Brazil's New Receivables Regulation & Fintechs

A Shift in Brazilian Merchant Payments

Significant changes are underway within Brazil's financial landscape, poised to reshape how merchants receive payments for goods and services.

The Brazilian Central Bank is at the forefront of this transformation, establishing a new framework with extensive implications for merchants and fintech companies throughout this rapidly expanding Latin American nation.

The Traditional Challenges of Receivables

Historically, unlike many other global markets, Brazilian merchants haven't received immediate full payment upon credit card transactions.

Approximately half of all card sales are settled in monthly installments, creating substantial cash flow management difficulties for sellers.

The typical response for merchants has been to sell their outstanding receivables at a discounted rate—accepting less than the full amount owed—to access funds more quickly.

This isn't a small market; around R$2 trillion (Brazilian Reais) in card transactions were processed in 2020 alone.

A Practical Example

Consider Maria, who purchases clothing from Clothing Incorporated. She opts to pay R$620 over six installments using her credit card.

While Maria immediately enjoys her purchases, Clothing Incorporated faces a delay in receiving full payment. This can be particularly challenging for smaller merchants with limited working capital.

They can either wait six months for complete payment, receiving monthly installments from their merchant acquirer, or they can sell the receivables at a significant discount to expedite the process.

The High Cost of Early Payment

If Clothing Incorporated’s acquirer is ExMarko, they might receive R$520 within days instead of waiting six months, with ExMarko retaining the remaining R$100.

This represents a substantial cost for the merchant, potentially equating to an annualized interest rate of around 70%—despite the acquirer facing minimal risk, as they are simply accelerating the collection of their own obligation to the merchant.

The Root of the Problem: Lack of Competition

Receivables financing in Brazil has been expensive primarily because, until recently, sellers were limited to discounting their receivables through a single buyer or acquirer.

This lack of a competitive marketplace allowed acquirers to dictate terms, often to the detriment of the merchant.

Merchants, needing immediate capital, had little negotiating power, and unfavorable rates—sometimes exceeding 70%—were commonplace.

The Central Bank's Intervention: Registration Entities

This situation began to change in early June with the Brazilian Central Bank’s introduction of “registration entities.”

Acquirers are now required to register all merchant receivables with these entities, enabling any interested buyer to submit offers, thereby fostering competition and driving down discount rates.

Clothing Incorporated can now sell its receivables to the highest bidder, promising significantly improved rates.

Addressing Inefficiencies

While selling receivables to access immediate funds carries a cost, the previously exorbitant rates created undeniable inefficiencies and fueled the need for regulatory change.

Acquirers were effectively charging rates of 70% or higher for a risk-free early payment, a disparity that prompted intervention.

New Opportunities and Financial Services

This new regulatory framework unlocks opportunities for various participants in receivables discounting.

Registration entities can serve as collateral verification for merchant loans and provide evidence of customer quality, opening doors to broader financial services.

A Changing Landscape

The dominance of established acquirers like Rede, Stone, Cielo, SafraPay, and PagSeguro, alongside CIP, is now being challenged by new entrants such as Cloudwalk, receivables marketplaces like Spike, and new registration entities like CERC and B3.

These developments signal an exciting period for fintech companies in Brazil.

B3's Role in the New System

B3, Brazil’s leading market infrastructure and Latin America’s largest stock exchange, is playing a key role. Fernando Bianchini, products associate director at B3, explains that they are leveraging their expertise in financial assets to provide a secure and transparent infrastructure for credit card receivables.

B3 aims to reduce transaction spreads and enhance the overall efficiency of the market, tailoring solutions to meet the specific needs of individual clients.

Industry Perspectives

Jonathan Whittle, a venture capitalist and co-founder at Quona Capital, emphasizes that the new regulation is a win for business owners who were previously constrained by a limited system.

He believes it will accelerate growth for both merchants and the Brazilian economy.

A Boon for the Economy

The changes primarily benefit merchants and foster innovation, while potentially impacting traditional receivables acquirers.

Reducing transactional friction, increasing transparency, and lowering discounting costs are expected to stimulate economic growth.

Innovation at the Forefront

Whittle notes the emergence of innovation centered around credit card receivables registration within the fintech startup ecosystem.

This includes advancements in low-cost B2B payments and collateralized working capital loans.

Regulation as a Catalyst

This situation demonstrates how regulation can drive innovation, fostering a more competitive market and improving funding costs for merchants, ultimately contributing to Brazil’s economic recovery.

This is a regulatory change that deserves widespread recognition.