Brazil: Fintech

The Brazilian Payments System (“SPB”) is currently governed by Federal Law No. 10,214/01, and Resolution No. 2,882/01, issued by the Brazilian National Monetary Council (CMN). In general terms, the SPB comprises the entities, systems and procedures related to transfers of funds and other financial assets, or related to the processing, clearing and settlement of payments in all forms.

In 2013, Federal Law No. 12,865/13 was promulgated with the purpose of governing payment schemes and payment institutions that are part of the SPB. This law sets forth the basic legal framework of the Brazilian payments industry, defining payment schemes, payment arrangers and payment institutions, among other matters. Federal Law No. 12,865/13 also determines that the Central Bank of Brazil (BCB) has authority to further regulate the payments industry, in accordance with the general principles set forth by the Brazilian National Monetary Council.

Shortly after Federal Law No. 12,865/13 was promulgated, the Brazilian National Monetary Council issued Resolution CMN No. 4,282/13, which established the general principles that should be observed by the Central Bank of Brazil while regulating the payments industry. The Central Bank of Brazil, in turn, has enacted a set of regulations to govern the main issues associated with the payments industry, in particular, (i) Circular BCB No. 3,682/13, which governs payment schemes and payment arrangers; (ii) Circular BCB No. 3,885/18 (later revoked and superseded by Resolution BCB No. 80/21 and Resolution BCB No. 81/21), which governs payment institutions; (iii) Circular BCB No. 3,680/13 (that will be revoked by Resolution BCB No. 96/21 on March 1, 2022), which governs payment accounts; and (iv) Circular BCB No. 3,681/13, which governs risk management and governance of payment institutions.

In the subsequent years, the Central Bank of Brazil has enacted additional regulations to govern other aspects related to the operation of payment institutions, such as regulations on compliance, internal audit and cybersecurity policies. Furthermore, certain specific laws and regulations originally directed to financial institutions are also applicable to payment institutions, covering matters related to know your customer (KYC) and anti-money laundering (AML) obligations, fees, bank secrecy obligations, special insolvency regimes, special liabilities of controlling shareholders, directors and officers, among others.

Yes. In Brazil, payment services can be provided by financial institutions (such as banks) and also by certain non-financial institutions (or non-bank entities), subject to the specific requirements and limitations set forth by the applicable laws and regulations. For purposes of this question, we highlight the following non-financial institutions that are able to provide payment services in Brazil: (i) payment institutions; (ii) sub-acquirers; and (iii) eFXs.

(i) Payment Institutions:

In line with our comments to question 1 above, Federal Law No. 12,865/13 created a new type of entity called “payment institution”.

Payment institutions are different from financial institutions and are subject to a specific legal and regulatory framework. In this context, certain types of payment institutions are currently allowed by the payments regulation to start operations before obtaining a license or authorization to operate by the Central Bank of Brazil. This feature of the Brazilian payments regulation has been an important factor to drive the recent growth of the payments industry in the country.

The main regulations applicable to payment institutions are Resolution BCB No. 80/21 and Resolution BCB No. 81/21, which revoked and superseded Circular BCB No. 3,885/18 on May 3, 2021.

Payment institutions are allowed to provide payment services, as listed in Federal Law No. 12,865/13, and must operate in the context of one or more payment schemes.

There are currently four types of payment institutions regulated in Brazil: (i) issuers of electronic currency (or e-money issuers); (ii) issuers of post-paid payment instruments; (iii) acquirers; and (iv) payment initiation service providers (“PISP”).

As a general rule, payment institutions that are issuers of post-paid payment instruments and/or acquirers are only obliged to file for an authorization with the Central Bank of Brazil if/when the regulatory transactional volume is reached: BRL 500 million in payment transactions, aggregated in the previous 12 months period.

The regulatory regime applicable for payment institutions that issue electronic currency was altered by Resolution BCB No. 24/20. The Resolution BCB No. 24/20 amended Circular BCB No. 3,885/18, the main regulation applicable to payment institutions at the time. In view of that, it is worth mentioning that Circular BCB No. 3,885/18 was later superseded by Resolution BCB No. 80/21, but the wording related to the regulatory regime applicable for payment institutions that issue electronic currency was maintained). Before Resolution BCB No. 24/20 was enacted, payment institutions that issued electronic currency were only obliged to file for authorization with the Central Bank of Brazil if/when one of the following regulatory transactional volumes was reached: (i) BRL 500 million in payment transactions, aggregated in the previous 12 months period; or (ii) BRL 50 million in funds held in prepaid accounts, aggregated in the previous 12 months period.

Under the new regulatory regime originally set forth by Resolution BCB No. 24/20 and later incorporated with minor amendments by Resolution BCB No. 80/21, payment institutions that issue electronic currency: (i) and that were in operation by March 1, 2021 may continue to provide payment services and will only be obliged to file for authorization with the Central Bank of Brazil if/when certain regulatory transactional volumes are reached (such transactional volumes will gradually decrease until March 31, 2023 – when all such payment institutions will be obliged to file for authorization by the Central Bank of Brazil to operate, irrespectively of reaching any specific transactional volume); or (ii) that commenced operations after March 1, 2021 are obliged to obtain prior authorization by the Central Bank of Brazil, before initiating the provision of the relevant payment services.

Finally, the newly created PISPs will be obliged to obtain prior authorization to operate by the Central Bank of Brazil (please refer to our comments to question 4 below for additional details on the open banking ecosystem).

(ii) Sub-acquirers:

Due to the growing relevance of sub-acquirers in the Brazilian payments industry, on March 26, 2018, the Central Bank of Brazil created a regulatory definition of sub-acquirer by amending Circular BCB No. 3,682/13.

According to this definition, a sub-acquirer participates in one or more payment scheme(s), and: (a) enables the end user (merchant) to accept payments using a payment instrument issued by a payment institution or a financial institution that is part of the same payment scheme, and (b) takes part in the settlement of payment transactions and is a creditor of the acquirer.

Currently sub-acquirers are not subject to a license or authorization by the Central Bank of Brazil to operate, but are obliged to comply with certain (sparse) regulatory obligations imposed by the Central Bank of Brazil, as well as contractual obligations imposed by payment arrangers of the payment schemes to which the sub-acquirer participates. In order to operate, sub-acquirers also need to have in place at least one sub-acquiring agreement with a local acquirer and must comply with the respective contractual obligations imposed by the acquirer as well.

Sub-acquirers have played an important role in the payments industry over the past years, by contributing to the expansion of the acceptance of payment instruments in several sectors of the economy, in particular marketplace, e-commerce and small businesses.

(iii) eFX:

In September 2021, the National Monetary Council and the Central Bank of Brazil updated the foreign exchange regulation considering technological innovations and new business models related to international payments and transfers. The new rules seek to promote a more competitive, inclusive and innovative environment for providing services to individuals and companies involved in cross-border transactions and transfers.

In this context, the National Monetary Council and the Central Bank of Brazil consolidated and modernized the regulation of international payment or transfer services in the foreign exchange market, providing uniform treatment for purchases of goods and services carried out with the participation of issuers of international payment cards, international payment facilitators and intermediaries and representatives in international orders acquisitions. Such services are now referred to in the foreign exchange regulations by the term eFX.

According to the newly issued regulation, the eFX is the international payment or transfer service that, through an exchange transaction or by means of an international transfer in reais, enables: (i) acquisition of goods and services in the country or abroad, (ii) current unilateral transfers, (iii) transfer of funds between an account in the country and an account abroad of the same ownership, and (iv) withdrawal of funds in the country or abroad.

