Brazil: Fintech

Law No12,865 published on October 9, 2013 (“Law 12,865/13”) was the first rule to regulate the industry of electronic payments in Brazil, more specifically, the rendering of payment services in the context of card networks that are part of the Brazilian Payment System (Sistema de Pagamentos Brasileiro or “SPB”). Such law created the concepts of card network, card network owners and payment institutions.

In addition to establishing the general principles and rules for card networks and payment institutions, Law 12,865/13 conferred to the National Monetary Council (Conselho Monetário Nacional or “CMN”) and the Brazilian Central Bank (“Banco Central”) powers to, through Resolutions, Circulars and Letter Circulars, regulate the industry of electronic payments, including their incorporation and operation, risk management and the opening of payment accounts, along with the transfer of funds from and to them.

Yes. Law 12,865/13 established that payment services can be provided by non-bank entities called payment institutions. Central Bank issued Circular 3,885/18 which classifies payment institutions in accordance with the payment services they provide: (i) issuers of electronic currency (e.g., typically, issuers of pre-paid instruments and e-wallets); (ii) issuers of post-paid instruments (e.g., typically, issuers of credit cards); and (iii) acquiring institutions.

We draw your attention to the fact that there is no prior approval to operate as a payment institution. The entity can freely start operating without a license.

However, if one of the following thresholds are reached: (i) R$ 500 million (five hundred million Brazilian reais) in payment transactions in the previous 12 months of operation; or (ii) R$ 50 million (fifty million Brazilian reais) in funds kept in payment accounts (e-wallets), the payment institution must apply for a license in one of the three categories in which it wishes to operate (i.e., acquiring, issuance of prepaid, or issuance of postpaid payment instruments). Durring the approval process the payment institution continues to operate regularly and once approval is granted, the payment institution must comply with Central Bank Rules. The logic of the regulation is foster competition hence the ability of a payment institution operate without any prior consent or approval from the Central Bank.

In Brazil, the most popular payment methods and payments instruments include: bank slips (“boletos”); debit card; credit card and pre-paid accounts (e-wallets).

On April 24, 2019, the Central Bank of Brazil (“Central Bank”) published Notice No 33,455 with the main guidelines regarding the implementation of open banking in Brazil.

So far, the Central Bank has defined open banking as “the sharing of data, products and services by financial institutions and other authorized institutions, by consent of their customers (…), through the opening and integration of platforms and infrastructures of systems of information, in a safe, agile and convenient way”.

Furthermore, it is worth mentioning that, although the implementation itself is not yet occurring (and it is predicted to begin in the second semester of 2020), Brazil already has some examples of how it would work. Last year, the Bank of Brazil launched a credit API (Application Programming Interface) in partnership with fintech BxBlue, which allows the customers to contract consigned credit through a 100% digital process, being the first institution to implement a process regarding open banking in Brazil.

Open Banking is based on the assumption that the customer’s data belongs to the customer, not to the financial – or any other – entity. Therefore, it is the client decision to share his/herinformation.

That being said, on August 14, 2019, Brazil enacted its first data protection legislation, Law No. 13,709, dated as of August 14, 2018 (“LGPD” or “Law 13,709/18”), which provides for data protection of individuals. The LGPD was largely inspired by the European General Data Protection Regulation (“GDPR”) and brings deep changes in the conditions for processing personal data in Brazil. The LGPD is applicable to any activity that involves the processing of “personal data”, which is defined as any information related to an identified or identifiable natural person.

Furthermore, financial institutions, specifically, are regulated by Supplementary Law No. 105, dated as of January 10, 2001 (“Lei do Sigilo Bancário” or “Bank Secrecy Law”, in a free translation), which dictates the best practices when dealing with customer’s transactional data. Even though the Bank Secret Law preceded Law 13,709/18 in almost two decades, one can find explicit provision regarding sensitive information (or “sensitive data”, as transactional data is defined by LGPD) in its scope.

Therefore, the data protection practices determine that financial institutions must request in the most explicit and informative way permission to their customers to share their data. Once given this consent, financial institutions are free to share the data for the purposes to which the customer has agreed. It is worth mentioning that any action when treating data that does not fit the scope to which the customer gave their consent must be preceded by another authorization regarding this specific sort of treatment.

In Brazil, as with most countries, regulation of fintech companies is still an evolving matter. The Central Bank of Brazil and the Brazilian Securities Commission (CVM), which regulates several aspects of the financial and securities markets, have been showing a modern and collaborative approach towards the innovation in the financial sector.

