Open banking and payment initiation service providers: new opportunities for foreign digital businesses
The Central Bank of Brazil (BCB) and the National Monetary Council (CMN) issued Joint Resolution No. 1 on May 4, 2020 providing the legal basis for implementing an Open Banking system in Brazil. This is part of BCB’s agenda towards increasing competition in the Brazilian payments system by lowering barriers to entry and reducing transaction costs.
The Open Banking system will enable the sharing of data, products and services among financial institutions, payment institutions and other licensed institutions, such as securities brokers and dealers. These rules will be implemented gradually pursuant to a schedule defined by BCB and CMN.
Adherence to the Open Banking will be mandatory for large financial institutions and payment initiation service providers (PISPs), the latter of which is a new type of payment institution based on the European model, and introduced in Brazil by Joint Resolution No. 1.
A PISP initiates the payment transaction at clients’ request by sending the payment instruction to the institution in which the client keeps its funds. The PISP or the depositary institution authenticates the request and the payment transaction is then performed by the depositary institution. PISPs differ from other payment institutions because they do not manage client accounts nor hold the funds being transferred at any time. Hence, their activity is not subject to liquidity, account management and custody risks like other payment institutions.
Based on the “same risk, same regulation” principle, BCB adopted less stringent regulatory requirements for PISPs in relation to financial institutions and other payment institutions (please read a comparative overview of the regulation of financial and payments institutions).
PISPs are subject to a simplified authorization process and can be incorporated as joint stock or limited liability companies. PISP’s owners are required to provide only R$1,000,000.00 (ca. US$180,000.00) as minimum capital and incorporation and maintenance costs are expected to be relatively low. Furthermore, no restrictions exist on the foreign ownership of PISPs. This lighter-touch regulation has a potential to lower payment transactions costs and to create new business opportunities for foreign digital entrepreneurs in Brazil.
Until now, online shops used to affiliate themselves to card payment schemes in order to sell goods and services to Brazilian clients inside their platforms. In doing so, they were charged the merchant discount rate (MDR) for every transaction. Even though MDR has been decreasing in the past few years, it is still a relevant cost for merchants. Moreover, while merchants depended on card payment schemes, there was a delay from the moment the transaction took place to the moment the funds were made available to them as funds were not transferred immediately to the merchant’s account. It could take about thirty days for the transfer to occur when a credit card was used, and about two days for debit cards. Although anticipation of funds is possible, as explained in another text of this issue of this newsletter, it is subject to a discount normally set at financial market rates.
These downsides can be avoided by replacing the traditional credit or debit card scheme with a PISP transaction. Through a PISP, the client could authorize the transfer of funds directly from his or her banking or payment account to the merchant’s account. The funds would be transferred immediately and would not subject to an MDR or discount fee. This alternative becomes even more attractive if the payment initiated by the PISP is routed through the recently created instant payment system (PIX). PIX is operated by the BCB and provides real time gross settlement payments to and from banking or payment accounts on a 24/7 basis.
Incorporating their own PISP can be a solution for merchants with a large volume of transactions in Brazil. Alternatively, an independent PISP can be engaged to provide the payment initiation service.
In short, the introduction of PISPs in Brazil is expected to reduce costs, increase competition in the national payment system, and create business opportunities for existing players and new entrants.