The Brazilian Central Bank (BACEN) has recently opened a public consultation for a new ruling that will regulate the fintech credit segment in Brazil (Public Consultation No. 55/2017). The proposal sets two new types of financial institutions, the direct credit company (Sociedade de Crédito Direto – SCD) and the peer-to-peer (P2P) lending company (Sociedade de Empréstimo entre Pessoas – SEP). Even though the proposed regulation aims at the fintech credit segment, it may also have an impact on the securitization and the alternative payment methods segments.
In recent years, the Brazilian fintech credit market has grown exponentially. This growth can be explained by the improved client experience and the better terms and conditions offered by fintech credit providers to their clients, and also by the fact that such fintech firms aim at consumers that are not usually targeted by conventional financial institutions. Due to strict regulatory framework and legal limits on interest rates that can be charged by lenders that are not financial institutions, most fintech firms work with bank partners that provide loans to the firms’ customers. This business model, on one hand, helps fintech firms reduce legal risk; on the other, however, increases costs and creates inefficiencies.
One of BACEN’s main goals in proposing the creation of the SCD and the SEP is to allow fintech credit providers to lend money to their clients without a bank as an intermediary. According to the ruling proposal, the SCD, or the direct credit company, would provide loans to borrowers using exclusively the SCD’s own capital. Funding models for SCD would be very limited. The SEP, or the peer-to-peer (P2P) lending company, would match prospective borrowers and lenders, assuming no credit risk in the loans. Both SCD and SEP would have restricted scope of activities and should provide services exclusively through electronic platforms. They both would benefit from a simpler registration procedure before BACEN and less severe minimum capital requirements than conventional financial institutions.
The use of loan securitization is a very popular funding option among fintech credit providers. Receivables investment funds (Fundos de Investimento em Direitos Creditórios – FIDC) and securitization companies raise funds in the capital market to buy loan receivables originated by fintech firms. The current model, however, is still based on the partnership structure abovementioned, in which all loans are provided by bank partners and not by the fintech firms themselves. Once the new fintech regulation is enacted, this model will have to be adjusted, potentially with some efficiency gains. Other securitization structures may as well be created to contemplate the SCD and the SEP models.
The alternative payment method segment could also benefit from this ruling. Although providing loans is not in the core business of payment services firms, most of them use bank partners to make loans available to their customers. Depending on the final wording of the ruling, such payment services firms may end up using the SCD and the SEP models.
The ruling proposal for fintech credit is part of BACEN’s agenda to increase competition and pressure financial institutions to be more efficient, foster credit market growth and lower costs to the final borrowers. This rule could bring important changes to the Brazilian credit market, not only the fintech credit segment. The deadline for participation in the public consultation is November 17, 2017.