Interchange fees — how much a merchant pays to the card issuer every time a client swipes their card — have a cap in Brazil, as per a recent decision from the central bank.
The regulator says it will lower costs and promote electronic payments. For Brazilian fintechs already struggling amid the global crisis, it is a significant blow to their revenues.
Last month, Brazil’s regulator said it would set a previously non-existent 0.7% cap on interchange fees for prepaid cards issued by fintechs. The decision comes after debate among banks and fintechs, with traditional lenders demanding equality in treatment. Even though lenders now face a slightly lower cap of 0.5%, it brings fintech regulation closer to the banks.
The new rule goes into effect next April. It represents a significant setback for fintechs, as they typically give out free cards to customers and make revenue from the transactions.
Affects fintech revenue
“This affects fintech’s main revenue directly,” Henrique Marise, Payments Executive Manager at Banco Will, told Fintech Nexus. The case is especially worrisome for startups that offer payment services, such as digital wallets.
“In those cases, the interchange is the company’s main revenue, most importantly at the beginning of the operation.”
Stocks of the few publicly traded fintechs in the country dropped following the announcement. Shares of Nubank and PagSeguro have performed poorly in recent weeks, albeit in a global risk-aversion context of falling prices.
Many financial technology companies in Brazil have grown massively in size over the past few years. In most cases, payments have been a starting point to penetrate the market and attract customers. After consolidating their user base, they move to other financial products.
For that matter, leading digital bank Nubank started in 2013 with a purple prepaid credit card. With that leading product, it amassed users across the country and now reports over 70 million clients. It was free, easy to get and its interface was user-friendly.
Fintech cards became ubiquitous
As prepaid fintech cards became ubiquitous in Brazil, the central bank set the cap to reduce costs for merchants that accepted electronic payment methods. Fintechs do not issue debit cards like banks but prepaid cards. These are similarly used but bear different regulations.
The regulator said the new rules would “increase the efficiency of the payments ecosystem and encourage the use of cheaper payment instruments” by retailers.
But undoubtedly, fintechs are taking a toll.
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Following the announcement, Nubank issued a statement saying interchange fees on prepaid cards accounted for 7.0% of the company’s total revenue in the past year. If those caps had been in place, the digital bank said, it would have had a negative effect of 2.9% in income.
To be sure, Nubank, like other large fintechs in Brazil, has slowly grown into a diversified business to avoid exposure to a single product.
Expansion into other products
Eventually, the company pivoted to virtual accounts, credit, crypto exchanges, investments, and insurance. For this reason, analysts think the impact could be somewhat contained. “From now on, Nubank will expand its portfolio and seek greater penetration of its other products in its current customer base,” Bruno Diniz, a fintech advisor, told Fintech Nexus.
At any rate, the regulation will reinforce fintechs’ pursuit of more efficient models. In the context of lower capital availability, startups in the sector face demands from investors to shorten their path to profitability.
“Companies now need to seek more efficiency or adapt their business model to overcome this revenue loss,” Marise said.
