When it comes to running a business, bringing in client payments is fundamental. In Brazil, the options for getting that cash are flourishing. If you have a subscription-based business, you might look to a service like Vindi, which will take repeating payments on your behalf. If you are in e-commerce, you could use Ebanx, allowing customers to make cash payments for online purchases. Want customers to pay with their smartphones in your store? PicPay has the solution.
All three have been set up in the past five years. They are just a few of the dozens of payments companies that have recently launched in the Brazilian market, upsetting what was once a highly-consolidated industry.
New technological capabilities have spurred the rapid expansion. But there has been another critical factor: new regulations.
“These fintechs are easing access for stores to accept credit and debit cards,” says Mathias Fischer, director for regulatory issues at Brazil’s FinTech Association. “Consumers who previously didn’t have access to a credit card or a prepaid card now have access to that technology. The recent regulation stimulated this.”
Brazil’s Central Bank introduced regulations for payments institutions in 2013. As a result, today a quarter of Brazil’s 230-plus fintech start-ups focus on payments, making it the most competitive such sector in the country according to data released earlier this year by the Inter-American Development Bank and Finnovista.
It was a case of Brazil’s regulators striking a careful balance between keeping the system safe while fostering competition and innovation.
“We had basically two or three players in the whole [payments] market,” says Fischer. “Aiming for competition and efficiency, [the Central Bank] saw this opportunity and took it.”
Now, Brazil’s Central Bank is looking to address the other parts of the financial system that are being upended by technological advances. Like other regulators throughout the region, they are struggling to replicate the balance between innovation and security.
New technology promises to open up financial services to millions of unbanked people across Latin America, making transactions faster and cheaper. But the rapid pace of digital change also brings new risks, which many people, including authorities, struggle to understand.
“Prudential supervision is what regulators are normally trained for and staffed up for,” says Andres Wolberg-Stok, global head of policy for Citi FinTech.
“But they are realizing now that it’s a matter of national interest to encourage innovation, safely and within limits. If they don’t, their societies miss out on the potential benefits of fintech – from financial inclusion, to greater efficiencies, to people being able to lead more productive, data-enriched financial lives.”
The question of how to balance financial stability and stimulate innovation is global, says Wolberg-Stock. “That’s the tension you see for regulators all over the world. We’re seeing the same concerns from Washington DC to Hanoi, Vietnam.”
A gray zone
In Latin America, new technology has the potential to open financial services to the region’s vast numbers of people without bank accounts. In Brazil and Mexico, regulators are working on new rules for fintechs. The aim in both countries is to help new technologies gain traction, but limit the risks.
Yet in other parts of the region, regulators are struggling to catch up with the quickly-evolving reality. Supervisors in many cases have no rules covering non-banks that provide some digital financial services.
“There is a kind of gray zone, because of a lack of regulation,” says Fermin Bueno, managing partner at Finnovista, a fintech promotion and development organization focusing on Spain and Latin America.
Peru is one example. The Andean market has been ahead of the game in some aspects of financial technology, rolling out a digital payment system for Peruvians without a bank account several years ago. But the virtual wallet has failed to take off as hoped. And today, the country still lacks regulation for fintech companies, says Luis Barragan, chief executive and founder of tech consultancy Maximixe TIC in Lima.
“I think the regulators are waiting for the market to evolve,” he says. “They want to give some freedom to innovation and think regulation could stop that. But they also don’t know what to do. They don’t have
much experience or information about the industry.”
Tech-based finance start-ups have really only just begun establishing themselves in Peru in the past two years, he says, although the number in operation is growing rapidly. “It’s a small market but it’s growing very, very quickly.”
While some existing rules already cover some of their activities, Barragan says he thinks it is unlikely Peruvian fintech startups will be subject to specific regulations in the near future. The rapid evolution of the market makes it difficult for the banking supervisor to define the newly emerging institutions and introduce future-proofed rules for them. He suggests that a regional collaboration might be helpful.
“Peruvian regulators have to speak with their peers in more mature markets, such as Brazil,” says Barragan. “They can learn from other countries. If there are standard definitions regionally, that would make things easier.”
A framework for Mexico
Regionally, Brazil and Mexico are the most developed markets for financial technology start-ups. Latin America’s two biggest economies each host hundreds of firms, outstripping in pure numbers the rest of the region.
Mexico’s Congress was expected to debate new laws for fintechs in November, and the legislation could be passed by year-end. Crowdfunding platforms and electronic payments companies will be subject to the new regulations.
In addition to keeping rapidly evolving financial technology industry safe, the law could also help start-ups grow, says Javier Soni, a partner at Creel Abogados. The Mexican law firm has received multiple requests for advice from international venture capital firms wanting to know about the legal framework for fintechs they are considering investing in.
“Unfortunately, when we are asked if crowdfunding institutions are fully legal in Mexico, we are required to say that right now they work in a very thin gray area,” he says.
“And serious venture capital funds that have a fiduciary duty to investors in the US, for example, are unable to invest in a foreign country in a company that is conducting activities which are not illegal as such, but for which they can’t obtain a clean legal opinion from a foreign legal counsel.”
But at the same time, Mexican fintechs are concerned about the potential costs of the regulations.
“The regulations do create certainty,” says Finnovista’s Bueno. “But that can also create barriers.”
Despite the release of the draft law, the scale of the potential barriers is still not clear. Much of the detail of fintech supervision in Mexico will be decided in secondary regulation, which will be rolled out between six and 24 months after the law passes. That means that tweaks can be made more easily if needed as technology evolves, notes Soni.
But given that secondary regulations will determine everything from the specific requirements for gaining authorization through to accounting treatment or how much capital institutions will have to hold, it makes planning difficult in the meantime.
“It is difficult to tell whether the secondary regulations will promote innovation and financial inclusion in Mexico, as capitalization requirements and other regulatory costs could seriously hinder the development of the incipient fintech ecosystem,” says Soni.
Brazilian lenders in focus
In Brazil, the Central Bank is also advancing with new rules, saying it hopes to encourage competition, increase lending and cut interest rates by safely facilitating fintech start-ups. It is taking comment until mid-November on draft rules that cover digital lenders, including peer-to-peer platforms.
The rules would stop peer-to-peer lenders carrying any credit risk at all – any new loans would have to be immediately matched with a lender – and it would offer lighter regulation for digital-only lenders, on the proviso that they don’t take deposits, says Renato Schermann Ximenes de Melo, a partner at Mattos Filho.
“The Central Bank is trying bring the fintechs into the traditional financial system, requiring them to obtain proper approvals with the authorities but under a lighter type of regulation,” says Ximenes.
But it’s not clear exactly how much lighter the regulation will be for the new companies, he says. For the companies that will now have to prove that they comply with the new rules, the costs of compliance will certainly be noticed.
“The fintechs have complained a lot, saying the Central Bank has oversimplified the rules and that it has not really lightened as much as the fintechs would expect the burden that comes with regulation,” he adds.
On the other hand, established banks worry that start-ups will undercut them, thanks to lower compliance costs compared to full-service institutions. “It’s hard to say who the Central Bank has actually made happy with these new rules,” says Ximenes.
Others are more optimistic, though. The rules would allow start-ups to operate with less capital than if they were a fully-fledged financial institution, says Fischer.
For regulators, emulating the payments rules to help the online credit industry boom without provoking a bust is no easy feat. LF