Brazil is one of the first countries in the world to introduce mobile payment regulations, and its government encourages m-payment providers to ensure the interoperability of their services. Yet the Brazilian m-payments market is proving slow to get off the ground and is being outpaced by Colombia and Peru. Robin Arnfield writes
Brazil certainly has the infrastructure in place for m-payments to take off. Its 199 million inhabitants have over 270 million mobile phones, of which around 100 million use 3G or 4G networks.
Camilo Tellez-Merchan, a financial sector specialist with Washington, DC-based CGAP (Consultative Group to Assist the Poor) says: “Brazil is one of the fastest-growing smartphone markets in Latin America.”
According to IDC, Brazilian smartphone sales rose by 49 percent year-on-year in the third quarter of 2014, and 55 million smartphones were sold in Brazil during 2014. GSMA Intelligence estimates that in Q3 2014 smartphones accounted for 32.4% of all mobile phones in use in Brazil.
Mobile banking has proved very popular with affluent consumers. Bradesco, one of Brazil’s largest banks, says the number of its Bradesco Celular m-banking clients rose from 3 million in January 2014 to 6 million in December 2014. M-banking transactions represented 26% of Bradesco’s total transactions in December 2014. Itaú, another leading bank, had over 3 million business and consumer users of its mobile apps in May 2014.
Around 1.5 million Brazilian POS terminals are currently NFC-enabled, and MasterCard and Visa have been promoting NFC payments in the country through pilots and service launches.
SMS and USSD
While the largest Brazilian banks are developing NFC payment offerings aimed at their affluent smartphone-owning cardholders, they also provide SMS- and USSD (Unstructured Supplementary Service Data) based payment services to unbanked and underbanked consumers. These services involve general-purpose reloadable Visa- or MasterCard-branded prepaid cards being linked to mobile phones for m-payments at the point of sale, airtime top-up and P2P transfers.
Brazil is a world leader in branchless banking, with over 400,000 banking correspondent agents in December 2013, according to Banco Central do Brasil (BCB), the Central Bank. These agents, who are mostly small convenience stores, provide cash deposits and withdrawals from bank accounts, as well as bill payments. They can also provide cash-in and cash-out services for prepaid cards and m-wallets.
In October 2013, Brazilian President Dilma Rousseff approved Law number 12,865 which regulates m-payment services providers such as banks, digital wallet providers, telcos and acquirers, and outlines the government’s long-term objective of encouraging interoperability between rival m-payment platforms. Its primary purpose is to facilitate financial inclusion among Brazil’s unbanked and underbanked consumers and to reduce the amount of cash in circulation.
In November 2013, the BCB and Brazilian financial regulator Conselho Monetário Nacional (National Monetary Council/CMN) published rules for m-payment services based on Law 12,865.
The Law introduced a new non-bank legal entity known as a “payments institution,” which is regulated by the BCB and the MCN, and permitted to offer m-payment services and e-money accounts with cash-in and cash-out facilities to low-income consumers.
Non-bank entities which obtain payments institution licenses must have “non-discriminatory access to the necessary services and infrastructure for the functioning of the payments schemes” including domestic processing systems and the BCB’s domestic clearing and settlement system, the Law says.
Payment institutions have fewer capital restrictions than traditional financial institutions. They are required to hold BRL2m ($703,000) in minimum capital and minimum equity of 2 percent of the average monthly value of transactions they have handled in the last 12 months.
Guilherme Lima, of Brazilian consultancy Ponto Futuro Consultoria Estratégica, says: “The broad view is that the BCB’s regulation was positive for the market’s development, as the oversight, parameters and processes it creates should decrease both individual and systemic risks, and allow for a safer investment environment. However, there are concerns about the BCB’s capacity to enforce and process all of its demands, as it has manpower constraints, and about the entry barriers arising from compliance costs.
“As of now, the BCB’s main regulatory concern is to foster competition in the acquiring market, and to encourage a decrease in acceptance costs, rather than accelerate the deployment of any specific technology.”
Previously, only payment instruments issued by financial institutions were subject to regulation by the BCB and the MCN. By removing the legal uncertainty about non-bank m-payment services which previously hadn’t been regulated, the Law has allowed non-banks such as mobile operators and digital wallet providers to enter the market with confidence.