The regulation established that the eFX services can be provided: (i) by institutions that are eligible to be authorized to operate in the foreign exchange market (e.g., certain institutions regulated by the Central Bank of Brazil), and (ii) by other legal entities exclusively to enable the acquisition of goods and services, limited to US$10,000.00 (ten thousand United States dollars) or its equivalent in other currencies (provided that these legal entities are not subject to authorization by the Central Bank of Brazil to operate).

In the past few years, the Brazilian payments industry has significantly changed, especially regarding digital payment methods and payment instruments.

The Central Bank of Brazil drew up an X-ray of the payments sector in Brazil last year and, as a result, published the “Retail and Cards Payment Statistics in the country”^[1]. The research indicates that the use of digital payment methods continues at full steam among Brazilians. Transactions carried out on mobile devices – cell phones and tablets, for example – reached 46,113 million in 2020. The number represents an increase of 35% compared to 2019 (34,170 million transactions).

In an aggregate analysis of retail payments and withdrawals made between the fourth quarter of 2018 and 2020, it was observed that the relative importance of prepaid cards increased significantly from 0.4% to around 8% in the period. This was a reflection of the increased participation of payment institutions in this market, since prepaid cards have been offered mostly by this type of institution.

The active card base increased in 2020, with emphasis on prepaid cards, which increased by 90%, followed by the debit and credit card basis, which increased 12% and 26%, respectively. However, the total amount of credit card transactions remained stable and debit cards had a small increase of around 5%, while the total value of credit and debit card transactions increased by 6% and 21%, respectively. Prepaid cards, on the other hand, had a significant increase, both in quantity and value of transactions, which grew by 90% and 81%, respectively, in 2020.

Finally, when talking about popular payment methods and payment instruments, it is also important to highlight the Brazilian instant payments ecosystem, called Pix. Launched in November 2020, Pix has contributed to the increase of the digitization of payments. Information compiled by the Central Bank of Brazil shows that more than 83 million individuals and more than 5.5 million companies have already adopted Pix. Since its launch, approximately 75 million Brazilians have used Pix, either to pay or receive. In other words, 45% of the adult population in Brazil has used Pix at some point. In April 2021, the amount of Pix surpassed the amount of TED, DOC, check and bank slip (boleto) combined. Transactions carried out by Pix (totalling 1,547 billion by May 2021) were already responsible for a transacted amount of more than BRL 1,109 trillion^[2].

References

^[1] Available for consultation at: https://www.bcb.gov.br/estatisticas/spbadendos. Accessed on September 27, 2021.

^[2] Available for consultation at: https://www.bcb.gov.br/detalhenoticia/545/noticia. Accessed on September 27, 2021.

In Brazil, the development and regulation of open banking took place gradually. Initially, open banking was unregulated and certain entities started to offer services based on the users’ provision of authentication information (such as password, PIN etc.) in order to enable such entities to have direct access to clients’ financial data held with financial institutions. In general, these services were based on the aggregation of financial data, such as the services provided by Account Information Service Providers (“AISP”) in the European Union (“EU”).

However, the absence of an open banking regulation in Brazil led to uncertainties and disputes between entities interested in offering aggregation services based on financial data and certain financial institutions that challenged this business model.

Meanwhile, the Central Bank of Brazil was evaluating the feasibility of implementing a regulated open banking ecosystem in the country and identifying the ideal structure to be adopted. In April 2019, the Central Bank of Brazil disclosed the fundamental requirements for the implementation of the open banking ecosystem in Brazil by means of a Letter (Comunicado) BCB No. 33,455/19, which presented the objective, definition, scope, regulatory strategy and actions towards implementation.

Afterwards, the Central Bank of Brazil has issued Public Hearing 73/19 to gather comments by market participants on the proposed regulation of the open banking ecosystem in Brazil. In 2020, the Brazilian National Monetary Council and the Central Bank of Brazil enacted the Joint Resolution CMN and BCB No. 1/20 and the Circular BCB No. 4,015/20 to officially regulate and implement the open banking ecosystem.

Similarly to the EU model, the Brazilian open banking regulation only allows the direct participation of regulated institutions, such as financial institutions, payment institutions and other institutions licensed by the Central Bank of Brazil.

The Brazilian open banking ecosystem enables regulated entities to share a significant amount of data and services, subject to prior consent by clients. In practical terms, this means that the Brazilian open banking ecosystem enables the provision of account information services, payment initiation services and other services to be developed in the future.

As a general rule, participation in the open banking ecosystem for purposes of account information services is mandatory for regulated institutions that are part of the prudential conglomerates under Segments 1 and 2 (which includes the largest financial institutions in Brazil).

Participation in the open banking ecosystem for purposes of payment initiation services is mandatory for authorized financial institutions and payment institutions that offer deposit accounts and prepaid payment accounts to clients, respectively, and also to payment initiation services providers (“PISP”).

PISPs are a new type of payment institution that were regulated by the Central Bank of Brazil on October 22, 2020, via Resolution BCB No. 24/20 (which has altered Circular BCB No. 3,885/18), later revoked and superseded by Resolution BCB No. 80/21 and Resolution BCB No. 81/21. Under the new regulation, PISPs are obliged to obtain a prior authorization to operate by the Central Bank of Brazil.

The Brazilian open banking regulations and Resolution BCB 80/21 do not create a new type of regulated entity to provide account information services (AISP). These services may be provided by authorized financial and payment institutions, subject to the terms and conditions of the regulation.

The open banking in Brazil is being implemented in different stages, from February 2021 to September 2022. Up to the date of preparation of this Q&A, the part of the open banking ecosystem that was implemented includes (i) disclosure of customer service channels and products and services provided by participating institutions, (ii) sharing of clients’ or their representatives’ registration information, and (iii) sharing of clients’ transactional data related to certain financial or payment products and services.

Moreover, Joint Resolution CMN and BCB No. 1/20 also delegates to market participants the self-regulation of certain key operational aspects of the open banking ecosystem in Brazil (such as technological standards and procedures, standardization of layouts etc.). This self-regulatory initiative is being supervised by the Central Bank of Brazil and is being prepared alongside with the stages for implementation of the open banking ecosystem in the country.

Finally, it is worth mentioning that in Brazil it is being implemented the so-called open finance, associated with the jointly implementation of open banking and open insurance. In view of that, in July 2021, the Superintendence of Private Insurance has published Resolution CNSP No. 415/21 and Circular SUSEP No. 635/21, which provide guidelines for the implementation of the open insurance system – open insurance.

In line with open banking, open insurance is expected to be implemented in phases and gradually.

The Brazilian data protection framework presents a set of general and sectoral laws and regulations that impact the provision of financial services. Under a general perspective, Federal Law No. 13,709/18 (“General Data Protection Law” or “LGPD”), which has a very broad scope, governs the rules applicable to all entities that process personal data in Brazil (including financial institutions and payment institutions). From a sectoral perspective, there are relevant laws and regulations, such as Complementary Law No. 105/01 (“Bank Secrecy Law”, applicable to financial and payment institutions), Federal Law No. 12,414/11 (applicable to credit bureaus), Federal Law No. 12,865/13 (“Internet Law”, applicable to entities that sell products or offer services online), Decree No. 8,771/16 (which regulates Internet Law), Resolution CMN No. 4,893/21 and Resolution BCB No. 85/21 (that set forth cybersecurity requirements for financial institutions and payment institutions, respectively) and the Joint Resolution CMN and BCB No. 1/20 (that regulates the open banking ecosystem).

The financial sector was one of the first regulated sectors in Brazil to have specific laws and regulations governing data protection (or bank secrecy), given the sensitive nature of data on financial services and products. In this context, Federal Law No. 4,595/64, and later the Bank Secrecy Law determined that information regarding financial services and products provided to clients, both individuals and legal entities, is confidential and may only be disclosed in very specific situations, such as disclosure with the client’s express consent.

