Hey FinTech Fanatic!
In the latest development of the ongoing 'war' between banks and payment companies over interest-free installment payments and revolving credit card balances, the Brazilian Federation of Banks (Febraban) has intensified the dispute.
Febraban, representing major banks, filed two complaints with the Central Bank of Brazil (BC), seeking an investigation and potential penalties against fintechs Mercado Pago, PagBank, PicPay, and Stone.
According to Febraban, these fintechs are allegedly involved in irregular and fictitious operations, where they discreetly charge consumers interest. The federation accuses these companies of what it terms "pirate interest-free installment". Febraban asserts that these firms are imposing "remunerative interests" on users, but disguising them in credit card statements as interest-free installments.
If proven, this practice could be a serious concern, as such activities might be prohibited or unauthorized by the Central Bank and potentially fraudulent, undermining the legality of these charges.
Context of the Dispute
This controversy emerges amidst a heated debate over the regulation of revolving credit card interest rates, sparked by the Bill 2.685/2022 and the inception of the Desenrola program. This issue has raised questions about the future of interest-free installments, which currently account for 15% of the consumer credit market in Brazil.
The sector is racing against time since the bill, passed in early October, gave the market 90 days to find a solution and present it to the National Monetary Council (CMN). If not, the interest rates on revolving credit will be capped at 100% of the principal amount. Currently, revolving credit is only available for 30 days; thereafter, unpaid balances shift to interest-bearing installment payments.
"Buyer Installment" Scheme
In its first complaint, Febraban alleges that independent acquirers PagBank, Stone, and Mercado Pago have developed a credit offering known as "buyer installment". In practice, this involves adding a percentage to the price of products for installment purchases. However, while charging interest to consumers, these acquirers supposedly record a false transaction of "interest-free installment" in the card brand systems, thus misrepresenting the actual transaction.
Febraban claims this method is an artifice to pass on the costs associated with receivables anticipation charged by the payment terminals of commercial establishments. This approach could make retailers more dependent on receivable anticipation from interest-free installments, simultaneously relying on consumer indebtedness, leading to high credit card interest rates.
Allegations of "Financial Engineering"
The second complaint by Febraban targets digital wallets Mercado Pago and PicPay. The federation accuses these firms of engaging in "financial engineering" to provide loans with interest to consumers, while recording the transactions as "interest-free installments". This practice supposedly involves using the credit card limits of individuals for various financial operations, only to later charge them in installments with added interest, but recording these as interest-free purchases on credit cards.
Febraban emphasizes that these companies are not authorized to provide direct loans to consumers and that such practices directly contravene the rules of credit card brands, as well as regulations set by the Central Bank and the National Monetary Council.
Response from the Accused Companies
Mercado Pago, PicPay, PagBank, and Stone have not individually commented on the allegations. Their collective stance is represented by the Brazilian Internet Association (Abranet), which includes several payment market companies.
Abranet dismisses Febraban's accusations as another attempt by major banks to undermine independent companies. They argue that there's no demonstrated link between the high-interest rates charged by big banks and the interest-free installment scheme, noting that credit card interest rates can reach up to 445% per year.
The Central Bank, when approached by Fintechs Brasil, a partner site, declined to comment on the matter. Abecs, representing over 90 payment companies including major acquirers controlled by banks, also chose not to issue a statement.
This unfolding story highlights the complexities and competitive tensions within Brazil's rapidly evolving fintech landscape, underscoring the need for clear regulations and transparency in financial operations to protect consumers and maintain market integrity.
Enjoy more global FinTech industry updates I listed for you below and I'll be back with more news tomorrow!
POST OF THE DAY
How have payments stocks performed in 2023?
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