Recent developments in the Brazilian Fintech environment: instant payment system and open banking

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Kenneth Ferreira
TozziniFreire Advogados, São Paulo
kferreira@tozzinifreire.com.br

Natasha Wiedmann
TozziniFreire Advogados, São Paulo
nwiedmann@tozzinifreire.com.br

Overview

Following the ongoing technological revolution and boost of Fintech services worldwide, the Brazilian Central Bank (BCB) has been working to provide a favourable regulatory environment for companies and users in Brazil. The development of specific innovations in the country’s financial sector is notable, more specifically in the areas of credit and payment, which are showing significant growth. BCB has taken a surprising leading role in creating an environment in which technology and innovation are encouraged, without jeopardising the soundness of the Brazilian financial system. Brazil is known for its robust legal financial framework and the path to regulate groundbreaking financial products has evolved since 2013, when BCB, in a pioneering effort, issued the rules on the regulation of payment arrangements and the supervision of payments institutions.

More recently, 2018 was marked by the regulation of peer-to-peer lending and direct credit companies, through BCB Resolution No 4,656/2018, which regulates financial institutions that use electronic platforms to connect creditors and debtors or to lend their own resources, respectively. Continuing the movement of improvement in the sector, in February this year, BCB published Circular No 3,985/2020 and Circular Letter No 4,006/2020, structuring an instant payment system framework. On 4 May 2020,BCB published Joint Resolution n 1 and Circular n 4.015, which regulate open banking and allow for the sharing of customers’ banking information by the financial institutions so that other service providers can also use this information upon the authorisation of the data holder. The recent innovations on the instant payment system and on open banking are described in more detail below.

Instant payment scheme and instant payment system

On 20 February this year, the BCB published Circular No 3,985/2020, defining the criteria and modalities of participation in the Brazilian instant payment scheme (PIX), the instant payment system (SPI) infrastructure and the proxy identifier database (DICT), and establishing the participation of financial institutions and of payment institutions under the SPI. A few days later, on 26 February 2020, the BCB published Circular Letter No 4,006/2020, establishing the rules for registration of participants in the PIX and in the SPI.

SPI

Instant payments comprise the electronic transfer of money between different institutions or persons in a way that allows the final beneficiary to receive the transferred funds in real time, 24/7 every day of the year. The SPI is the centralised and sole settlement infrastructure for instant payments. Instant payments will be available for transfers between two persons, a person and a company, and between companies. It will also be available for transfers involving government entities, such as for tax payments by individuals or legal entities, or social benefits and grants, among others, paid by governments to persons or to companies. This is a result of a technical cooperation agreement entered between the BCB and the National Treasury Secretariat, signed in February 2020.

The SPI will allow people and companies to transfer money at any time, using more accessible payment mechanisms. This type of transfer tends to be more practical than those currently used, such as the available electronic transfer and credit order document, as  it allows for instant transfer, does not require an intermediary and has lower costs.

The SPI provides for two forms of participation: direct and indirect. The first involves a direct connection of the participant institution to the SPI, meaning that they will settle transactions directly on the settlement platforms. Commercial banks, multiple banks with a commercial portfolio, savings banks, clearing houses, and clearing and settlement service providers will necessarily be direct participants.

Institutions that do not hold an operating permit from the BCB are not allowed to participate in the direct form. Indirect participation applies to institutions that do not hold a direct connection to the SPI and that do not have an SPI account. These institutions will operate through an intermediary, which must be a direct participant of the SPI infrastructure and will be responsible for registering and settling the operation entered under the SPI. Commercial banks, multiple banks with commercial portfolios, clearing and settlement service providers, among others, are not allowed to participate indirectly in the SPI. Moreover, payment institutions that are not licensed by the BCB will only be able to participate as indirect participants.

PIX

PIX will be the single brand for instant payment functionality in Brazil, operated by BCB. The aim of centralising instant payment functionality is to create a visual identity that can be easily identified by users, facilitating the understanding and adoption of the instrument. Considering that the big players will be required to participate in PIX, a significant portion of the population will be able to evaluate options to pay and collect payments.

PIX will allow transactions to be performed though the use a QR code or even using simple information, such as a mobile phone number, email or taxpayer registration number (CPF for natural persons or CNPJ for legal persons). It is expected that the measures will increase competition between financial services providers.  

Adhesion to PIX will be mandatory for financial institutions and payment institutions licensed by the BCB with more than 500,000 active customer accounts – including checking and savings accounts and prepaid payment accounts – in order to settle instant payment transactions whenever they involve a transfer between instant payment accounts.This means that these institutions are required to provide their customers with all the functionalities to initiate or receive instant payments. Participation in the PIX is optional for entities that provide clearing and settlement services exclusively for the purpose of settling private-liquidity supply operations, carried out between SPI participants within the instant payment infrastructure.