Federal Law No. 12,414/11 regulated the enrolment of individuals and legal entities in databases designed to support credit score and, originally, also relied on consent. However, Complementary Law No. 166/19 implemented significant changes in Federal Law No. 12,414/11, in order to facilitate the inclusion of individuals and legal entity`s data in these databases. The Brazilian National Monetary Council and the Central Bank of Brazil also created certain regulatory obligations to financial institutions regarding the sharing of clients’ data related to credit operations with credit bureaus, aiming at supporting and strengthening this legal initiative (please refer to Resolution CMN No. 4,737/19 and Resolution BCB No. 14/20).

In 2013, the Internet Law introduced specific provisions to address concerns associated with processing of personal data online. Among other obligations, the Internet Law required free, express and informed consent by the data subject for the data processing, the provision of clear and complete information about the processing to the data subject and the protection of certain rights of the data subject, such as deletion of personal data.

Five years later and influenced by the promulgation of Regulation (EU) No. 2016/679 (that created the General Data Protection Regulation – GDPR), Brazil finally established a general and comprehensive legal framework on data protection by promulgating LGPD. LGPD requires a lawful basis to process personal data, the provision of clear information to the data subject, internal security and organisational measures to protect personal data, mandatory adoption of certain controls regarding the sharing of personal data with third parties, among other obligations.

LGPD has entered in force in 2020 and, in particular, the sanctions imposed by such law have entered in force in the second semester of 2021. The Data Protection National Authority (ANPD) is still evaluating and consulting the market in order to impose infralegal regulation on the matter. In this scenario, it is still unclear how the enforcement of LGPD by the Courts and by ANPD will be made. Nonetheless, it is certain that LGPD requires the adaptation of business models of financial and payment services providers to the new legal obligations and that data privacy is being taken into account in the design of new products or services.

Certain operational challenges have arisen as a result of LGPD, such as limitations on the use of personal data collected from clients, potential restrictions to share data with commercial partners and/or the need to comply with additional requirements in order to be able to transfer data to other countries. Entities that rely on the processing of a massive quantity of personal data for marketing, credit score or cross-selling have been more impacted by LGPD. However, we understand that LGPD has not been and will not be a major hurdle or even an agent to decelerate the fast pace of financial and payment services development in Brazil.

In terms of data security, since 2018 financial institutions and payment institutions are required to comply with the Central Bank of Brazil’s cybersecurity regulations, which mandate the implementation of cybersecurity policies and compliance with certain obligations in the outsourcing of cloud computing and data storage services. Therefore, the impacts of LGPD requirements in this regard have been less relevant (given that the Central Bank of Brazil`s regulation on cybersecurity tends to be more stringent).

Finally, with respect to open banking, the Central Bank of Brazil has determined that the freely given, informed, unambiguous and prior consent by the client is a requirement for sharing client`s data or services with another institution within the open banking ecosystem.

Based on our comments above, financial and payment services providers are subject to a variety of data protection laws and regulations in Brazil. The applicability and impacts of each of such laws or regulations should be evaluated on a case by case basis, since they may vary according to the type of institution, the activity performed, and the ecosystem involved. Notwithstanding the above, as data protection laws and regulation are quite recent, the legal framework for the enforcement of these rules is still under development.

One important measure to be highlighted was the permission that was granted to payment institutions to commence operations without the need of a prior license or authorization by the Central Bank of Brazil (please refer to our comments to questions 1 and 2 above). In this context, payment institutions were only required to file for authorization if/when one of the transactional volumes defined in the regulation was reached.

Therefore, in practice, this meant that a payment institution had the opportunity to test the viability of its business model, offering payment products and/or services before having to incur in all regulatory costs that are required from authorized payment institutions (the entity had only to bear such costs after reaching one of the transactional volumes and filing for authorization with the Central Bank of Brazil).

However, this scenario was partially altered by Resolution BCB No. 24/20, which alters Circular BCB No. 3,885/18, later revoked and superseded by Resolution BCB No. 80/21, that maintained, with minor amendments, the wording of Resolution BCB No. 24/20. Under this new regulation, the benefit mentioned above is only applicable to payment institutions that operate as issuers of post-paid payment instruments, acquirers and/or, to a certain extent, issuers of electronic currency that were in operation by March 1, 2021^[1]. Payment institutions that wish to initiate activities as issuers of electronic currency after March 1, 2021 and the newly created payment initiation services providers have to obtain prior authorization to operate by the Central Bank of Brazil (please refer to our comments to question 2 above).

In addition, the Central Bank of Brazil has stated its purpose of promoting financial inclusion, competitiveness, transparency, financial education and sustainability in a public document entitled Agenda BC#^[2]. This initiative focuses on resolving structural challenges of the Brazilian National Financial System (“SFN”) by, among other measures, fostering technological innovation in the local market.

The Central Bank of Brazil has also adopted several measures in the last years aimed at promoting competition in the financial sector. These measures include the implementation of the open banking and instant payments ecosystems (Pix). Both initiatives are important steps to incentivize financial innovation, facilitate the flow of data and funds in the market and increase competition.

In addition to the implementation of these new ecosystems, the Central Bank of Brazil has also incentivized innovation by launching, in May 2018, the Financial and Technology Innovation Laboratory (“LIFT”). LIFT is a program designed to promote the collaboration among academia, market participants, technology companies and startups, with the purposes of enhancing the efficiency of the SFN, reducing the cost of credit, and promoting financial citizenship. LIFT’s initial editions comprised, as finalists, 12 projects in 2018, 17 projects in 2019, 21 projects in 2020. In the 2021 edition, 11 projects were selected and are participating in the LIFT Lab, with the support of technology companies.

Finally, on October 26, 2020, the Brazilian National Monetary Council and the Central Bank of Brazil have enacted Resolution CMN No. 4,865/20 and Resolution BCB No. 29/20, which create a financial regulatory sandbox in Brazil. This regulatory sandbox is a controlled environment for testing financial and payment innovations, under the Central Bank of Brazil’s supervision. The regulatory sandbox framework was proposed by Public Hearing No. 72/19, which was subject to suggestions and comments by market participants.

The regulatory sandbox will happen in cycles of one year (which may be extended for an equal period). The first cycle of the regulatory sandbox was already enacted and regulated by Resolution BCB No. 50/20, which provides for the requirements for its establishment and execution by the Central Bank of Brazil, as well as the procedures and requirements applicable to the classification and authorization to participate in this environment.

The institutions interested in participating in the first cycle of the regulatory sandbox had to subscribe until March 19, 2021. The Strategic Regulatory Sandbox Committee (CESB – regulated by Resolution BCB No. 77/21), responsible for the execution of the regulatory sandbox, will select and authorize up to fifteen regulatory sandbox’s participants until November 26, 2021. After the disclosure of the final results of the selected participants, the first cycle of the regulatory sandbox will start in five business days.

References

^[1] Note that payment institutions that are issuers of electronic currency and that were in operation by March 1, 2021 are subject to decreasing transactional volumes and will ultimately have to file for authorization to operate by the Central Bank of Brazil, irrespectively of reaching any specific transactional volume.

^[2] Available for consultation at: https://www.bcb.gov.br/acessoinformacao/bchashtag. Accessed on September 27, 2021.

We do not foresee any major imminent risk to the growth of the fintech market in Brazil from a legal or regulatory perspective, although there is some tension caused by the consolidation of fintechs in the last years and competition with incumbent financial institutions. As mentioned in question 10 below, the Brazilian fintech market, at present, seems to have a high growth potential for the next years, taking into consideration the considerable growth experienced in the recent past, the Central Bank of Brazil’s positive attitude towards financial innovation and competition, as well as a developed legal and regulatory framework.

