New Brazilian central bank regulations provide legal certainty for fintechs operating in the country and might mean increased competition in Brazil's banking market, says a Pinheiro Neto Advogados partner.
The new regulation, which was introduced on 26 April, allow fintechs to operate under two different models: Sociedade de Credito Diretos (SCDs) and Sociedade de Emprestimo entre Pessoas (SEPs). SCDs allow fintechs to use their funds to lend directly to certain qualified investors, such as financial institutions and investment funds, through an online platform. Meanwhile, SEPs let fintechs provide peer to peer lending. Under this model, a fintech cannot use their own funds to lend, but they can provide an electric platform through which a lender and a borrower can conduct transactions. The SEP model has a cap of 15,000 reais (US$4,220 dollars) for each operation.
Both company structures can provide credit analysis, insurance services and issue electronic coins. Like other financial institutions, these companies will be connected to the central bank data system.
Pinheiro Neto was a driving force behind the recent changes. Back in 2014, when fintechs were unknown to most of the Brazilian market, the firm agreed to advise some of these companies, sharing the risks of investing in an unknown territory by agreeing to defer legal fees until the business was successfully operating.
Pinheiro Neto partner Bruno Balduccini says the regulator's move came as a "good surprise." "The central bank has shown itself to be quite open to new technologies and this new regulation leaves Brazil side by side with other jurisdictions which prioritise innovation," he says. Balduccini adds that fintechs are now rushing to get central bank approval and operate under these new regulations.
Fintechs came to Brazil to fill a position major financial institutions – which dominate the concentrated Brazilian market – had ignored. "The banks are not particularly keen on providing services to low-income consumers or to very small companies," explains Balduccini.
Fintechs' arrival on the Brazilian financial market may help cut costs for retail consumers and companies through technology and by increasing competition. "The central bank wants to foster competition as it may help to reduce interest rates which are very high in Brazil," notes Balduccini. "It is very difficult for new players to join the market with its current structure, so the central bank sees fintechs as a good opportunity to break this barrier."
The first Brazilian fintechs operated with the support of financial institutions already regulated by the central bank. As they developed, they started to present new ideas to the regulators. This process was encouraged by the creation of a fintech association called ABFintech.
Pinheiro Neto has worked closely with many ABFintech members. "The firm's name provided legal security to the projects which were well received by the regulator," says Balduccini. "By helping these companies our firm is also helping to promote innovation which has an important role to play in the country's economy."
Balduccini says well-established banks and financial institutions are also paying close attention to new fintech innovations because they could cut bureaucracy. They may even help develop new fintech-based practice like open bank and blockchain technologies. The former uses application programming interfaces to create, share and access financial data, while the blockchain is the technology behind bitcoin. It creates an encrypted ledger of all financial transactions conducted through a peer-to-peer network, which are then shared with the network's users to combat illicit practices.
Still, while the new fintech regulations are enough to operate, other regulatory changes may be necessary in the future. "We are testing new ground, so there are many areas where we need to explore," Balduccini says. Among the companies Pinheiro Neto wants to support are fintechs, which rely on blockchain technology. "We will assess how robust they are, and if a project is serious and promising we will provide the legal support they need to innovate," says Balduccini.