Banco Central do Brasil, the central bank of Brazil, is considering putting the brakes on tougher regulations for the rapidly growing fintech industry. Four sources familiar with the matter told Reuters. The country’s central bank has withdrawn a draft proposal that has been planned to be voted on last month by the National Monetary Council (CMN), the government’s top financial policy-making body.
On November 18, the central bank proposed regulations will be discussed at an extraordinary meeting organized by the CMN. However, officials have so far not voted on the new rules, which aim to level the playing field between fintech firms and traditional banks, sources revealed. It is unclear why the central bank chose to delay the passing of the regulatory change but left a multi-billion-dollar sector on tenterhooks.
The proposed changes want to increase the minimum capital requirements for fintech firms, according to their size, risk-weighted assets and transaction volume. Payment institutions in the country have been expecting the regulator to approve such proposed changes any time soon.
Two sources have disclosed that the delay does not necessarily mean that the central bank would water down the rules. However, a third source stated that the central bank department in charge of the regulatory adjustments has made a decision to carry out a review to ensure that the new regulations would not unnecessarily burden the sector.
It has been nearly a decade since Brazil’s central bank made reforms in the regulatory framework for payment institutions, putting them under its supervision and paving the way for the nascent fintech industry of financial startups using technology to simplify borrowing, transfers and payments. The central bank introduced different regulations to create more competition for the old banking sector dominated by a number of traditional banks and to break the traditional business practices of high lending rates in Brazil.
Currently, the impact of such changes involves a rapidly growing Brazilian fintech industry. For instance, Brazil's most prominent fintech company, Nubank, recently listed its shares on the New York Stock Exchange, a move that made the company’s value stand at $50 billion. The valuation makes the fintech bank to become the most valuable financial institution in Latin America.
The new regulations were meant to be announced as Nubank’s debut which occurred last month. Nubank disclosed in its prospectus that under the new rules, that would be subject to a 60% higher minimum regulatory capital or 2.1 billion reals ($367.55 million). Nubank’s impressive IPO follows the increase of other fintech firms in Brazil, such as PagSeguro, Stone and PicPay, which have all obtained millions of customers, raised venture capital financing and either listed their operations or plan to do so.
Traditional banks are increasingly crying foul and urging the central bank to bring highly successful fintech firms into line. But, since more than 1000 fintech firms in Brazil have taken different paths, the introduction of new rules by the central bank would be a complex venture. Fabiano Camperlingo, the President of SumUp, a mobile payments company in Brazil, talked about the development: "If the dose is wrong, the central bank can create barriers to entry and even make business unfeasible."
Fintech Eating Into Banks’ Business
The latest development comes after Brazil’s government recently planned to publish new regulations for fintech firms following public consultations by the country’s central bank last month. The authorities stated that these regulations were discussed at an extraordinary meeting prepared by the CMN. The public consultations were published in 2019 after established big banks complained that fintech firms were getting special treatment with lax regulations. In addition, the consultations pointed out the need to increase capital requirements of the large fintech companies such as Nubank, PagSeguro, and Stone.
However, Brazilian authorities stated that they would attempt to continue encouraging startups because fintech firms are increasing competition and bringing innovation that is making the big banks improve their business operations. Fintechs not only promote competition and financial inclusion, but also the efficiency of the national financial system. In Brazil, the ecosystem of fintech firms is diversified, and they operate in several market segments such as insurance, investments, loans, financial management, payments, credit, private financing, debt negotiation, cryptocurrencies and distributed ledgers.