Notwithstanding the foregoing, certain amendments to the payments regulation introduced by Resolution BCB No. 24/20 (later adapted by Resolution BCB No. 80/21) may impose a minor setback to new payment institutions that are interested in operating as issuers of electronic currency (e-money issuers).

As mentioned in questions 2 and 6 above, payment institutions that decided to operate as issuers of electronic currency since March 1, 2021 have to obtain a prior authorization to operate by the Central Bank of Brazil (instead of being able to commence operations without prior license or authorization). Although these changes to the regulation may increase costs and compliance requirements by certain new payment institutions, we do not believe that the changes will pose a real threat to the general growth of the fintech market in Brazil.

In addition, there is a recent discussion between certain fintechs and incumbent financial institutions, which has in its core an allegedly regulatory asymmetry that would benefit fintechs. As a consequence, such financial institutions are urging for more regulation over fintechs and their activities.

If the Central Bank of Brazil decides to increase the regulation over fintechs in order to address the requests made by incumbent financial institutions, there may be an increase of the regulatory burden over fintechs.

However, as we have detailed above, the Central Bank of Brazil has introduced certain amendments to the payments regulation to adapt it to the recent growth of the fintechs market in Brazil (such as requiring prior authorization to operate as an issuer of electronic currency and payment initiation services provider). This indicates that the Central Bank of Brazil is monitoring the market and will increase the regulatory obligations applicable to fintechs if/when it deems advisable, irrespectively of any requests from specific sectors.

In Brazil, there are no specific tax incentives to encourage fintech investment. However, there are certain tax incentives that can be adopted by entities in this sector, such as Federal Law No. 11,196/05 (known as “Lei do Bem”). In other words: there are general tax benefits, which can also be used by fintechs, but are not limited to or specifically designed for fintechs.

In view of this, fintechs must be subject to the “common” taxation regimes, as follows: (i) Simples Nacional (with a maximum annual turnover of BRL 4,8 million); (ii) Presumed Profit (with a maximum annual turnover of BRL 78 million); and (iii) Actual Profit. In general, these regimes are related to the company’s annual turnover (months), and not to its specific activity (although there are some activities that can only be subject to Actual Profit – e.g., financial institutions).

From a tax standpoint, financial institutions and those equivalent to them are mandatorily subject to the Corporate Income Tax (“IRPJ”) and Social Contribution on Net Profit (“CSLL”) calculation through the Actual Profit. It is important to mention that the law lists the institutions subject to the Actual Profit, as follows (art. 257, caput and item II of Decree No. 9,580/18 – Income Tax Regulation “RIR/18”):

1. commercial banks;
2. investment banks;
3. development banks;
4. development agencies;
5. savings banks;
6. credit, financing and investment entities;
7. real estate credit entities;
8. brokerage for bonds, securities and foreign exchange;
9. credit entities for micro-entrepreneurs and small businesses;
10. distributors of bonds and securities;
11. leasing companies;
12. credit cooperatives;
13. private insurance and capitalization companies;
14. open complementary pension fund entities; and
15. entities that explore the securitization of real estate, financial, and agribusiness credits.

Notwithstanding the above, the determination of whether one regime is more beneficial than the other will depend on a case-by-case analysis (taking into consideration aspects such as the company’s profitability and annual revenue). It is also worth mentioning that the benefits of Lei do Bem are only applicable to companies that are subject to the Actual Profit (with taxable income).

In addition, another initiative to encourage small fintechs is Bill No. 6,625/13, which provides for a differentiated tax regime for initiatives that fall under the Special Treatment System for New Technology Companies (SisTENET). This Bill is still under discussion, and the proposal is to guarantee total exemption from federal taxes for 2 years (extendable for an identical period of time) to companies classified as startups. To take advantage of the benefits, a fintech would have to obtain a quarterly gross revenue of up to BRL 30,000 and maintain a maximum of four hired employees.

Note that, again, this is not a benefit aimed exclusively for fintechs, but for all companies considered “startups” and that the benefit will only be available if/when the Bill is approved.

Moreover, apart from tax incentives for fintechs, it is also worth mentioning certain mechanisms to attract investment to businesses in general, such as (i) the Angel Investor Law (Complementary Law No. 155/16), which provides incentives for investors who act as “angels” (i.e., help finance early-stage companies); and (ii) the Financier of Studies and Projects (Finep) acting as a public company to foster the technology sector, innovation and development of science.

As a final note, due to the COVID-19 pandemic, Brazilian authorities decided to postpone the payment of determined federal taxes by companies in general (for example, postponement of PIS/Cofins payable), on a short term. These postponements are applicable to all companies in general (including fintechs and startups).

In general terms, the growth in numbers of fintechs in Brazil has decreased in 2021 in comparison to 2020 due to the excessive growth in past years. In the first semester of 2021, according to the Fintech Report published by Distrito Platform^[1], there were very few new fintech startups when compared to 2020. In June 2021, according to the same publisher, Brazil had 1,174 fintechs registered.

However, when considering that investments made into fintechs in the first semester of 2021 were over a billion dollars, and the total number of deals was over 60 deals, we can still conclude that the opportunities for investment are still very much present.

The areas with the most significant investment in 2020 were the Digital Services area, with over USD 900 million, followed by credit, with an investment of USD 350 million. The fintechs have had their biggest investment in the Series F, with an amount of USD 400 million, followed by Series C, with an investment of almost USD 320 million^[2]. Recent changes in Brazilian Corporations Law (Law No. 14,195/21) and the enactment of the Startup Law (Complementary Law No. 182/21) are expected to foster investments in startups and simplify the incorporation and day to day life of startup companies.

References

^[1] DISTRITO, Inside Fintech Report 2021, São Paulo, Jun. 2021, available at: https://distrito.me/dataminer/reports/?report-sector%5B0%5D=113&report-content=. Accessed on September 15, 2021.

^[2] DISTRITO, Inside Fintech Report 2021, São Paulo, Jan. 2021, available at: https://distrito.me/dataminer/reports/?report-sector%5B0%5D=113&report-content=. Accessed on September 15, 2021.

We can highlight at least three main aspects that justify a move to the Brazilian market: (i) size and potential of the local market; (ii) recent growth of the fintech sector, and (iii) legal and regulatory efforts to create a favourable legal and regulatory framework.

Brazil has more than 212 million inhabitants, ranking as the 6th most populous country in the world^[1], and has a Gross Domestic Product – GDP of around USD 1,4 trillion, ranking as the 12th highest GDP in the world^[2].

Therefore, the Brazilian market is already a significant market and still has a lot of potential for further development, considering that a relevant part of the local population is still unbanked. In 2017, around one third of Brazilian adults were unbanked^[3]. However, as a result of governmental financial support granted to the population during the Covid-19 pandemic and the investment in new technologies by the financial sector and fintechs, this number has decreased to nearly 10% of the Brazilian population, according to recent researches^[4]).

Irrespectively of the substantial decrease in the unbanked population experienced in the recent past, there is still a lot of room to increase the offering and sophistication of financial and payment products and services to a large part of the Brazilian population.

In addition, according to the Brazilian’s Relationship with Money report⁵, prepared by the Central Bank of Brazil, the majority of Brazilians still use cash as a form of payment, instead of more complex forms of payment, such as payment cards, online transfers etc.

However, the recent changes in digitization and bankarization of the Brazilian population, in particular in connection with the governmental support mentioned above, had positive effects on the payments sector. In view of this, the number of transactions by means of debit or credit card has increased more than 50% since 2019, as well as the total amount of non-presential purchases has increased 46,5% within the period of 12 months as of June, 2020⁶.

