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.

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.