The central bank of Brazil eased regulation on the fintech sector in the country, a much welcome respite for many of the new entrants in the industry as the economy deteriorates and inflation, although on a downward trend, is way above target.
The regulator postponed the implementation of a new prudential capital regulation by six months, giving flexibility to companies in the sector to adjust their business models amid a challenging scenario for local fintechs. Inflation is running at 6.5%, while an ultra-high Selic rate –from a record-low of 2.0% in 2021 to 13.75% in 2022– eats away at families’ capacity to repay.
While it has relaxed deadlines for companies (which benefits large fintechs in Brazil), it has also made it easier for smaller-sized companies to obtain a license, a sign seen as supportive of the sector.
“We are going through a delicate phase for retail, and this measure is welcome as it provides a more flexible environment for companies,” Jihane Halabi, a fintech adviser and book author in Brazil, told Fintech Nexus. “It provides new entrants with a longer period of adjustment and additional breath to adjust their direction in somewhat uncertain times.”
Brazil’s fintechs have grown in size
Earlier in the year, The Central Bank had improved prudential rules for payment institutions (IPs), a category typically assigned to financial technology companies in the country. In practice, laws already followed by “banks” were applied to certain fintechs, although on a proportional basis. As a result, the regulator began to demand more capital, especially from the largest payment institutions.
“Payment institutions in Brazil reached a high degree of complexity in the last decade so that the original prudential regulation from 2013 became inadequate,” Aylton Gonçalves, Senior Associate at BBL Advogados, said to Fintech Nexus. “These companies started to incur new risks resulting from expanded operations, especially credit risk, but also liquidity and market risks.”
The new regulation was expected to come into effect in January 2023, with full implementation as of 2025. However, with this new disposition, the deadline is postponed in the face of a more challenging scenario, saving fintechs some regulatory costs for the time being.
Implementation delays
However, the regulator did not acknowledge economic stress in justifying its decision, but rather a delay in setting the necessary infrastructure from the companies.
“The development and necessary adjustments in management systems and generation of prudential information by the regulated institutions will demand a longer period of adaptation than initially indicated by the regulator,” the BC said in a regulatory filing. “The Central Bank of Brazil understands that the new deadline will be sufficient for the necessary adaptations,” he added.
The requirement, more significant for large fintechs, will now come into effect on July 1, 2023, giving these companies extra time to adjust capital.
The largest fintech ecosystem
Brazil is the largest fintech ecosystem in Latin America, with 771 different companies as of 2021, which amounts to almost a third of the entire regional hub. As elsewhere in the region, its growth has been meteoric, especially during the Covid-19 pandemic. Since 2019, the number of fintech startups has grown by almost 70%.
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Large fintech companies have shown signs of stress in the past few quarters. Companies such as Nubank, the most prominent digital bank in Brazil, reported growth in net income and revenue, yet it acknowledged investors of a rise in delinquencies. That was leading the online bank to be especially cautious when it came to granting new credit.
The new prudential rule for payment institutions foresees that the capital requirement for larger payment institutions will reach 10.5% by 2025. The condition will be implemented gradually. In 2023, it will be 6.75%, and in the following year, it will be increased to 8.75% to reach the total percentage later.