As an example of the collaborative approach, CVM has introduced on August 28, 2019, a regulatory sandbox whereby the regulatory entity opens a discussion opportunity among the players involved in innovative solutions in the financial sector to hear from them what are the main regulation challenges and how should the regulatory entity approach this disruptive situation.

The new rulemaking process, so called regulatory sandbox, allows the creation of an experimental regulatory environment where temporary regulatory instruments may be issued to empirically assess the benefits and most suitable procedures to implement a recommended solution.

With this novelty, the regulator will have means to test, individually and for a limited period, regulatory changes that, due to their features and according to the CVM Board, justify a trial environment, avoiding additional risks to the national financial system or to investors’ protection. Same approaches have been adopted by other regulatory bodies such as the Insurance Regulator (SUSEP) and Central Bank.

No, on the contrary, in recent years, several new rules and guidelines have been introduced by the Brazilian Central Bank to foster the innovation and creation of new players within payment, peer-to-peer lending, personal finance management and among others financial technology segments.

Despite the collaborative approach towards the innovation in the financial sector, it’s worth mentioning that the new fintechs still face the consequence from a concentrated marked. As an example, given the regulatory requirements, fintechs struggle from the financial and operational costs, which in many cases prompts fintechs to partner with financial institutions.

There are no tax incentives in the Brazilian jurisdiction to encourage fintech investment.

Fintech is a rapidly growing sector in Brazil, drawing the attention of global and local investors. There are a couple of main emerging areas of fintechs in Brazil that attract the investor, as follows: (i) Credit and Lending Fintechs such as Nexoos, Payly and Geru which involves Series A-E of investments; (ii) Digital Banking and Payment area such as Nubank who capitalized US$ 400 million at its 7th round of investment’s (Series F); (iii) insurtechs are also growing and attracting investment in the country, for example the fintech Seggui which uses Artificial Intelligence and machine learning to provide a better experience for its custormers; furthermore (iv) blockchain and crypto fintechs also a strong segment in Brazil.

Brazil presents an extremely fertile market. For instance, our current market conditions feature high levels of concentration and banking spreads, high service tariffs and the prospect of regulatory modernization, while a large portion of the population is still lacking access to financial services, making Brazil particularly attractive for investing in fintechs. In addition, Brazil has a high use of smartphones and elevated levels of Internet access, which cooperates with the development of the technology sector. Therefore, there is a large sum of people prone to use mobile phones and keen to invest, the perfect equation for the growth of financial services technology.

Currently there are no specific immigration rules in our jurisdiction regarding the retention and/or attraction of qualified talent. However, it’s worth mentioning that Brazil have always recognized the importance of immigration for its development and up to today it is still considered a key factor for the future of the country.

In this context, migration legislation (Law Nº 13.445, the New Migration Law) was approved in 2017, with new policies aimed at making the process for foreign nationals coming to Brazil easier and faster. New procedures have been introduced to expedite and facilitate the granting of certain work visas, and also to grant immediate residence status in both cases where families were being reunited and under the Mercosur Agreement.

Additionally, the fact that immigration into countries such as the United Kingdom and the United States is restricted, indirectly it represents an opportunity for Brazil, which, because of its current rules, not only allows, but also, in fact, encourages foreign nationals to study and work in the country.

It’s hard to measure the fintech industry influence on immigration policy in Brazil, since it is still in its early stages and no major impact have been proved under immigration rates related to the fintechs appearance.

However, it is fair to state that fintechs have a natural advantage over traditional companies in the battle for the young talented workforce. For instance, their more flexible and diverse culture and concern about the social impact of their operations tend to function as a factor in attracting the new talent generation that holds the skills needed to drive innovation in these companies. On the other hand, the lack of more mature professionals with adequate knowledge of the regulation of the financial services sector in the country, which is rigorous and complex, may represent a barrier to the advancement of these companies.

Industrial property rights in Brazil are specifically governed by Law No. 9.279, of May 15, 1996 (“Industrial Property Law”), and by the Brazilian National Institute of Industrial Property’s (“INPI”) internal rules and regulatory acts.

Pursuant to the Industrial Property Law there are three industrial property rights which acquire legal protection upon registration with government authorities, namely: (i) trademarks, (ii) patents, and (iii) industrial designs. On the other hand, Technology and/or Know-How are not considered industrial property rights per se, and they may only be contractually protected (through confidentiality and non-competition clauses).