After the draft version of the Law was published in May 2013, three m-payment schemes involving mobile operators and targeting unbanked and underbanked consumers were launched:
– Zuum, offered by Mobile Financial Services (MFS), a Brazilian joint venture between MasterCard and Spain’s Telefónica, which owns Brazilian mobile operator Vivo;
– Oi Carteira (Oi Wallet), a partnership between Banco do Brasil, card acquirer Cielo and Brazilian mobile operator Oi, and
– Mobile operator Claro and Bradesco’s Meu Dinheiro Claro (my Claro money).
TIM, the fourth major mobile operator, has announced plans to launch an m-wallet in partnership with the government-owned bank Caixa Econômica Federal and MasterCard.
“I believe the main Brazilian banks – Banco do Brasil, Bradesco and Itaú – will continue to dominate the payments industry, and that includes the coming acceleration in m-payments,” Lima says. “The Brazilian retail finance industry is a very powerful oligopoly, and my view is that any new competitor, regardless of how big they are, will eventually associate with the big banks at some level. This is happening right now in the prepaid card arena, as market pioneers are starting to be acquired by the larger banks.”
“I see some consolidation in the near future among the smaller m-payments providers which had already entered the market,” says Bruno Balduccini, a partner at Brazilian law firm Pinheiro Neto Advogados. “They will find that the cost of investing in the systems and controls to comply with the new regulations may render their business not viable.”
“For the m-payments start-ups in Brazil, especially in the mPOS segment, the dream exit strategy for most of them is an acquisition by a big bank,” says Lima. “The lack of access to capital for SMEs and innovative companies will cement this trend.”
“The major banks will keep m-payments as a top priority in the years to come, as this is one of the key growth paths they have available, as the traditional credit card market matures, due to a saturation of the traditional distribution model,” says Lima. “After 15 years of consistent 15 plus per cent growth, credit card volumes have been slowing down, and should grow in mid-single digits, allowing for inflation, this year.”
Brazil’s regulations are similar to those introduced in Peru in October 2013 for e-money issuers (Entidades Emisoras de Dinero Electrónico) by Peru’s banking regulator Superintendencia de Banca, Seguros y AFP (Superintendency of Banking, Insurance and Pension Funds). These regulations are based on the Electronic Money Law (Ley de Dinero Electrónico), which was passed by Peru’s Congress in January 2013 and which calls for interoperability between m-payment schemes.
Both the Brazilian and Peruvian regulations state that e-money accounts issued by licensed non-banks aren’t bank deposits, and so aren’t covered by deposit insurance and can’t accrue interest. Low-value e-money accounts are subject to simplified KYC procedures.
“(Brazilian and Peruvian e-money) licensees must set up a trust account equal in value to the amount of money issued electronically, and non-bank e-money issuers are not allowed to intermediate funds,” Mireya Almazan, manager for the GSMA’s Mobile Money for the Unbanked program, wrote in a GSMA blog.
Tellez-Merchan, in a blog, wrote: “Interoperability will not be mandated (in Brazil), but is signaled as a goal further down the road, and any new (m-payment) service which receives a license will be required to have a clear roadmap of how it will eventually interoperate with the wider (Brazilian) financial ecosystem.”
“The impact of Brazil’s regulations is that every m-payment service provider is on an equal playing field,” Tristan Hugo-Webb, associate director of U.S.-based Mercator Advisory Group’s International Advisory Service, says. “Also, as the regulation encourages interoperability, consumers will be the ultimate winners, as interoperability brings down prices by increasing competition. Brazil could benefit greatly from the emergence of m-payments, as Brazilians’ use of mobile phones exceeds that of payment cards. M-payments could be the solution to bringing Brazil’s large unbanked and underbanked population into the mainstream electronic payment ecosystem.”
However, m-payments interoperability will be a challenge in Brazil, due to the fact that voice and text message communications between different Brazilian mobile operators don’t work all that well, Elizabeth McQuerry, a consultant with U.S.-based Glenbrook Partners, wrote.
“Every telco, bank or other payment provider will need to be able to quickly and efficiently exchange payments with each other,” McQuerry wrote in a separate blog. “Brazil does have a faster payments system operated by the bank consortium Câmara Interbancária de Pagamento (Interbank payments chamber) that could potentially be utilized for transacting mobile payments but the Law doesn’t require it be used…Brazil is a complex business environment that will need to figure out how to retrofit potentially tens of millions of mobile payments into the payment system.”
Colombia and Peru
“Colombia and Peru are really outpacing Brazil in mobile payments,” Tellez-Merchan says. “It’s early days for m-payments in Brazil, and another year will be needed for consumers to understand how m-wallets work. The Brazilian m-payment market is moving very slowly, as is the Mexican market.”
