Fintechs And Their Regulation In Brazil

Like other countries, Brazil is experiencing the rise of new high technology-based financial services providers, which are known here also by the English neologism: Fintechs.

Some Fintechs challenge the traditional financial system by offering innovative, more user-friendly and cheaper services - at least until they become big enough to dominate the market and impose prices. In a highly regulated market as is the Brazilian financial sector, not all the above benefits will necessarily be present: either the Fintechs will offer ancillary, less value-added services, such as organization of personal expenses, or their revolutionary ideas will fall within any kind of regulated, state-supervised activity - exactly as the traditional institutions.

Fintechs that intend to offer full financial services need a license from the Central Bank of Brazil to operate as a bank, credit company, securities or foreign exchange broker, dealership house or payment institution, depending on the nature of the services. If the service involves securities, the Fintech also needs to obtain authorization from the Brazilian Securities and Exchange Commission (CVM) or be eligible to exemption.

The licensing process is typically time and cost expensive, in particular if the Fintech has foreign capital shareholders, no matter to what proportion. Brazilian Federal Constitution requires Presidential approval by Decree for any new foreign investment in the financial system.

For these reasons, some Fintechs operate in partnership with authorized financial institutions, whereby the latter are the actual service providers. Other Fintechs apply for their own licenses. In other words, behind a cool Fintech, where all can be done through a few touches in the smartphone screen, anywhere in the world and far from the bureaucracy and costs of the old banks, there is often a good old bank.

According to press reports, some intermediaries - apparently operating outside of the Brazilian territory - offer money transfer services through the internet without the high costs and taxes charged by banks. The intermediary basically matches transfer orders from country A to country B with transfer orders from country B to country A, and then settles the orders by transferring local currency among the parties that are in the same country.

That would be a real Columbus egg, if it were not for one detail: the exchange of Brazilian currency against foreign currency, or vice-versa, is defined by...