How new payments regulations in Brazil could affect fintech sector


New financial technology regulation in Brazil may affect profitability for large enterprises as companies allocate more significant capital requirements that could lead to higher costs.

It could also bog down investments in middle-sized companies, experts said.

Last month, the Central Bank of Brazil announced a new string of regulations that would demand higher capital reserves for large-scale fintechs. It reclassifies most financial technology companies according to their size and, in practice, requires more significant prudential capital requirements from large ones to the point that their regulatory framework closely resembles that of a bank.

Although simplified requirements are mandated for small fintechs, the new regulation could likely require capital boosts from big names in the industry. One of them is Nubank, the Brazil-born digital bank that expanded across Latin America and recently reached over 50 million clients.

The regulator reassured that its decision, widely expected in the market, was based on the rapid growth of financial technology firms over the past decade. The bank said such an exponential evolution resulted in the sophistication of business models, leading the entity to develop new guidelines to mitigate unknown risks to the financial sector.

Requirements fell behind

Over the past years, companies that started as payment institutions and were regulated began branching out to other segments such as digital credit and insurance. In the announcement, BCB said that growth over the years has led “part of this segment to create financial subsidiaries and assume new risks, without the proportional prudential requirements.”

The new rules, which target aggregated business conglomerates rather than individual companies, do not require drastic changes in the short term, as they are expected to be sorted out gradually and fully implemented as of 2025.

However, some have argued that it could affect digital lenders’ long-term growth potential as it mandates increasing capital allocation to face operational risks.

“It could generate further costs for companies as they continue to grow, but I think that it is a good call by the regulator from a risk point of view,” Joelson Sampaio, an academic with Getulio Vargas Foundation, said. “Some of these companies grew a lot over the past years, and now they are going to have more requisites from a capital adequacy perspective.”

Nubank held firm

Nubank, a multibillion-dollar company which filed an IPO on NASDAQ in 2021, dismissed concerns that it would affect its ambitious growth strategy and assured investors that it could meet the targets set by the Central Bank of Brazil.

According to Carlos Augusto de Oliveira, a fintech advisor in Brazil, it is unlikely that large fintechs could be hamstrung significantly by the new regulation as they have substantial capital reserves and market access. However, he said it could affect profitability in the future.

In his view, however, it could be middle-stage fintechs that suffer the most from the new rules. Even though the regulation only affects them proportionally (as they represent a low risk to the system), he argues that there is a risk that private capital will factor in the new demands from the regulator when allocating resources.

“It may affect smaller fintechs that are in the critical phase of scaling up and looking to prove the viability of their business model to continue to obtain funding,” he said.

“There is a risk that capital will get more selective in supporting these startups given the additional burden they will have to bear until they reach (breakeven).”

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