The fintech sector is amongst the fastest growing sectors in Brazil and the country is well renowned for its vibrant fintech ecosystem. After a period of economic challenges and turbulence during the 80’s and 90’s, Brazil managed to develop a robust financial market, albeit highly regulated and more concentrated. During the last years, however, new market participants (in particular fintechs) were able to enter the market by offering innovative products and services at competitive costs. Throughout 2019, the sector attracted USD 910 million in investments, corresponding to 35% of the venture capital investments in Brazil accounted for in the period⁷.

According to the Global Fintech Ranking 2021⁸, Brazil is listed as the great fintech ecosystem in Latin America & Caribbean region and reached the 14th place in the world. In particular, the city of São Paulo is ranked as the 4th in the world ranking of fintech ecosystems, which shows the dynamism and appetite of the Brazilian market for fintechs.

Finally, the Central Bank of Brazil has adopted in the past years a favourable posture towards financial innovation and has fostered competition in the financial and payments industries. In addition to the measures adopted to encourage the entry of new participants and the offer of new products and services (please refer to our comments to question 6 above), the Central Bank of Brazil has been opened to discussions and suggestions, evidenced by the increasing number of public hearings proposed since 2017 (including public hearings related to credit fintechs, open banking, instant payments, regulatory sandbox and the updated of foreign exchange regulation).

Furthermore, the Brazilian regulations are usually in line with international regulatory frameworks adopted in well-developed jurisdictions (in particular the European Union), such as the rules governing open banking and instant payments.

The combination of a relevant economy, a dynamic fintech ecosystem and an innovation-friendly regulator tends to provide good business opportunities for fintech entrepreneurs.

References

^[1] Available for consultation at: https://data.worldbank.org/indicator/SP.POP.TOTL?contextual=max&locations=BR&most_recent_value_desc=true. Accessed on September 26, 2021.

^[2] Available for consultation at: https://data.worldbank.org/indicator/NY.GDP.MKTP.CD?locations=BR&most_recent_value_desc=true. Accessed on September 26, 2021.

^[3] Available for consultation at: https://globalfindex.worldbank.org/ . Accessed on September 26, 2021.

^[4] Available for consultation at: https://www.i-maxpr.com/s/0429/90.pdf; and https://cmsportal.febraban.org.br/Arquivos/documentos/PDF/pesquisa-febraban-relatorio.pdf.  Accessed on September 26, 2021.

^[5] Available for consultation at: https://www.bcb.gov.br/content/cedulasemoedas/pesquisabrasileirodinheiro/Apresentacao_brasileiro_relacao_dinheiro_2018.pdf. Accessed on September 27, 2020.

^[6] Instituto Propague. Mercado de pagamentos em dados, 2T 2021, available at: https://institutopropague.org/analises/mercado-de-pagamentos-em-dados-resultados-do-varejo-e-mercado-de-cartoes-no-tri/. Accessed on September 27, 2021.

^[7] DISTRITO, FinTech Report 2020, São Paulo, Apr. 2020, available for consultation at: http://conteudo.distrito.me/dataminer-fintech. Accessed on September 21, 2020.

^[8] Global Fintech Rankings, Findexable, 2021, available for consultation at: https://findexable.com/2021-fintech-rankings/. Accessed on September 27, 2021.

The current Brazilian immigration laws do not contain specific provisions aimed at encouraging or at hindering access to foreign talents in the fintech industry. Nonetheless, certain recent amendments to the immigration laws and regulations can be highlighted, as described below.

The main Brazilian immigration law is Federal Law No. 13,445, which is further regulated by Decree No. 9,199, both issued in 2017 (the “New Immigration Law”). The New Immigration Law simplifies a variety of administrative procedures required for admittance of immigrants in Brazil, by expediting the immigration process. These procedures tend to be more favourable for both local employers and foreign employees interested in working in Brazil.

Based on the amendments introduced by the New Immigration Law, the Brazilian Immigration Council (in Portuguese, Conselho Nacional de Imigração or “CNI”) has issued additional regulations to govern the concession of residence and temporary visas.

One of the regulations that may be particularly useful for fintechs has created rules that facilitate the granting of 1-year temporary visas for foreigners when there is the possibility of transfer of know-how and technology under a cooperation agreement entered into between a Brazilian company and a foreign company (as per Resolution CNI No. 4/17).

Additionally, CNI has also facilitated the granting of residence and temporary visas in cases related to: (i) employment relationship in Brazil (as per Resolution CNI No. 2/17); (ii) investments by individuals in Brazilian companies (as per CNI Resolution No. 13/17); and, more specifically, (iii) the representation of regulated entities headquartered abroad (as per Resolution CNI No. 9/17).

Finally, it is worth mentioning that in April 2021, CNI has established a Specialized Chamber with the objective of studying and proposing measures to attract qualified labor in strategic areas for national development for the country. After a 1-year period, the Specialized Chamber must present a proposal to simplify the procedures for granting temporary visas and residence permits for the purpose of working in strategic areas for the country.

Since Brazil has a well-developed financial market and a dynamic fintech ecosystem, there is access to talented local professionals, who can supply the demands of fintechs in most areas of expertise.

Nonetheless, as mentioned in question 11 above, we understand that the Brazilian immigration policy does not hinder the access to foreign talent. Therefore, immigration of talented professionals is also an alternative to fill gaps in certain areas.

As a matter of fact, the Brazilian general immigration laws and regulations tend to be fairly flexible and incentivize the attraction of foreign talents to different sectors of the economy, including the fintech sector.

Nonetheless, we still believe that there is room for additional regulations aimed at increasing access to foreign talent, in particular for purposes of the fintech industry. The Brazilian authorities seem to be aware that there is room to improve the Brazilian general immigration laws and regulations, considering that a Specialized Chamber was established with the objective of studying and proposing measures to attract qualified labour in strategic areas for national development for the country (as mentioned in question 11 above).

It is difficult to measure the level of influence of the fintech industry on the Brazilian immigration policy, given that the fintech industry is quite new and the improvement of immigration policies does not seem to be a top priority in the fintech industry’s agenda.

For the purposes of this question, we can divide the Brazilian intellectual property legal framework into two main areas of protection: copyrights and industrial property.

Copyrights are protected by Federal Law No. 9,610/98 (“Copyright Law”) and cover scientific, artistic, and literary intellectual creations. The Copyright Law grants to authors the exclusive rights of use, fruition, and disposal of their intellectual works. Brazil also provides protection to rights over software, as per Federal Law No. 9,609/98 and the Copyright Law. Protection of copyrights and software is granted irrespectively of prior registration with the local authorities.

Furthermore, the Brazilian intellectual property legal framework also protects industrial property, as per Federal Law No. 9,279/96 (“Industrial Property Law”). The Industrial Property Law grants protection to (i) invention patents and utility models; (ii) industrial design; and (iii) trademarks. As a general rule, protection under the Industrial Property Law requires registration with the National Institute of Industrial Property (“INPI”), a public entity responsible for granting intellectual property rights.

The purely abstract knowledge and know-how by itself are not supported by industrial property rights. However, they can be protected by contractual provisions and clauses, such as non-disclosure and non-competition clauses.

As a final note, it is worth mentioning that Complementary Law No. 167/19 facilitates the access of the so-called “Simple Innovation Companies” to patent application filing and trademark registration services by giving priority to the examination of trademark registration applications filed by such companies.

The banking regulatory framework in Brazil does not regulate cryptocurrencies. However, certain Brazilian public authorities and regulators – such as the Brazilian Internal Revenue Service, the Brazilian Securities Exchange Commission and the Central Bank of Brazil – have already issued opinions and raised concerns associated with the use of cryptocurrencies.

