Financial and payment institutions: a comparison

Payment institutions are authorized to conduct some activities in Brazil that are typical of financial institutions, as explained in another text of this issue, however they are subject to more flexible regulatory requirements. In this article we compare the regulatory regimes applicable to financial and payment institutions, starting with the conditions for foreign investments in these entities.

Foreign investments in financial and payment institutions

Since 1988, foreign investments in Brazilian financial institutions are only allowed when there is a formal recognition that they are in the “national interest”. This rule applies to the incorporation of new institutions, increase in the percentage of foreign capital in existing ones, and establishment of branches of foreign financial institutions in Brazil. Payment institutions, on the other hand, have never been subject to such restriction in foreign investments.

Until recently, a foreign investment only met the “national interest” requirement when the President of the Republic issued an executive decree to that effect. Such decree, besides being discretionary, could take two or more years to come through. On September 2019, a Decree delegated to the Central Bank of Brazil the power to define the criteria for determining when a foreign investment in an institution is in the “national interest” and decide, on a case by case bases, whether a specific investment meets the test.

On January 29, 2020 the Central Bank issued Circular No. 3,977 declaring that any participation in Brazilian financial institutions by individuals or legal entities resident or domiciled abroad is in the national interest if such individuals or entities meet the same conditions applicable to local institutions regarding incorporation, change of control and corporate restructurings.

In practice, this change means that barriers for new foreign investments in Brazilian financial institutions have been removed. Because the legal basis for this change is a Decree and a Central Bank regulation, these barriers could be easily reinstated in the future. Although this is a potential risk, especially considering that the Brazilian Constitution discriminates between national and foreign investments in financial institutions, there is no sign that a change is in the horizon. When it comes to investments in payment institutions, on the other hand, there is no such risk because national law has never limited foreign investments in these entities.

Regulatory framework

Payment institutions are subject to a simplified licensing process in comparison with financial institutions and are relatively less regulated than financial institutions. The following table highlights some key differences between financial and payment institutions, based on current laws and regulation.


Financial institutions (FIS) Payment institutions (PIS)

Licensing requirement exemptions

 No Available for certain PIs based on the scope of their services and volume of businesses

Form of incorporation

 Joint stock corporation Joint stock corporation or limited liability company

Licensing process

Complex: 9 phases (Resolution No. 4,122/2012 from the National Monetary Council) Simplified: 3 phases (Circular No. 3,885/2018 from the Central Bank of Brazil)

Minimum capital requirement

Commercial Banks: BRL 17.5 MM (ca. US$ 3.15MM)

Investment Banks: BRL 12.5 MM (ca. US$ 2.25 MM)

Other credit and leasing companies: BRL 7 MM (ca. US$ 1.26 MM)

Mortgage companies: BRL 3 MM (ca. US$ 540,000)

Brokers/dealers: BRL 1.5 MM (ca. US$ 270,000) (full license) or BRL 550,000 (ca. US$ 99,000) (limited license)

Foreign exchange (FX) brokers: BRL 350,000 (ca. US$ 63,000)

FX operations: BRL 6.5 MM (ca. US$ 1.17 MM)

Multiple banks: the sum of the amounts indicated above for each authorized activity

Issuers of prepaid instruments: BRL 2 MM (ca. US$ 360,000)

Issuers of post-paid instrument: BRL 2 MM (ca. US$ 360,000)

Acquirers: BRL 2 MM (ca. US$ 360,000)

Payment initiator service providers (PISPs): BRL 1 MM (ca. US$ 180,000)

Minimum net worth requirement

FIs must keep a minimum net worth calculated according to the “Basel core principles”, which take into consideration the structure of their risks (credit, market and operational); calculation is complex PIs must keep a minimum net worth equivalent to 2% of their transaction volume (or currently 1% in the case of PISPs), or 2% of the balance of electronic currency issued by them; calculation is simple. Proposed regulation may however submit PIs and FIs to the same minimum net worth requirement rules

Risk management structure requirement

FIs must maintain adequate internal structures for management of risks, monitoring of capital and liquidity requirements, and information disclosure, as per Resolution No. 4,557/2017 from the National Monetary Council and related regulation Risk control structures that PIs are required to maintain are less complex, as per Circular No. 3,681/2013 from the Central Bank of Brazil. Proposed regulation may extend to certain PIs compliance rules that are now applicable only to FIs

Engagement in "financial intermediation" (extend credit with funds collected from third parties)

 Permitted  Prohibited

Extension of credit to related parties

 Prohibited (with exceptions) Permitted (provided that the PI does not engage in “financial intermediation”)

Engagement in FX transactions

 Permitted (upon specific authorization) Not possible under current regulation, but the PI may apply for a special authorization under the Central Bank sandbox. Proposed regulation may authorize PIs to engage in limited FX transactions.

Management of investment funds

 Permitted  Prohibited

Issuance of debentures

 Prohibited  Permitted

Creation of subsidiaries

Only upon authorization from the Central Bank of Brazil (with exceptions)  No authorization required

Banking secrecy laws

 Applicable  Applicable

Anti-money laundering laws

 Applicable  Applicable

Special insolvency regimes conducted by the Central Bank of Brazil

 Applicable  Applicable

Depositors' credits

Credits against the FI arising from sight, time or savings deposits are unsecured credits and subject to other creditors’ preferences in case of insolvency of the FI Credits against the PI arising from deposits in electronic money accounts are not affected by the insolvency of the PI

 

The conclusion is that payment institutions are subject to much lighter regulatory constraints than traditional financial institutions such as banks, not only regarding institutional aspects such as licensing, capital and net worth requirements, but also in relation to operational aspects such as risk management structures and subsidiary formation. These lighter constraints come at the expense of not being able to engage in financial intermediation and fund management. Depending on the area of activity, this latter restriction may be a small price to pay for increased regulatory freedom.

L&S Authors

Luiz Roberto de Assis

Luiz Roberto de Assis

Partner

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