DICT

The DICT is a component of the PIX that stores payees’ information and respective transaction accounts, including proxy identifiers and related data. The DICT will be operated exclusively by the BCB. A direct participant in the SPI will have to access DICT directly. Indirect participants will be able to choose to access the system directly or indirectly.

Implementation and expectations

The new rules are a step forward in the BCB’s initiative of establishing an SPI in Brazil, following Bulletin No 32,927 of 21 December 2018 in which the authority recognised the validity of instant payments and addressed the fundamental requirements for its environment within the regulatory framework of the Brazilian payment system. The implementation of the instant payments ecosystem in Brazil is expected to take place in November this year.

Besides facilitating instant transfers in general, this model is favourable to the emergence of Fintech companies whose purpose is the development of innovative solutions to ease payment transactions. As announced by the BCB, Fintechs will be able to act as payment institutions, supplying customers with payment accounts, or as payment- initiation service providers.^[1] The measures enable the inclusion of new players in the financial market, which is of great significance in a country with high rates of banking concentration such as Brazil.

Open banking

BCB, in its efforts to adapt its regulatory framework to the innovation environment, launched Public Consultation No 73/2019 on 28 November 2019 to gather the market’s opinion on a draft resolution regulating open banking. The public consultation was published after Announcement No 33,455, dated 24 April 2019, in which the BCB established the guidelines for the implementation of open banking in Brazil. As a result of these efforts, on 4 May 2020, BCB and the National Monetary Council published Joint Resolution n 1 and BCB Circular n 4.015, finally implementing and regulating the matter.

Open banking and sharing of data and services

The novel regulation defines open banking as the standardised sharing of data and services by opening and integrating information systems platforms and infrastructures. The regulation encompasses the sharing of the following data and services: (1) exchange of data on access channels, institutions’ products and services, and clients’ registration and transactions; and (2) services related to payments transactions and credit operations proposals.

Data can only be shared upon the customer’s prior approval. Participating institutions should provide data sharing interfaces, standardised in accordance with a convention to be entered among participating institutions.

Participation in the open banking system

In the case of data sharing, participation in the open banking will be mandatory for institutions included in the S1 and S2 segments, designation that encompasses financial institutions whose size (according to criteria designated by BCB) is larger than ten per cent of the GDP and between ten per cent and one per cent of the GDP, respectively. Further, it is optional for further institutions authorised by BCB to operate as financial or payment institutions, provided that some requirements are met, such as registration in a participants’ repository and the availability of interfaces dedicated to transfer the data.

As with the sharing of services, participation is mandatory for account-holding institutions; institutions that initiate payment transaction services; and financial institutions or institutions authorised by the BCB that have entered into a correspondent agreement providing services related to payment transactions and credit operations proposals. Institutions that are part of prudential conglomerates and do not provide services related to customer transaction data are not covered by the regulation.

The regulation also provides for the possibility of non-authorised third parties participating in open banking, as long as they enter into a contract with an authorised institution.

The main actors in the open banking system

The open banking regulation provides for the following essential roles:

• Data donor: the institution that shares the clients’ data with the receiver;

• Data receiver: institution that requests data-sharing with the data donor;

• Accounts holder institution: institutions that maintain client deposits or savings accounts or prepaid payments accounts; and

• Payment transaction initiator: institutions that render services of payment transaction initiation, without holding the transferred funds. Open banking has the potential to increase competition within the financial sector.

Implementation schedule

The new regulation will start producing effects on 1 June 2020. Nonetheless, the open banking system will be implemented gradually. The following implementation schedule, consisting of four phases, is expected:

1. Phase 1: until 30 November 2020, data related to service channels, products and services, such as those related to deposit accounts and credit operations, will be shared;

2. Phase 2: until 31 May 2020, customer records and transactions information related to the services covered in Phase 1 will be shared;

3. Phase 3: until 30 August 2021, the shared data will encompass payment initiation services and sent credit operations proposals;

4. Phase 4: finally, until 25 October 2021, data on other products, services and client’s transaction will be shared, such as exchange operations, investments, insurance and salary accounts.

Expectations

The new regulation seeks to allow the integration of information systems platforms and infrastructures, paving the way for lower interest rates, increased competition and the emergence of new business models with inclusive and customised service solutions for different users’ profiles.

The market is eager to see how central banks will approach to the regulation of disruptive and innovative financial services and, in this regard, the BCB should be praised for seeing Fintechs as a new reality that will allow banking inclusion and competition in such an important industry.

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