The Brazilian Internal Revenue Service was the first public authority to deal with the matter, by explaining in the “Questions and Answers – Individual Tax Return”¹, in 2017, that cryptocurrencies should be declared in the assets and rights section of the tax statement as “other assets”, such as a financial asset.

In the current version of the “Questions and Answers – Individual Tax Return”^[1], issued in 2020, the Brazilian Federal Revenue  treats cryptocurrencies as a type of crypto asset. In view of this, nowadays crypto assets should be declared if the purchase price is equal or above BRL 1,000 in the assets and rights section of the tax statement according to the following specific description fields: (i) “Cryptoasset Bitcoin – BTC”; (ii) “Other crypto asset, considered digital currency, known as altcoins”; and (iii) “Other crypto assets that are not considered cryptocurrencies (payment tokens)”.

In addition to the above, the Brazilian Federal Revenue has enacted the Normative Instruction 1,888/19. This normative instruction obliged crypto assets exchanges to inform the authority on a monthly basis regarding all transactions performed in its platform. Moreover, individuals or legal entities that operate crypto assets on foreign exchanges or without intermediation of any exchanges must also declare their transactions on a monthly basis to the Brazilian Federal Revenue.

The Brazilian Securities Exchange Commission issued certain notes, reports and a FAQ with focus on the risks associated with Initial Coin Offerings (“ICO”), as explained in detail in our comments to question 15 below.

Under the discussions regarding the nature of ICOs, the Brazilian Securities Exchange Commission has stated that cryptocurrencies may be classified as a security in case the public offering involves “any collective investment instrument or agreement that creates the right of participation on profits or remuneration, including as a result of the provision of services, and whose profits derive from the efforts of the entrepreneur or from the efforts of third parties”, as per article 2, item IX, of Federal Law No. 6,385/76.

The regulator has also commented on the legal nature of utility tokens, which are digital assets that enable the holder to access a certain platform, product or service, similar to a license to use a product or service.

In 2018, the Brazilian Securities Exchange Commission stated that mutual funds would not be allowed to directly invest and keep cryptocurrencies on their respective portfolios, since this type of asset would not qualify as a financial asset under Instruction CVM 555/14 and, consequently, would not fulfil the applicable regulatory requirements (please refer to Official Notice (Ofício Circular) SIN No. 1/18 issued by the Brazilian Securities Exchange Commission).

Later in 2018, the Brazilian Securities Exchange Commission stated that mutual funds may indirectly invest in cryptocurrencies, by purchasing shares of foreign investment funds that, in turn, invest in cryptocurrencies, subject to certain requirements and proper disclosure (please refer to Official Notice (Ofício Circular) SIN No. 11/18 issued by the Brazilian Securities Exchange Commission). Additionally, recently, the Brazilian Securities Exchange Commission authorized the launch of exchange-traded funds (ETFs) based on cryptocurrencies.

In the financial sector, the Central Bank of Brazil also issued letters and a FAQ stating that (i) cryptocurrencies are not official currencies issued, supervised and/or controlled by a sovereign Nation, thus, this type of asset is not backed by a Nation`s treasury; (ii) cryptocurrencies are different from the electronic currencies, governed by Federal Law No. 12,865/13 and respective payments regulations, which backed by Brazilian Reais (i.e., the Brazilian national currency); (iii) that users of cryptocurrencies may be investigated, if such cryptocurrencies are used for illegal activities; and (iv) in case of cross-border transactions, the foreign exchange regulations should be complied with, which results in the obligation to engage an authorized foreign exchange dealer to remit funds abroad and/or to receive funds in Brazil (please refer to Letter (Comunicado) No. 25,306/14 an Letter (Comunicado) No. 31,379/17 issued by the Central Bank of Brazil).

Notwithstanding the mentioned above, the Central Bank of Brazil has also stated that it is monitoring the use and development of cryptocurrencies in Brazil and around the world. Depending on how this issue evolves, the banking regulator stated that it may step up and regulate cryptocurrencies in Brazil.

Finally, in 2021 the Central Bank of Brazil disclosed the guidelines to the potential development of the Central Bank Digital Currency – CBDC in Brazil (Real Digital). The guidelines to the Brazilian CBDC are divided into 3 categories: (i) operation; (ii) legal guarantees; and (iii) technological assumptions.

According to the financial authority, the Brazilian CBDC will focus on technology and aims to stimulate innovative business models and its usage in retail. The distribution model to be implemented is intermediated and the Central Bank of Brazil will issue the Brazilian CBDC that will be passed to the end user through the participants of the payment system, as occurs today with the real in its physical form.

The legal framework will be adjusted in order to provide the legal guarantees to the Brazilian CBDC, which shall also be aligned with the requirements of the Brazilian Data Protection Law and Anti-Money Laundering Law. The Central Bank of Brazil also highlighted in the Brazilian CBDC guideline that cryptocurrencies have not the same characteristics of digital currency and will not receive the same treatment by the regulator.

Reference

^[1] Available for consultation at: https://www.gov.br/receitafederal/pt-br/acesso-a-informacao/perguntas-frequentes/declaracoes/dirpf/pr-irpf-2021-v-1-0-2021-02-25.pdf. Accessed on September 26, 2021.

The Brazilian Securities Exchange Commission has issued notes, reports and a FAQ stating that, depending on the circumstances, ICOs may fall into the definition of public offering of securities, which are subject to the securities regulation.

The securities laws apply whenever the ICO involves “any collective investment instrument or agreement that creates the right of participation on profits or remuneration, including as a result of the provision of services, and whose profits derive from the efforts of the entrepreneur or from the efforts of third parties” and the cryptocurrencies may be characterized as a security under article 2, item IX, of Federal Law No. 6,385/76.

In 2018, on a relevant administrative decision for the cryptocurrency sector, the Brazilian Securities Exchange Commission decided that the public offering of Niobium Coin – a crypto asset intended to be used to pay for services in a cryptocurrencies exchange platform offered by the Bolsa de Moedas Digitais Empresariais de São Paulo (Bomesp) – was not subject to the Brazilian Securities Exchange Commission regulation, since the Niobium Coin would not fall into the definition of security.

During 2020, the Brazilian Securities Exchange Commission applied a sanction of approximately BRL 700,000, jointly to a company and to its manager, because of an ICO that occurred in 2018 and raised funds in the market by means of the sale of crypto assets without prior registration with the securities regulator.

With regard to the likelihood of changes on the securities regulator’s position above in the near future, we understand that it will depend on how cryptocurrencies will be treated and regulated in other jurisdictions, as well as on the actual growth and potential impacts of ICO’s in Brazil.

Currently, there are 5 different Bills pending before the National Congress that propose the regulation of cryptocurrencies. The most recent ones, in line with the statements issued by the Brazilian Securities Exchange Commission, grant to the authority the power to regulate certain tokens and crypto assets that could fall into the definition of securities according to Brazilian law. Nonetheless, until the moment, none of the bills has reached the final stages in the Nation Congress to be voted and enacted.

In this context, the International Organisation of Securities Commission (IOSCO) may play a relevant role in the efforts to regulate or not regulate ICO’s in Brazil, since the Brazilian Securities Exchange Commission has already stated that it is taking part in discussions on this matter at an international level. In addition, if the Brazilian Securities Exchange Commission perceives any relevant risks associated with ICO’s or considers that there is an unacceptable level of legal uncertainty in the market, it may move to regulate ICO’s irrespectively of any international developments in this area.