Both the industrial property rights (trademark, patent, industrial design) and the technology/know-how may be the subject matter of licensing or transfer agreements, respectively, which are subject to the INPI’s approval.

Once INPI has approved the fintech intellectual property license, the fintech shall be protected by INPI regulatory acts regarding the industrial property rights matters, such as the registration of trademarks and patents, as well as licensing of intellectual property and technology transfer agreements.

The boom experienced in users’ adoption of virtual currencies has also reached the Brazilian market, which has given local law practitioners, legislators and regulators a lot to discuss. Traditionally, technology and business innovation comes ahead of regulation, and this is also proving to be the case with virtual currencies businesses.

The virtual currencies industry is both globalized and localized, and the growth of its ecosystem has given grounds for discussions that range from local mining activities to global exchanges, with services and products that defy the limits of banking, payment and capital markets laws and regulations on a daily basis. This is the case in Brazil.

The first official communication by the Brazilian Central Bank (the Central Bank) regarding virtual currencies occurred in 2014. In this statement, the Central Bank clearly stated that virtual currencies are not considered legal currency in Brazil, and thus would not be subject to Central Bank scrutiny. It also stated that although it would follow the development of this market closely, the volume of transactions was not yet large enough to pose a threat to the soundness of the Brazilian financial system.

The 2017 boom in the virtual currencies market brought virtual currencies back into the spotlight and resulted in the Central Bank and the Brazilian Securities Exchange Commission (CVM) releasing more comprehensive communications to the market stating their position regarding new virtual currencies businesses in light of the existing Brazilian laws and regulatory framework.

Therefore, the Brazilian Congress has started a series of public hearings to hear regulatory authorities, market players and specialists as part of discussions regarding a bill of law aimed at regulating virtual currencies in Brazil. Currently cryptocurrencies are not regulated and as a consequence are permitted.

Markets Law and the potential characterization of virtual currencies as securities in Brazil have gained relevance due to the growth in interest in virtual currencies and other virtual assets throughout 2017, especially in initial coin offerings (ICOs).

ICOs consist of making an offer to the public of virtual currencies or virtual assets (financial or otherwise). The market has conventionally named these tokens or coins, as they are created within a blockchain or distributed ledger technology.

Virtual currencies offered through an ICO may represent any type of asset or instrument, from a share to a feature to access a certain platform. In this sense, as mentioned above, a given virtual currency may be subject to a specific legal and regulatory framework depending on the intrinsic characteristics of each virtual currency, including its purpose and usage, existence of remuneration, and distribution and issuance methods. If a new virtual currency created in the scope of an ICO has characteristics that match the requirements to classify as a security in Brazil, it will be subject to the Brazilian capital markets legal and regulatory framework.

In light of the growth in the number of ICOs in 2017, the CVM published two notices to the market confirming that any given virtual currency may or may not be subject to the Capital Markets Law and CVM regulatory framework and scrutiny depending on whether or not it is classified as a security in light of the concept of security provided by the Capital Markets Law, and the analysis should be made on a case-by-case basis.

Additionally, the CVM has issued specific opinions dealing with offerings of securities using the internet that occurred abroad whereby the authority has stated that an offering made using the internet is generally considered public, and that even if a certain public offering occurs abroad, in cases where it targets Brazilian investors it will be subject to Brazilian capital markets laws and regulation.

In this sense, an ICO is for all purposes a public offering as it uses the internet as the main distribution method, and even if the public offering is occurring elsewhere, it should observe Brazilian capital markets laws and regulation if Brazilian investors are targeted.

As a result, the CVM may administer the applicable sanctions and penalties in the event of offers of virtual currencies that fit the definition of security in disregard of the capital markets applicable regulation, an understanding that has already been publicly confirmed by the CVM.

In early 2019, the CVM published a new internal regulation modifying its rule-making process. Among the main changes are the introduction of a phase for assessment of the regulatory impact as a means to consider the cost-effectiveness of a proposed rule and the possibility of introducing a regulatory sandbox phase through issuance of temporary rules for empirical testing of their adequacy to market requirements.

An example of blockchain usage under the segment of payments services is Broota Pagamentos who is currently analyzing the regulatory aspects to implement blockchain technology under the platform of Equity Crowdfunding among its company group provided services. But generally blockchain usage in Brazil is still in the POC phase.

