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An Introduction to Brazil FinTech

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Current political and economic scenario

After a long period of administrations led by the left-wing political party PT, and amidst turmoil involving corruption scandals and increasing political polarisation – which seems to be the tone worldwide these days - Brazil elected President Jair Bolsonaro, an ultra-conservative politician, 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 modernising the highly protective labour relations in Brazil, was actually approved during the former mandate of President Michel Temer, who replaced President Dilma Roussef, removed from office after an impeachment process.

At the end of 2019, following intense debates at Congress, a pension system reform was approved in order to equalise the rules for granting of benefits and reduce the current fiscal deficit. Next in line are changes to the amazingly complex Brazilian tax system, the restructuring of the government administrative system and political reform, expected to be initiated in 2020, but postponed due to the COVID-19 pandemic.

Economy-wise, Brazil is still trying to recover from the 2015-2016 recession. There was a slight improvement in 2019, and even though economic growth was still at low levels, investments were increasing once again and expectations were optimistic for 2020.

However, the pandemic brought the economy to a halt. An emergency financial aid was provided by the government to lowest-income families and companies were entitled to stay employment contracts, in which case salaries were paid directly by the government. The Brazilian Central Bank reduced the Brazilian annual interest rate (SELIC) to the lowest ever rate – 2% p.a. – since August 2020, but despite all efforts inflation has skyrocketed, the Brazilian currency has devalued significantly, unemployment rates are increasing and GDP is likely to fall by around 5%.

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 in order to attribute to the Brazilian Monetary Council (CMN) and the Brazilian Central Bank – the CMN’s prudential and financial institution supervision branch – authority 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 such as the CMN, the Brazilian Central Bank, the Stock and Exchange Commission (CVM) and the CADE have been actively engaged in supervising anti-competitive 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 also benefited, as the Brazilian government authorised peer-to-peer lending fintechs to be wholly-owned subsidiaries of foreign companies.

A programme known as Inova Simples was created to facilitate the opening and closing of startup companies, enabling them to test their products on a small scale without the burdens applicable to “regular” companies, and the Ministries of Economy and of Science, Technology, Innovation and Communications 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 CVM has shown 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, however, a bill under consideration in Congress to regulate the subject.

The most significant innovation during 2020 was certainly the instant payments system known as PIX, launched by the Brazilian Central Bank in November 2020, which enables real-time gross settlement amongst all major banks. Smaller banks and payment institutions are also entitled to participate on an optional basis. PIX is likely to significantly impact the payments market, enabling safe and cheaper instant money transfers.

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

Regulatory sandboxes are also a strong trend, aiming at encouraging innovation and competition. In 2020 the Superintendence of Private Insurance (SUSEP) selected 11 projects that are likely to boost the insurtech market in the years to follow. The CVM also regulated its sandbox and will select the first participants during the first quarter of 2021. The Brazilian Central Bank has also set the rules for the sandbox, but is yet to define the rules for the first cycle of the project.

Another eagerly expected change is the implementation of open banking, starting in November 2020 and to be fully operational in October 2021.

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

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

The regulatory sandboxes are also likely to make innovative products and services from fintechs and insurtechs flourish to the benefit of customers and society as a whole.

It is also expected that in 2021 a new ruling about the offering of cards receivables as security will enter into force, allowing each sales transaction to be registered on a central system and offered as security independently. By keeping a ledger of each registered security, that new system will increase the safety and reliability of the guarantees and will tend to create a more beneficial scenario for credit granting.

In parallel, the 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 naturally technology-driven consumer market we envision a pretty favorable scenario for fintech development in Brazil in the years to come and hope for a better economic perspective for 2021.