The new “banking” activities of payment institutions – an opportunity for entrepreneurs

Payment institutions – a typology – Banks and other financial institutions in Brazil are subject to several regulatory restrictions including stringent authorization requirements and other operational constraints. Payment institutions, on the other hand, are subject to more flexible regulations, as provided in Law No. 12,865 of 2013 and Central Bank guidelines.

This issue compares the legal requirements applicable to financial and payment institutions. The present article focuses on the ways payment institutions provide services that are typical of financial institutions while being subject to less regulatory constraints.

Each payment institution can be placed in one of the following categories, according to their activities:

• issuers of prepaid payment instruments or electronic money issuers, which receive payments in Brazilian currency to be stored in electronic form and used in financial transfers or purchases;
• issuers of post-paid payment instruments, or credit card issuers, which relate to end users, issuing the plastic or electronic system in which payments are imputed, charging users' invoices and passing the amounts on to the accreditors;
• the accreditors, who essentially enable merchants to accept payments through cards, receiving funds from card issuers and paying such merchants;
• payment initiation service providers, also known as PISPs, that provide means for the ordering of payment transactions, including interfaces, but do not hold funds in accounts.

The new rules regulating payment institutions were well received. They provided legal basis for the operation of non-financial entities that had already begun offering, with great success, services which, to a certain extent, substitute those of banking and financial institutions in general. Before this regulation was put in place, there was great uncertainty as to whether these institutions should be subject to the same stringent regulatory constraints applicable to financial institutions. Now, with these changes, one can expect a strong deconcentration in relation to several financial activities, away from banks.

Banking activity – banking activities in Brazil are subject to rules applicable to financial institutions in general. Financial institutions are classified as such based on the activities they undertake. Brazilian law and case-law presently define financial institutions as publicly or privately held legal entities dedicated to either: (a) the collection, intermediation and application of financial resources, in national or foreign currency, or (b) the custody of third party property.

Such a strict definition creates a closed system in which the functioning of financial institutions depends on the authorization from the Central Bank of Brazil granted on a discretionary basis. Operating as an unauthorized bank is a criminal offense, under the terms of Article 16 of Law No. 7,492, of June 16, 1986. A strict regulatory regime is imposed covering institutional aspects (such as minimum capital requirements) of financial institutions and their operations. This framework enabled financial institutions to develop activities that were not strictly exclusive to them, due to the confidence that their regulation aroused, such as payment services. This has changed in recent years with the advent of the regulation of payment institutions.

The new custody regime – Brazilian law provides that the “custody of third party property” and the intermediation of financial resources are activities that can be undertaken exclusively by financial institutions. A literal interpretation of these rules would suggest that general warehouses, document keeping companies and even cloakrooms in theatres would fall under this provision and be considered financial institutions. In order to avoid such widespread application, this provision had to be narrowly interpreted. This was done by applying the definition of financial institution used for criminal purposes as a supplementary source, that interpret the term “custody” as “custody of securities”. However, despite this reasonable interpretation, there was still great uncertainty surrounding this issue.

It was only upon the advent of the regulation of payment institutions, and the express regulatory consent they were given to accumulate resources for simple financial transfers or purchases, or issue the cards we use on a daily basis, that such activities were finally freed once and for all from the yoke of the financial institution and its stringent requirements.

Collateralization of credits of accreditors and raising of funds - But it was not only in this regard that Law 12,865/2013 enabled payment institutions to step into traditional core activities of financial institution .

The new regime recognized that payment institutions and their business customers would need resources to leverage their activities, and that they could obtain them by collateralizing their credits generated by card payment mechanisms. Thus, Law No. 12,865/2013 states that the credits of payment institutions can be given as collateral of credit operations, provided that the resources obtained are reserved and kept unencumbered for payment of debts to final payees. This allows, for example, the accreditors to pledge the credits they hold against credit card issuers, generating resources that can be used in advance operations to their end customers, sellers of goods and services in need of working capital.

Direct pre-maturity advancements by payment institutions – Under Law No. 12,865/2013, the accreditors are allowed to anticipate their debts to Merchant customers, that normally mature in 30 days under typical credit card rules. Such an operation can be made at freely agreed rates because it is a mere prepayment of the accreditor’s debt with the merchant who sold goods or services to the cardholder.

Under this framework, the accreditor is not undertaking activities that are exclusive to financial institutions, but merely advancing an amount owed to its client, without making a financial loan. Thus, even if third party resources were used, as per the previous item, this would be lawful: again, only upon financial intermediation would there be activity reserved to financial institutions, such as banks.

Such transaction is also not banned by usury laws, which only restrict interest, because in a payment anticipation there is merely a discount rate on preexisting debt.

A conclusion in this sense had already been issued before the regulation of payment institutions by Law No. 12,865/2013, enshrined in precedents of the Brazilian Superior Court of Justice, that artificially (and wrongfully) considered credit card companies as financial institutions. Such companies were thus allowed to charge unlimited “interest”. The reasonable finding hid an equivocal premise, which may, in future, provide technical grounds for the decision to be overruled. Since 2018 when specific legislation was enacted and regulation issued by the Central Bank of Brazil, we know that payment anticipations are lawful business operations of payment institutions accrediting credit cards. And this makes perfect sense, since they do not intermediate resources through credit. From this emerges a solid legal framework supporting anticipations made by accreditors to their merchant customers, in replacement of normal and costly financing by traditional banks and other like institutions.

Raising of resources through credit-purchase funds – Finally, this more liberal environment was completed by regulations from the Central Bank of Brazil, which considered credits due by a payment institution to its customers as assets subject to centralized registration. This includes receivables owed by the accreditors to their business customers. The reason for that is to enable the proper transfer of title to these credits for securitization and collateralization purposes, with effect before third parties.

As a result, merchants can use their credits against accreditors to easily obtain advances, transferring them at a discount or as a fiduciary guarantee to financial institutions. However, it turns out that, due to the proximity of business clients to their accreditors, more favorable conditions for the entrepreneurs often prevail if the same transfer is done to funds of receivables organized by the accreditors themselves and even funded by them as investors. With a centralized registration, merchant’s credits can be easily purchased by and transferred to such funds. With the side effect of making the operation safer and decreasing the financial discount applied to determine the acquisition price.

Conclusion - It follows from the above that Law No. 12,865/2013 had the important effect of freeing payment institutions from the wooden vest of financial institutions, which has always haunted them. As a result it opened the road for such institutions to enter in “banking” operations such as:

i) the custody of financial resources for specific transfers and for use in payments for goods and services;
ii) the raising of finance by accreditors through the collateralization of their credits against credit card issuers;
iii) the extension of finance to merchant clients, either indirectly through accreditor-sponsored investment funds, or directly through anticipation of credits effectively due.

Thus, a new world emerges for prospective investors in “banking” activities and their businesses: it is no longer necessary to go through the pains of capitalizing and incorporating a bank to undertake the activities above. This is no small matter in the current days of financial uncertainty.