The Brazilian Central Bank encourages the use of artificial intelligence in the financial sector. The lending, compliance and Know Your Client (KYC) sectors are already implementing it.

There is, however, some grey area regarding the applicable laws. So far, the technology is manly regulated by LGPD, which is causing some debate towards the sufficiency of such normative to protect such sensitive data. Up to this point, it is likely that the financial institutions themselves will be in charge of regulating the issue (through what Central Bank called “self-regulation”).

Therefore, even though there might be some issues since the topic is not yet regulated to the extent of allowing provisions with a higher degree of accuracy, the scenario is, overall, optimistic.

Insurance business is still a very concentrated market in Brazil due to rules and laws which prioritize large insurance companies over small innovative initiatives.

The National Council of Private Insurance (“CNSP”) and the Private Insurance Authority (“SUSEP”) are the authorities responsible for regulating the Brazilian National Private Insurance System (“SNSP”), which is composed by large insurance and reinsurance companies, entities operating open-ended private pension funds, capitalization companies and insurance and reinsurance brokers.

In this context, Decree-Law No. 73 of November 21, 1966 (“Decree-Law 73”) is the main law regulating the insurance industry and both CNSP and SUSEP are responsible for issuing consequential and more detailed regulations.

With due regard to the above, recently enacted Provisional Measure No. 881/2019 (“MP 881/19”), known as the “Economic Freedom Act”, provides that companies can test out inventive business models within a closed group without requesting any prior approval. The Brazilian government has been notably more pro-market and liberal since the last election and this has been reflected in SUSEP.

SUSEP has made several statement in favor of insurtechs and other innovative models and is looking to create a more competitive scenery over the next years within the insurance market.

The digital banking system is growing in Brazil´s jurisdiction, revealing the inefficiency of the traditional banks in interesting new generations. An example of such prosperous scenario is Nubank, a Brazilian startup in the payment and credit segment. The traditional banks are trying to compete with such innovations, exemplified by Santander Innoventures stating its investment in the Series C of Creditas, a big online lending platform in Brazil. So the main areas fintechs are strong are: lending, credit, payments and receivables discount

Although it is true that the insurgence of fintechs may make it look as if incumbent financial institutions, such as banks, are facing the risk of becoming obsolete (along with “declaring war” against these new technologies), truth is there is an infinity of options besides fighting or surrendering.

The financial system is going through changes and implementing new technologies in payment services, which has plenty of potential when it comes to boosting the efficiency and lowering the costs of such services.

This explains why a considerable amount of banks are making fintechs their partners and why a lot of them are interested in joining Open Banking once the integrated API’s are a reality in Brazil.

So generally it is fair to say that Brazil is migrating slowly from a disruption model into a collaborative model. However we are as just in the beginning of this trend

Several innovation programs are being developed by the incumbent banks. Most of them, in fact, involve financing startups, in order to implement their technologies that are applicable to the financial market. There are some examples of this trend such as Bradesco´s InovaBRA”, Itau’s Cubo and BTG´s Boostlab.

On April 26, 2018, the National Monetary Council issued Resolution No. 4,656 providing for the setup and operation of two new types of financial institutions specialized in lending through electronic platforms: Direct Credit Company (Sociedade de Crédito Direto – “SCD”) and Peer-to-Peer Loan Company (Sociedade Empréstimo entre Pessoas – “SEP”).

According to the Central Bank of Brazil (BACEN), this new regulatory framework seeks to foster innovation at the National Financial System (SFN) as well as to improve competitiveness and increase competition among financial institutions in the credit market, thus creating the conditions for a reduction in interest rates.

The business model of an SCD is characterized by lending, financing and acquisition of receivables exclusively through an electronic platform, using financial resources that originate solely from its own capital. This means that an SCD is prohibited from raising funds from the public or collecting deposits to be used in its financial activities.

On the other hand, SEP stands for a financial institution that, exclusively through an electronic platform, brings creditors and borrowers together in a peer-to-peer lending arrangement. By so doing, SEPs will intermediate the borrower-creditor relations, thus engaging – in the words of BACEN – in a ‘typical financial intermediation activity.

The new resolution has brought greater legal certainty to the lending fintech industry by specifically regulating transactions in this incipient market segment and allowing it to detach from the traditional banking industry. It is hoped that the setup and authorization processes develop at a reasonable pace so that lending fintechs may soon start doing business in the new format proposed by the Brazilian monetary authorities. Currently there are several SCD and SEP approved and in the process of being approved by BACEN.