a widespread of wallet apps – soon to be boosted by instant payments.

A program known as Inova Simples is already in place to facilitate the opening and closing of startup companies, enabling them to test their products in small scale without the burdens applicable to “regular” companies, and the Ministries of Economy and of Science, Technology, Innovation and Communications recently created joint working committees with public and private entities to discuss the Brazilian business ecosystem and how to stimulate innovation and disruption.

The cryptocurrency market, on the other hand, is not yet subject to specific regulation. In 2017, the Brazilian Central Bank issued a public warning about the risks attached to the maintenance and negotiation of cryptocurrency, but stressed that, at that point, there were signs that transactions with virtual currency could affect the financial system and, therefore, there was no risk to justify issuing of regulation. The Stocks and Exchange Commission (CVM) shows similar concerns regarding transactions with cryptocurrencies and has already stated that coin offerings cannot be directed to investors in Brazil unless approved by the regulator under the current securities public offering rules.

So far, the only rules regarding cryptocurrencies are a couple of normative orientations from the Brazilian Tax Revenue Office stating that cryptocurrencies should be treated as assets rather than as actual currency and that transactions made with cryptocurrencies must be declared and are subject to taxation. There is, though, a bill under consideration in Congress to regulate the subject.

What to expect in the (near) future – potential hurdles and opportunities

There are currently a number of proposals under analysis by regulators which may significantly impact the fintech market in the near future.

Both the Securities and Exchange Commission (CVM) and the Brazilian Central Bank are studying to implement regulatory sandboxes to encourage innovation. That is also on the radar of the Superintendence of Private Insurance (SUSEP), which is likely to boost the insurtech market.

The Brazilian Central Bank intends to issue, in 2020, regulation on open banking and instant payments, bringing a whole new range of possibilities for the payments and credit markets. In that scenario, infrastructure and data protection will probably be the biggest challenges.

With broad access to financial data from clients and the possibility of 24/7 payment transactions by simply reading a QR code on the mobile or typing the number of a person’s phone, certain traditional products such as banking transfers (DOC/TED) and the use of debit cards tend to disappear in time.

It is also expected that in 2020 a new ruling about the offering of cards receivables as security will enter into force, allowing each sales transaction to be registered at a central system and offered as security independently. By keeping a ledger of each registered security, that new system will increase safety and reliability of the guarantees and tends to create a more beneficial scenario for credit granting.

In parallel, the Securities and Exchange Commission (CVM) is working on a bill to simplify the structure of Credit Rights Investment Funds, especially with regard to fund custody and administration.

All those initiatives show alignment with market trends and proactivity from regulators in Brazil, favouring an innovation environment. Added to the optimistic economic perspectives for 2020 and a naturally technology-driven consumer market, we envision a pretty favourable scenario for fintech development in Brazil in the years to come.