Fintech in Brazil

Historically, the provision of financial services in Brazil has been concentrated in a small number of players. Nonetheless, in the last decade a growing number of new entrants, especially fintech companies, are increasing their market share mostly due to reforms of the payments sector, the growth of e-commerce and the diffusion of digital means within its population.

Some numbers help to see this trend, as there are around 900 Fintech companies in Brazil (an increase of 30% since last year), and around USD 2 billion were invested in them during 2020 (an increase of 70% since last year). More commonly, Brazilian fintech companies are present in sectors such as payments, back-office, credit provision and insurance, although recently we have seen an increase in the number of companies offering compliance and risk management services, as well as crypto-related business.

Moreover, although Fintech companies are spread all over Brazil and there are some relevant clusters elsewhere, more than half of them are concentrated in the state of São Paulo.

The Central Bank of Brazil ("Central Bank") regulates fintech companies that operate in the credit provision and payment segments. The legal framework is established by Law No. 4,595 of 31 December 1964, for financial institutions and the provision of credit services, while Law No. 12,865 of 9 October 2013 regulates the payment industry.

The Brazilian Securities and Exchange Commission ("CVM") regulates fintech companies that trade with securities (such as digital securities brokers, equity crowdfunding platforms, and platforms that trade with security tokens). The legal framework for securities offerings and trading is established by Law No. 6,385 of 7 December 1976.

As for insurtechs, they are regulated by the Superintendence of Private Insurance ("Susep"), for which the legal framework is established by Decree No. 73 of 21 November 1966.

While these are the main Statutes that govern Fintech, it is important to note that most of the regulatory provisions arise from the regulators themselves, as administrative resolutions that are constantly updated.

Brazilian regulators are overall supportive of fintech companies, seeing them primarily as an opportunity to foster competition and financial inclusion in the financial services industry. For instance, the Central Bank is leading meaningful initiatives, such as the implementation of the Open Banking ecosystem, the instant payments system (represented by the new payment arrangement managed by the Central Bank, with the PIX brand), and the Regulatory Sandbox. Similarly, both CVM and Susep are implementing regulatory sandbox initiatives.

Despite having lower growth in 2020 (28%) than in 2019 (33%), Brazilian fintech companies still showed significant success, even during the COVID-19 pandemic.

This success had as one of the main factors the pandemic itself since the sectors most in-demand during the pandemic are those with many fintechs. For example, more people and companies turned to fintechs, rather than traditional banks, for credit. Also, the increase in the number of online transactions accelerated the demand for payment fintechs.

Moreover, it is important to note that the government and the regulators enacted several emergency laws and other initiatives, many of which were aimed at using Fintech companies as catalysts, with the main objective of preserving jobs, helping small and medium-sized companies, and protect the financial industry.

Brazilian regulatory bodies are showing increasing interest in bringing innovation and competition to the ecosystem. On the other hand, fintechs may still have to face conditions that generally apply to companies operating in Brazil. Tax and labour laws in Brazil are rigid systems, requiring a cautious action plan for newcomers, to reduce liabilities and expenses.

Prudential regulation of the payments sector and other barriers to entry are slowly increasing, as the Central Bank notes that a good number of new entrants have already found their way into the market, making this the ideal time for a sprint before regulatory demands level off between new and incumbent players.

Also, even though promising changes are expected in the near future, the credit sector is currently highly centralized by traditional institutions (i.e. banks) and barriers to entry are significant, creating competitive barriers for fintechs acting in this segment.

Moreover, the increase in the number of players is causing an increasing number of antitrust accusations and disputes, as well as stirring up battles in the field of public policy.

The year 2021 promises to be very eventful in the fintech arena, as some important initiatives start to consolidate and show their disruptive potential, as:

1. the Open Banking ecosystem begins operations,
2. the instant payment arrangement (PIX), already a success story, evolves into new services,
3. the mandatory registry of credit card receivables in centralized databases comes into force and
4. the Regulatory Sandbox initiatives of multiple regulators begin their first cohorts.

Also, it is expected that two very relevant Bills proposed by the Central Bank will further engage the financial industry: one by opening the foreign exchange markets to new players and for the provision of new services and the other by modernizing resolution regimes for regulated institutions. Both bills carry special potential for the use of digital platforms, smart contracts and crypto assets, thus mobilizing the fintech industry.