Finally, the Brazilian Securities Exchange Commission has recently created a regulatory sandbox in the capital market (please refer to Instruction CVM No. 626/20) with the purpose of incentivizing innovative business models and investment products. This may be an interesting opportunity for the participants of the crypto assets industry to test projects under the regulator’s supervision and to have a potential impact over future regulations related to crypto assets and blockchain-based initiatives.

The Brazilian private and public sectors have been developing projects that use blockchain technology for different purposes in several areas, including in the financial markets, insurance sector, health care sector and certification of documents or signatures.

One example of a Brazilian company that uses blockchain technology to offer products or services is OriginalMy, a company that provides services related to, among other things, store certified documents, information and evidence, certify signatures and offer know your customer solutions. Evidence certified by OriginalMy blockchain technology has already been accepted as valid means of proof by Brazilian Courts.

According to recent researches, there are 26 startups in Brazil that provide blockchain in cybersecurity services, covering the sectors of finance, healthcare, real estate, supply chain and governance^[1].

From the perspective of the public sector, we highlight the initiative to develop the Regulatory Entities’ Information Integration Platform (in Portuguese, Plataforma de Integração de Informações das Entidades Reguladoras – “PIER”).

PIER was launched on April 1, 2020, by the Central Bank of Brazil, the Brazilian Securities Exchange Commission and the Superintendence of Private Insurance and it is based on blockchain technology. The platform will be used to facilitate the exchange of information among the three regulators and aims at expediting authorization proceedings in the Brazilian financial system.

Although PIER’s first stages are restricted to consultation of the Brazilian Securities Exchange Commission and the Superintendence of Private Insurance databases, the program has the potential to aggregate a variety of databases from other public entities, such as information from the judiciary, boards of trade and international financial stability bodies.

It is worth mentioning that the Central Bank of Brazil has been studying projects involving blockchain since 2016. In addition to PIER, we highlight the Alternative System for Transactions Settlement (SALT), a conceptual system for a contingent solution that would be able to immediately replace core functionalities of the main Brazilian Real Time Gross Settlement System in case of its full collapse. The Central Bank of Brazil continues its studies and development of SALT, but it has no perspective of implementation yet.

Finally, as per our comments to question 14 above, the Central Bank of Brazil is studying the creation of a digital currency, called Brazilian CBDC, which may rely on blockchain technology.

Reference

^[1] DISTRITO, CyberTech Report 2021, São Paulo, Aug. 2021, available for consultation at: https://materiais.distrito.me/dataminer-inside-cybertech-agosto. Accessed on September 26, 2021.

Based on publicly available information, artificial intelligence has been used by different players in the payment card industry, in particular for the purpose of preventing frauds.

Visa, for instance, has stated that it is using artificial intelligence in connection with card payment authorization procedures, in order to increase the security of payment transactions and preventing losses associated with frauds^[1]. Brazilian fintechs have also been using artificial intelligence in connection with the offering of financial or payments products and services. As an example, Nubank has been using artificial technology to assist it in the analysis of credit profiles of clients^[2].

In 2021, the Brazilian Federation of Banks – FEBRABAN” and Deloitte published the “FEBRABAN Banking Technology Survey”^[3], that comprises information about 87% of the Brazilian banking industry. The survey concluded that the investments in technology grew 8% in 2020; artificial intelligence, cybersecurity and teleworking are priorities highlighted by banks.

The “FEBRABAN Banking Technology Survey” also highlighted artificial intelligence as the top priority in the TI investments by banks. Among the ongoing projects, financial institutions have stated that their top priorities are improving customer support, credit, biometric, robot advisor and legal activities. Artificial intelligence focused on customer service remains on the agenda of investments in disruptive technologies, but operational processes such as credit and legal, also gain greater priority.

Although the financial market has been investing in the use of artificial intelligence, it is still unclear how and to what extent the use of artificial intelligence will be regulated in Brazil.

Brazilian legislators and regulators have started discussions on this matter, but the directions of such initiatives are still unclear. The Decree No. 9,854/19, for example, regulates public initiatives regarding the internet of things (IoT). Additionally, there are several bills of law that aim to create a legal framework for the development and use of artificial intelligence, such as Bill No. 5,051/19, Bill No. 5,691/19, Bill No. 240/20, Bill No. 21/20 and Bill No. 872/21.

References

^[1] Available for consultation at: https://www.visa.com.br/sobre-a-visa/noticias-visa/nova-sala-de-imprensa/inteligencia-artificial.html. Accessed on September 27, 2021.

^[2] Available for consultation at: https://link.estadao.com.br/noticias/inovacao,o-que-esta-por-tras-dainteligencia-artificial-de-credito-do-nubank,70003121159.amp. Accessed on September 27, 2021.

^[3] Available for consultation at: https://cmsportal.febraban.org.br/Arquivos/documentos/PDF/pesquisa-febraban-relatorio.pdf Accessed on September 27, 2021.

In general terms, the pace of innovation in the insurance sector in Brazil has not been as fast as the pace of innovation in the fintech sector up to this date. In this context, most insurtechs are still in early stages of development. Nonetheless, it is worth mentioning that almost half of the existing insurtechs in the country have emerged over the past four years, which demonstrates a growing trend in the sector.

The National Private Insurance Council has broad regulatory authority to, among other things, set forth guidelines and regulations for private insurance in Brazil. In addition, the Superintendence of Private Insurance, a public authority under the Ministry of Economy, is responsible for controlling and supervising the insurance, reinsurance, open private pension plans and capitalization industries.

The above-mentioned regulators have undertaken in recent years a number of initiatives to enable innovation in the insurance market. One of the main initiatives in this regard was the enactment of a regulation for the insurance regulatory sandbox, which authorizes the operation of new players subject to lighter regulatory requirements, in order to test innovative products or services in the local market (as per Resolution CNSP No. 381/20 and Circular SUSEP No. 598/20, as amended).

Additionally, the insurance regulators have implemented other innovations that affect the functioning of the ecosystem as a whole, such as the permission to issue electronic insurance policies and rules regarding the registration of insurance policies, under the Operations Registration System (“SRO”) (as per Resolution CNSP No. 383/20 and Circulars SUSEP No. 599/20 and 601/20, as amended). Registration of insurance policies is an important step for the development of the insurance market, since it increases transparency and facilitates access to documents and information by clients and other beneficiaries.

The Superintendence of Private Insurance is also developing a market for Insurance-Linked Securities (ILS) and has published the Resolution CNSP No. 396/20. The ILS are a way to finance risks linked to insurance or reinsurance, enabling a more efficient allocation of risks in the market.

Finally, the Superintendence of Private Insurance has been closely monitoring the developments of open banking and is studying the creation of an open insurance ecosystem in Brazil. In view of that, in July 2021, the Superintendence of Private Insurance has published  Resolution CNSP No. 415/21 and Circular SUSEP No. 635/21, which provide guidelines for the implementation of the Open Insurance System – Open Insurance. The regulations aim at the development of the sector, ensuring clients more security and control in accessing their data, expanding interoperability in the insurance market and the offer of products, as well as increasing opportunities for innovation.

Open Insurance is expected to be implemented in phases and gradually, aiming at better organization and predictability in the sector. The first phase, which includes the sharing of public data from companies regarding products and service channels, should start on December 15, 2021. The second phase, when clients will be able to share their personal data, starts on January 9, 2022. Finally, the third phase, which provides for the execution of services through the ecosystem, will start on December 1, 2022. Open Insurance enables, jointly with Open Banking, the formation of the so-called Open Finance.

The Central Bank of Brazil defines fintechs as “financial-technology-intensive startups that technologically enable financial innovation – new business models, applications, processes, or products – with an associated substantial effect on financial markets and institutions and the provision of financial services”^[1].

