Central Bank Public Consultation Notice No. 77/20 proposes changes to the rules for authorizing the operation of payment institutions set out in BCB Circular No. 3,885/18. Published in early July, the draft brings in impact proposals for the Brazilian payments industry. Some of them have been long awaited by the market, such as the regulation of a new type of payment institution (creation of payment transaction initiator).

In this article we address three aspects of the public notice that deserve special attention from the industry.

Objective of payment transaction initiator

Inspired by the payment initiation service provider (Pisp), created under the open banking regulation in the United Kingdom, the BCB has been indicating since April of 2019 that the service of initiating payment transactions is one of those contemplated in the Brazilian open financial system (open banking).

The first regulatory provision of this service took place on May 4, 2020, with Joint Resolution No. 1 of the BCB and the National Monetary Council (CMN), which established the regulatory framework for open banking in Brazil. The rule defines what payment transaction initiating institutions are (article 2, VI) and that the service to be provided by them consists of enabling "the initiation of the instruction of a payment transaction, ordered by the client, in relation to a deposit account or pre-paid payment" (article 2, VII). In addition, the rule makes it clear that payment transaction initiators will be mandatory participants in open banking and must observe the rules applicable to them.

These definitions, however, are somewhat abstract in nature, an option commonly adopted by regulatory bodies to confer a legal framework to future and uncertain situations.

The market expectation was a more detailed rule on payment initiation services. However, as the notice shows, it seems that the BCB intends to follow an abstract definition that guarantees it a comfortable level of control over potential new entrants, even at the expense of greater predictability for the industry. This dilemma is commonplace in financial regulation and so far the BCB has shown no sign of changing strategy.

Even so, it is already possible to find some practical examples that give a more precise idea of how this service will work in practice. According to a note published on the BCB website, a payment transaction initiator will allow the client to make payments by debiting his deposit or payment account without using cards, that is, through any other existing systems, such as book transfers or PIX, the instant payment arrangement to be implemented by the BCB by the end of 2020.

Good examples of use are delivery applications, which currently facilitate payments with the use of cards, but may offer a debit service without having to manage a payment account or participate in the transaction settlement chain.[1]

The less detailed nature of the standard opens up an important range of options for implementing this service. Regardless of the means used for the transfer (debit card registration, provision of data on the source account itself, or another tool that allows for direct transactions between accounts), if the initiation involves a payment debit or deposit account, it is a regulated service.

Greater regulatory rigidity on the part of the Central Bank

A second highlight of the public notice is the greater restriction to be imposed on payment transaction initiators. In the proposal presented, payment transaction initiators will need to request prior authorization from the BCB to operate. The rule differs from the current system for payment institutions, which should only request authorization after reaching certain operational limits.

In addition, the BCB has proposed that payment transaction initiators may not store end-user credential data used to authenticate payment transactions with the account-holding institution, unless the initiators provide a cloud storage service to financial institutions under the regulations in force.

In practice, this means that people will have to input their information with each transaction carried out, if this proposal is implemented, which may compromise the user experience. Currently, one of the greatest features for using cards in online purchases, especially in e-commerce sites and delivery and transportation applications, is the possibility of registering and activating cards for future transactions, without the need to manually input information with each purchase.

The BCB's proposal responds to the growing concern for cyber security and personal data protection in the financial system. However, it also shows the weight that this factor has been having in the regulator's decisions: information security is taken as a priority, even though it may harm the end user experience.


Greater stringency with electronic money issuers

A third point to highlight is the tightening of the rules on the authorization of electronic money issuers (institutions offering pre-paid payment accounts) to operate.

Currently, these issuers need to apply for operating authorization from the BCB only after reaching R$ 500 million in payment transactions or R$ 50 million in client funds held in a pre-paid payment account.

The BCB proposed in the public notice that all new institutions falling into this category should apply for authorization before starting to operate and those already operating below the limit should seek authorization according to a predetermined schedule, depending on the operational volume of each institution. Thus, all issuers would be covered by mid-2023.

According to the note released by the BCB, the change has reasons of a competitive nature (to level the market conditions of the providers of this service), a regulatory nature (to improve the monitoring of transactions, especially for the purposes of preventing money laundering and terrorist financing), and prudential nature (to improve the risk management of popular savings accounts managed by these institutions).

In various countries, there is growing concern regarding the financial resilience of pre-paid payment account managers and e-money issuers. In the US, for example, where the regulation of these players is generally more flexible and varies according to the state in which the institution is organized, some authors advocate improving the institutional arrangement applicable to e-money issuers in order to increase the protection afforded to users’ funds.[2]

Regardless of the reason, there is a clear indication of the change in risk perception by the BCB, which will certainly transform the payments market in Brazil, which, after six years of development, is already showing signs of resourcefulness and attracting a growing number of consumers.

Regarding the payment transaction initiators, there is no exact measure of the size of this market in Brazil, but it is already possible to have an idea of its potential, evidenced, for example, by the recent controversy involving WhatsApp Pay.

The regulator’s expectation is that this new type of payment institution will make the market increasingly competitive, stimulating creativity and innovation, both from established players and possible new entrants. However, the exact effects of this are still uncertain. After all, if the brief history of payment initiation in Brazil has taught us anything, it is that its potential impact is of great proportions.

[1] A payment method already present in Brazil for purchases over the Internet is bank transfer via partner bank. In these cases, the online store provided a direct link to the internet banking of one or another partner bank for transfer with pre-filled-in data of the beneficiary. With the concept of the payment initiator, the expectation is that this model may be replicated more widely and in a centralized manner, with lower transaction costs.

[2] Awrey, Dan. Bad Money (February of 2020). 106 Cornell Law Review. Available at: https://ssrn.com/abstract=3532681.