The Central Bank of Brazil issued new guidelines on interchange rates for prepaid card and debit card transactions, with new caps of 0.7% for prepaid cards and a firm rate of 0.5% for debit cards. This adds pressure to the country’s burgeoning fintech industry, but brings relief to traditional banks working to compete with the less regulated startups. Full details of the new regulations, which are slightly less stringent than initially proposed, are reported by Reuters:
“The central bank had put the issue out for public consultation last year, but its proposal suggested a maximum rate of 0.5% for both debit and prepaid cards, which would be even more damaging to fintechs. Banks’ debit card interchange fees, which currently have to comply with a joint weighted average calculation of 0.5% and maximum value per transaction of 0.8%, will now be capped only by 0.5% per transaction.”
The main benefit in Brazil is that the regulations create more equity for debit issuing banks in competition with fintechs using prepaid instruments. This is likely a reason why consumer benefit was not a highlight of the announcement. By bringing prepaid cards in-line with debit interchange rates, Brazil creates a more simplified environment that banks feel creates a level playing field in how they work with merchants and compete against startups that previously had more latitude on creating revenue by using prepaid instruments.
In the prepaid space, an argument can be made that the restrictions on interchange can maintain or increase service fees paid by consumers for prepaid cards as a way for the fintechs to compensate for lost interchange revenue. Brazil’s policy, which takes effect on April 2023, doesn’t hide that the move was made for the benefit of the retailer with no direct implication that the consumer would benefit as well:
“According to the central bank, the changes will ‘increase the efficiency of the payments ecosystem, encourage the use of cheaper payment instruments, enabling the reduction of costs for stores to accept these cards.’”
The rates and rationale for Brazil are similar to rates and rationale established in the United States by the 2010 Durbin Amendment that was upheld in 2014 by the Supreme Court, although in the U.S. there was added political rationale to aid consumers though lower prices. Since that time there has been widespread debate if the overall purpose, to keep retail costs lower by capping interchange, has been successful. Detractors argue that the lower rates are rarely reflected in savings passed on to the consumer and the lack of flexibility in rate setting, with no free market system, actually hurts consumers, retailers, and banks alike within the process.
Overview by Jordan Hirschfield, Director of the Prepaid Advisory Service at Mercator Advisory Group.