Bloomberg Línea — Last Friday, the Brazilian Central Bank adjusted the regulatory asymmetry for fintechs, toughening capital requirements for payment institutions that want to offer credit.
After regulatory changes in 2013 to put competition in Brazil’s concentrated financial market, the Central Bank now raises the bar so that large fintechs do not generate a systemic risk to the financial system. Nubank (NU), for example, does not have the same license as a bank. The company is licensed by Brazil’s Central Bank as a payment institution.
With the new change, financial institutions led by payment institutions that have credit cards will have to start having capital requirements. In other words, whenever these companies cede a real in credit, they must have a proportionate percentage in the capital, which is a match to the capital requirements for incumbents.
What the new Central Bank rule says
The new resolution brings a gradual increase in the capital requirement for payment institutions, which in practice only impacts the business model of large fintechs, such as Nubank, PagSeguro (PAGS), PicPay, and Mercado Libre’s fintech arm Mercado Pago, for example.
The new rules begin to take effect in January 2023 and will be fully in force from January 2025. The rule classifies fintechs into three groups, each of which has a separate capital requirement.
The type 1 group includes conglomerates led by financial institutions, with prudential segmentation already in place. Type 2 includes conglomerates led by companies licensed as payment institutions and not consolidated by financial institutions or other entities licensed by the Central Bank.
Type 3 is the conglomerate led by a payment institution and consolidated by a financial institution or other entity licensed by the Central Bank. This is where Nubank, for example, is featured.
Prudential regulation dictates how to weigh risk and what kind of capital requirements the fintech should have within its balance sheet to guard against risk in the credit portfolio.
“What the Central Bank is proposing is that somehow these payment institutions, like Nubank, have the same credit card product requirements that a normal bank has,” explains João Bragança, senior director at the German consultancy Roland Berger.
Brazil’s Central Bank proposes that whenever there is a credit portfolio originated by a credit card, these fintechs will have to do the calculations in the same way a traditional bank does. The capital requirement will be progressive on the total value of risk-weighted assets: 6.75% in 2023, 7.5% in 2024, and 8% from 2025.
What analysts say
Credit Suisse analysts Bruna Amorim, Marcelo Telles, and Daniel Vaz said in a report that regulatory asymmetry between banks and payment institutions was already a topic of debate in Brazil as fintechs gained greater relevance and scale.
When it IPO’d (initial public offering) in 2021, Nubank was even more valued than Itaú, becoming the most valuable financial institution in Latin America. Credit Suisse analysts consider that the new rules fulfill the role of safeguarding systemic risk while leaving the doors open for competition because of the proportionality principle, with a phased implementation of the new regulation.
Bragança adds that the impacts of the new regulation are not much different from what was already expected: “We have a phasing from the previous regulation to the new regulation until January 2025, which facilitates the management of the impacts that this new regulation may have and in some way facilitates business planning”, he said.
On the impact of the regulation on type 3 institutions, i.e. financial institutions led by a payment institution, Berger said the regulation is very much focused on the credit card. “What the Central Bank is doing is adapting the regulation to what is the transformation of the market itself,” he said.
When the Cenbank, in a purposeful way, over the last decade, created a regulation directed towards innovative business models migrating to a pro-competition stance, fintechs such as Mercado Pago, PagSeguro, Picpay, benefited. Now, what the Brazilian Central Bank does, is like a “step back”, according to Berger, as these innovative business models have grown and put pressure on large competitors, which was the initial goal.
“Now a readjustment had to be made with all these capital requirements and this equalization of the regulation of a banking institution. Still, there is graduation in what is being created by the Cenbank. What changed on Friday is very much focused on fintechs that have systemic risk. We don’t have a big impact on a small fintech that may emerge tomorrow.”