A regulatory change makes it easier for Brazil’s digital lenders to tap international investors. The change comes as startups, merchants and even asset managers apply to operate independently as direct credit companies and P2P lenders
Brazil’s central bank has made it easier for newly-registered fintechs to get international investment, with a regulatory change that is expected to drive more growth in the digital lending market.
The Central Bank has issued a blanket decree that says having foreign capital flowing to the online lending industry is in the national interest.
Previously, digital lenders and peer-to-peer loan platforms had to individually request a Presidential decree that said an international investment in their firm was in the national interest.
“The Central Bank saw that requiring a presidential decree for investment was a bottleneck,” said Bruno Balduccini, partner at law firm Pinheiro Neto Advogados. “The Central Bank is very eager to help fintechs, because they want to foster competition in the credit market. The process now is much easier and faster.”
The regulatory change is similar to another that allows shares in Brazil’s biggest banks to trade freely on international markets.
“It’s an important move,” said Rubens Vidigal Neto, partner at PVG Advogados in Sao Paulo. “In this market, there is heavy foreign investment in fintech startups.”
New status for digital lenders
The rule change comes after the central bank created a new legal status for online lenders earlier this year. That scrapped a requirement that fintechs partner with a local bank to operate.
Digital lenders can now apply to be licensed either as a direct credit company (SCD, for Sociedade de Crédito Direto) or a peer-to-peer lender (SEP, for Sociedade Entre Pessoas).
Already, six of Pinheiro Neto’s clients have applied for a license from the Central Bank, and another seven are working on applications, said Balduccini. And it’s not just straight credit fintechs that are looking at the new regulatory status.
Some large merchants are considering seeking authorization under the new rules, he said. Such registration could allow retailers to roll out e-wallet services that streamline payments, and open the way to lend to their customers for purchases, for example.
Similarly, some asset managers and broker dealers are considering applying for online lender status. As with retailers, they see opportunities to extend credit to their clients.
“It’s not restricted just to credit fintechs,” said Balduccini.
At the same time, some smaller fintechs may opt to stay in partnership with banks, said Vidigal. That’s because the costs of registration outweigh the flexibility gained, he said.
“We are having discussions with fintechs about whether it makes sense to be regulated,” he said. “It makes you more flexible, because you no longer depend on a third party. But it demands a relevant increase in costs, such as complying with tax and labor regulation.”
While last week’s rule change on foreign investments may help drive interest in regulated status for fintechs, “investment is not the major concern in taking these decisions,” said Vidigal.
Central Bank continuity likely
Recent rule changes for fintechs – such as this one on foreign investment – come as part of the Brazilian Central Bank’s agenda to increase financial inclusion and foster competition in the country’s financial sector.
The bank, led by Ilan Goldfajn, has made good progress in that area, say lawyers.
Last month’s presidential elections created uncertainty over whether Goldfajn would remain as Central Bank Governor. But recent comments from Paulo Guedes, who has been designated finance minister in Jair Bolsonaro’s incoming administration, indicate Goldfajn will stay in his role.
For Brazil’s fintechs, that is good news.
“The Central Bank is keen to find the best way for the market in terms of regulation,” said Vidigal. “And, technically speaking, they are very good.”
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