Rise of fintechs puts the Central Bank in a regulatory trap

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At the traditional annual meeting of Febraban, at the end of last month, representatives of the financial industry expected that the president of the Central Bank, Roberto Campos Neto, would announce stricter rules for fintechs. The autarchy itself had been signaling that greater capital requirements for large digital banks and for the operation of payment accounts were at hand, after several months of public consultation.

But the BC has put the brakes on, four government sources with knowledge of the matter told Reuters. This left the financial sector wondering if the regulator chose to just avoid giving a negative signal on the eve of the debut of the biggest fintech star on the stock exchange, Nubank, or if it was convinced that its new regulations as designed would leave a more negative balance instead. of a positive balance that could be brought about with the correction of supposed regulatory asymmetries.

The proposal to raise capital requirements for payment institutions, as a result of public consultation 78, which could target names such as Nubank, PagSeguro, Stone and Picpay, came to be ruled by the National Monetary Council (CMN), the last instance of approval before a regulation comes into effect, as published by Reuters.

The rule was being discussed amid the growing cry from the biggest banks that the simplified regulatory shelter no longer made sense to several of its neo-rivals, who have already reached tens of millions of customers and started to offer a wide variety of products. To support their argument, they presented a study commissioned to the consultancy Oliver Wyman, pointing out the risks of regulatory asymmetry.

Days before disclosing the adjustments, however, the autarchy acceded to warnings that a wrong dose of regulatory tightening, both in the case of prudential capital requirements and in the payment account operation, this target of public consultation 89, could compromise the evolution of more fintechs and for losing the progress of the pro-competition agenda of the BC itself.

“If the dose is wrong, the BC can create barriers to entry and even make business unfeasible,” said Fabiano Camperlingo, president of SumUp, which specializes in micro and small businesses.

The director of a large digital bank, who asked not to be named, told Reuters that the BC does not seem to know how to raise that ruler without harming the market’s dynamism.

According to sources familiar with the matter with the regulator, the issue is still under deliberation at the BC, which decided to carry out a calibration in prudential aspects.

When consulted, the BC stated that it would not comment on the matter.

The episode illustrates the crossroads the BC has reached in regulating fintechs after a decade on its agenda to increase banking competition and try to break the dynamics of tariffs and historically high interest rates in Brazil.

One of the complications of a regulatory move now such as the one intended by BC in Brazil is that fintechs —today more than a thousand — have taken very different paths and use only the criterion of customer base size or financial volume handled, as the BC indicated , could create more problems than solutions, assess digital sources.

Some neobanks have bet on facing the big ones head on. Others chose not to take deposits or offer credit to escape capital requirements, but they became huge. There are also platforms that work with loans, but without using equity, instead seeking resources in the market with receivables funds. Therefore, they defend to be free from a tightening of the capital rules.

At stake are tens of billions of reais from domestic and foreign investors injected into financial services platforms and who now, even with minor regulatory adjustments, could see their ambitious plans undermined.

“In addition to the main war between banks and fintechs, there have been several other smaller clashes between digital banks themselves,” said an executive at a major digital platform. “And the conversations are getting more and more visceral.”

The situation exposes how the BC’s task has become enormously more complex than just mediating a relationship between large and small. But by wearing the hats of regulator and market stimulator at the same time, the authority has placed itself in growing conflicts of interest.

Having barred WhatsApp Pay last year from debuting on the market before Pix, the regulator’s own instant payment system, made BC the target of criticism that it operated in its favor at the expense of a market solution.

The fear is that controversies like this will gain new contours with the entry into force of new phases of open banking, which will increase competition for even more sensitive areas of the system, such as credit and insurance, said an executive of the sector.

In view of this, the discussion on redefining the BC’s spheres of action defined by law 12,865 has grown, both inside and outside the government, eventually with the spin-off of some activities currently carried out by the regulator, as in the case of Pix itself.

But it is not clear either for the market or for the government which is the best path.

A source familiar with BC affairs opines that as a regulator, the payment method created by the bank could become too large and go to the private sector.

When consulted for this matter, Nubank and Mercado Pago stated that their positions on these topics are dealt with by Zetta. Created last March to defend the interests of digital financial services platforms, Zetta said in a statement that it “supports proportionality in prudential norms, considering the size of conglomerates”.

Febraban, in a statement, stated that it defends that “competitors of equal sizes are subject to the same regulatory environment” and that excessive asymmetries can distort competition, weakening the industry and the consumer.

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