Lindsay Lehr
Managing Director
PCMI
Brazil continues to make headlines globally for its innovations in payments. Pix, the Central Bank’s real-time payment system launched in 2020, has rapidly become the most widely used payment method in Brazil, and according to the Central Bank of Brazil and the Prime Time for Real-Time Report study,[1] Pix represented 15% of instant payments globally with nearly 30 billion transactions. The Central Bank is also one of the most advanced in the world with respect to central bank digital currency and in March 2023 announced the winners of the LIFT challenge, a crowd-sourcing competition that asked industry stakeholders to develop potential use cases for the Digital Real. In the private sector, Brazil is home to the world’s largest neobank in terms of market capitalization, Nubank, and data from the Central Bank reports that financial inclusion is Brazil is well over 90%. In nearly all ways, Brazil’s public and private sector are stretching the limits of financial technology, pushing into fringe use cases, determined to solve the inefficiencies that still belabor money movement in the country.
One area where Brazil has not yet earned global headlines is in cross-border payments. Brazil is a relatively closed market with respect to foreign exchange, compared to trade Mexico, for example: Brazil’s trade to GDP ratio was 40% in 2021 compared to Mexico’s 84%.[2] This is due to the sheer size of Brazil’s domestic market (8th largest in the world), and to regulation, including a variable “IOF” and withholding tax applicable on certain foreign exchange transactions, and strict requirements on which institutions can access the foreign exchange market.
Even so, just about anything in Brazil can be considered big, due to the sheer size of its economy, and Brazil has attracted a lot of investment and fintech to various cross-border use cases. Here is a look at some numbers in the outbound cross-border market in 2023 (estimated forecasts):
We can see that the primary opportunity in the cross-border industry is small business exports, which dwarfs other payment verticals. And yet, very little payment innovation has flowed to this vertical. By and large, small business in Brazil depends on international wire transfers to pay invoices abroad and have limited (and expensive) access to the foreign exchange market. And while the Central Bank and other fintechs are making inroads to improve outbound cross-border payments, today the focus is on payments within Latin America, i.e. to Colombia and Argentina. These efforts could be misplaced when it comes to serving small businesses, considering the top outbound corridors for small business invoice payments are China, the US, and Germany.
Why this is changing
Cross-border payment companies, therefore, have the opportunity to disrupt the market for small businesses, streamlining payments, making them more accessible, transparent and affordable, and change may be on the horizon, consider four key trends:
- Fintechs dedicated to international payments for small businesses. Some companies are actively working on this. Cross-border banking fintech and licensed foreign exchange bank, Bexs, provides specialized import/export service and international remittances for companies.
- International accounts becoming more accessible. Global and local fintechs & medium size banks such as Wise, C6, BS2 make it possible for Brazilian companies to open international accounts to make and receive payments in multiple currencies.
- International Pix. The Central Bank has cross-border payments with Pix on its long list of agenda items, but an update came in February this year, when president of the Central Bank, Roberto Campos Neto, said that Brazil is considering organizing with a block of countries to enable international Pix. The central bank has already met with representatives from Colombia, Ecuador, Chile and Uruguay to this end.
- More flexible regulation. Brazilian regulators understand that to maintain the competitiveness of their economy, regulation must remain flexible and pro-business. As such, the IOF for credit card purchases abroad was reduced from 6.38% to 5.38% in 2023, and the IOF for all foreign exchange transactions will fall to zero by 2029. At the end of 2022, the Central Bank also become more flexible on offering access to the FX market, enabling acquirers and other regulated payment institutions (most of which are fintechs) to provide cross-border services.
The cross-border market in Brazil still has a long way to go to becoming fully open, transparent and accessible to small businesses. But with 30 million small and micro businesses in Brazil, representing 30% of Brazil’s GDP (north of $500 billion), there is a large opportunity to provide them with better access to cross-border payments. As commerce becomes more globalized and Brazil’s economy grows, small businesses will continue to source goods and services from all other the world, providing a nearly $100 billion opportunity for those who are positioned to capture it.
Sources
[1] BCB, 2023. “Pix is one of the world’s most used instant payment systems.” Link here
[2] World Bank
