What does Brazil’s new receivables regulation mean for fintechs?

Something strange is afoot in Brazil, and it promises great changes for how merchants get paid.

This the story of one regulator, the Brazilian Central Bank, and how it has taken center stage in creating a framework that will have far-reaching effects across merchants and fintechs in this fast-growing Latin American nation.

But first, some background: Unlike in the rest of the world, when a credit card is used for payment in Brazil, the merchant does not receive the funds owed to them all at once. Instead, nearly 50% of card sales are completed in monthly installments, leaving the sellers to manage a difficult cash flow process.

The most common solution for merchants is that they end up selling the remaining receivable at a discount — taking less than they are owed — in order to get their money sooner. And we’re not talking about a small-volume market: Some R$2 trillion (Brazilian Reais) in card transactions were processed in 2020.

Here’s what this looks like in practice: Let’s say Maria purchases a few articles of clothing from retailer Clothing Incorporated. When paying via her credit card at checkout, Maria can choose to pay in two to 12 installments. Maria decides to pay the balance of R$620 over six installments.

While Maria is happy with the products in hand, Clothing Incorporated is without the full payment — and for small merchants in particular, the difficulties associated with limited working capital can be acute. Clothing Incorporated can either wait the full six months to be paid, receiving payments from their merchant acquirer each month until they are paid in full, or they can choose to dramatically discount the amount they are owed and not have to wait the six months.

Let’s say Clothing Incorporated merchant acquirer is ExMarko — instead of receiving R$620 over six months (net of any merchant discount rates), they could receive R$520 within days after the purchase, with ExMarko pocketing the rest when it comes in. This comes at a steep cost of doing business to the merchant, with an implied annualized interest rate that sometimes can reach  ~70% — for a risk-free operation, since the acquirer is only liquidating earlier its own obligation to pay the merchant.