In line with the broad definition above, the Brazilian fintechs ecosystem is very diversified and involves a wide variety of areas, such as credit, payments, backoffice, investments, foreign exchange, debt negotiation, crypto assets etc.

According to the 2021 edition of Distrito Fintech Mining Report, a research carried out by Distrito – a company specialized in the fintechs industry – in 2020 the Brazilian financial industry had 1,157 fintechs^[2].

In this scenario, the research pointed out that the payments sector is particularly strong in the Brazilian fintechs ecosystem (representing approximately 15% of the fintech’s market). According to the report, the payments segment was followed by credit and backoffice services (with approximately 13,5% of the market each).

References

^[1] Available for consultation at: https://www.bcb.gov.br/en/financialstability/fintechs_en. Accessed on September 27, 2021.

^[2] Available for consultation at: https://materiais.distrito.me/fintech-mining-report-2021.Acessed on September 27, 2021.

Based on the results of the “FEBRABAN Banking Technology Survey”, published by FEBRABAN and Deloitte in 2021^[1], it is possible to conclude that there is a scenario of collaboration between incumbent financial institutions and startups, fintechs and big techs, especially to foster innovation in the financial sector. According to the research, 62% of the incumbent financial institutions distribute partner products and have partners who distribute their products, being among these partners fintechs and big techs.

In this sense, the research also pointed out that 68% of the incumbent financial institutions have developed partnerships with the purpose of fostering innovation. In 2020, 60% of the incumbent financial institutions had startups and fintechs involved in the development and offer of products and services regarding loans/credit, payment instruments and accounts (onboarding clients), which are the main strategic priorities of incumbent financial institutions.

Although the partnership model is very common among incumbent financial institutions and fintechs, many incumbent financial institutions have adopted different strategies to promote innovation and disruption in the financial market. Thus, some financial institutions are also investing in the acquisition of fintechs, internal development of new technologies or even incorporation of new entities that operate under a fintech business model, as detailed in our comments to question 21 below.

In this scenario, although the fintech boom may potentially represent a disruption in the way that financial services are provided to end users, this does not mean that incumbent financial institutions are becoming obsolete and/or will be extinct in Brazil.

On the contrary, fintechs’ growth represents an opportunity for incumbent financial institutions to aggregate value to their traditional services through the implementation of new technologies that may further benefit their clients. It is also worth mentioning that incumbent financial institutions have large client databases and the financial resources to carry out substantial investments in technology and innovation.

Therefore, in view of the above, we note that the majority of the incumbent financial institutions in Brazil are aware of the changes brought by technology and fintechs to the financial sector and are working on a variety of initiatives in order to adapt to the demands of clients and new market trends.

Notwithstanding the foregoing, there is a recent discussion between certain fintechs and incumbent financial institutions, especially banks, which has in its core an allegedly regulatory asymmetry that would benefit fintechs. As a consequence, such financial institutions are urging for more regulation over fintechs and their activities, as detailed in our comments to question 7 above. Therefore, that discussion could lead to some tension in the Brazilian financial industry between large fintechs and incumbent financial institutions, which could have some impact in the collaboration between these players.

Reference

^[1] Available for consultation at: https://pesquisas.lp.deloittecomunicacao.com.br/febraban-lp. Accessed on September 27, 2021.

As mentioned in question 20 above, the incumbent financial institutions are fully aware of the changes to the financial market brought by fintechs and innovation programmes.

According to the “FEBRABAN Banking Technology Survey”, the majority of incumbent financial institutions in Brazil that took part in the research have undertaken at least one initiative aimed at developing innovation programmes^[1].

Under this perspective, the most common innovation program developed by financial institutions is the “acceleration program”, which has been implemented by 62% of the financial institutions that took part in the research. The acceleration programmes are usually structured by incumbent financial institutions in order to enable their participation in the development of new technologies.

By using acceleration programs and incubators, incumbent financial institutions are encouraging the creation of fintechs that may end up providing innovative services to the market in general and/or to the sponsoring financial institution itself. These initiatives are also important measures to associate the brands of incumbent financial institutions with technology and innovation.

Among the main acceleration programmes developed by Brazilian incumbent financial institutions we highlight the following: (i) “Cubo”, an initiative by Itaú Unibanco; (ii) “Radar Santander”, an initiative by Santander; and (iii) “InovaBra”, an initiative by Bradesco. It is important to highlight that the financial institutions mentioned above are among the main financial institutions in the country.

Finally, fintech development/innovation programmes carried out by incumbent financial institutions are not limited to acceleration programmes. Instead, the programmes may also involve venture funds, innovation labs, coworking and hackathons. The “FEBRABAN Banking Technology Survey” concluded that 100% of the financial institutions that participated in the survey develop and organize hackathons, while 75% of such financial institutions have innovation labs.

Reference

^[1] Available for consultation at:https://cmsportal.febraban.org.br/Arquivos/documentos/PDF/pesquisa-febraban-relatorio.pdf. Accessed on September 27, 2021.

Fintechs may help promote competition, increase efficiency of the financial system, reduce interest rates, and, ultimately, accelerate financial inclusion (one of the main obstacles of the Brazilian market), by making available innovative products and services to clients.

One example of disruption by fintechs in the Brazilian market is the development and offering of e-wallets (payment services, usually based on prepaid payment accounts) by fintechs, big techs and major retailers. During the last two years, the offering of such payment services has increased dramatically and a part of the Brazilian population that did not have access to deposit accounts or credit cards have opened prepaid payment accounts. These e-wallets present an increasing variety of features, which may include the online and offline payment of products/services, peer-to-peer transfers, payment of bills, receipt of wages etc.

In addition, fintechs were also involved in the development of peer-to-peer loans in Brazil. Although lending is the sole domain of financial institutions, many fintechs started to operate as “banking correspondents” of authorized financial institutions. In this capacity, fintechs managed to develop sophisticated and highly technological online platforms to offer loans on behalf of financial institutions.

As a result of the rapid growth of this business model, the Brazilian National Monetary Council decided to regulate credit fintechs and issued Resolution CMN No. 4,656/18, creating two new types of financial institutions in the country: the Direct Credit Company (“SCD”) and the Peer-to-Peer Lending Company (“SEP”).

In general lines, SCDs are financial institutions that carry out the following main activities, exclusively through electronic platforms: lending, financing and acquisition of credit rights. SEPs, in turn, are financial institutions that perform, exclusively through electronic platforms: peer-to-peer lending and peer-to-peer financing transactions.

Since Resolution CMN No. 4,656/18 was issued, the Central Bank of Brazil has authorized more than 50 SCDs and SEPs. This indicates a growing demand for these entities and also represents an important step to deal with two of the main challenges of the Brazilian financial system: the limited access to credit and high interest rates.

Fintechs also had an important role in the development of the open banking ecosystem in the country. Even before the Central Bank of Brazil decided to regulate open banking, certain fintechs started to offer products and services based on the concept of open banking (i.e., products and services that require direct access to clients’ financial data held with financial and payment institutions). These initiatives have probably helped to accelerate the process of regulation and implementation of the open banking ecosystem in Brazil (which will likely be very disruptive in the following years).

Finally, more recently, the National Monetary Council and the Central Bank of Brazil decided to improve foreign exchange and international capital regulation by issuing, respectively, Resolution CMN No. 4,942/21 and Resolution BCB No. 137/21. One of the main innovations of these newly issued regulations was the creation of an uniform regulatory framework for the provision of eFX services (as described in question 2 above), which took into account technological innovations and new business models related to international payments and transfers adopted by several fintechs. The regulation of the eFX may be considered another example of the importance of fintechs to foster innovation and improvement of the regulation.