One key advantage Peru has over Brazil is that ASBANC, the Association of Peruvian Banks, has developed an interoperable mobile payments platform. “This platform can be used by any company applying for an e-money licence, not just banks,” Tellez-Merchan says.
According to a blog on the Better than Cash Alliance website, the main Peruvian banks, Banco de Crédito del Perú (BCP), Interbank, BBVA Continental, Scotiabank Peru and Banco de la Nación, as well as several non-banking formal financial institutions and telcos including Movistar and Claro have joined ASBANC’s platform.
“Colombia is home to the most successful m-wallet in Latin America, DaviPlata, which is issued by Colombia’s Banco Davivienda and has 2 million users, many of whom receive the government’s Familias en Acción (families in action) subsidies in their m-wallet,” Tellez-Merchan says. “The Colombian government wants to pay subsidies to victims of the country’s recent civil war as well as various rural subsidies via m-wallets.”
Linking government welfare subsidies to m-wallet accounts is key to gaining consumer adoption of mobile wallets. “Brazil’s CEF could potentially be transformational in the Brazilian m-payment market,” says Tellez-Merchan. “This is because the Brazilian government pays 12 million families the Bolsa Familia (family allowance) subsidy every month, and CEF, being government-owned, has the only franchise to receive these payments. So, once CEF launches is m-wallet, it could have a big impact.”
In August 2014, Colombia’s Parliament passed a Law allowing non-banks such as telcos and postal service providers to apply for mobile money licences. “There could be 10-12 providers, known as Sociedades Especializadas en Depósitos y Pagos Electrónicos (companies specializing in electronic payments and deposits), getting mobile money licences, once the Colombian Law comes into effect,” Tellez-Merchan says. “I expect telcos to go into partnership with banks in Colombia.”
Tellez-Merchan cites several factors for the slow take-off of Brazilian m-payments. “Brazil has been in recession, and there was a general election in October 2014, which led to a lot of firms staying in a holding pattern and not making major investments,” he says. “For example, CEF, being government-controlled, has been very slow to develop its m-payment service and has yet to launch.”
Tellez-Merchan says Brazilian m-payment providers haven’t been in tune with the realities of the market. “For example, there’ve been a lot of issues with the marketing of mobile wallets,” he says. “The lesson we learnt from M-Pesa in Africa is that you have to market mobile wallets in a way that consumers can relate to. When I was in Brazil in 2014, I saw ads for Meu Dinheiro Claro which were urban and aspirational. This is OK for São Paulo, but not for the North-East of Brazil, which has a large concentration of low-income people. The reality is that to succeed, mobile wallets have to target the North-East.”
Another factor is the use of USSD for mobile payments. “USSD is clumsy and you need to punch a lot of buttons,” Tellez-Merchan says. “Also, USSD payments take too long. What will make m-payments attractive to young people is m-wallet apps they can download onto their smartphone.”
Tellez-Merchan says Zuum is the most successful of the m-payment services launched so far in Brazil.
In May 2013, MFS and Telefónica’s Vivo launched a pilot of Zuum in five cities in São Paulo State and in Belo Horizonte, capital of Minas Gerais State. MFS is a separate initiative to Wanda, MasterCard and Telefónica’s joint venture which is developing m-payment services in 12 Latin American countries excluding Brazil.
Vivo’s customers can access their Zuum m-wallet using USSD. In addition, customers can download a smartphone app enabling them to access their Zuum m-wallet on the Vivo network or any other Brazilian mobile operator’s network.
Zuum users can transfer money to other Zuum subscribers, buy prepaid airtime from their mobile operator, view account balances, and pay bills. They can also obtain a prepaid MasterCard that is linked to their account. Customers of Banco do Brasil, HSBC, Itaú, Bradesco and Banrisul can transfer funds to their Zuum account using their bank’s online service.
Marcos Etchegoyen, Zuum’s president, said in a news release that the service had 320,000 subscribers in October 2014 and that he predicts 1.2 million users by the end of 2015. Zuum is currently available in six states, Sergipe, Minas Gerais, Bahia, São Paulo, Santa Catarina, and Rio Grande do Sul, but MFS plans to roll it out to additional states during 2015.
Meu Dinheiro Claro is linked to a prepaid card and allows cash withdrawals and deposits at Bradesco ATMs as well as P2P transfers, airtime top-ups, bill payments, and SMS- and USSD-based payments at POS terminals connected to Cielo’s network. “The problem with Meu Dinheiro Claro is that Bradesco has taken a secondary role to Claro, and the two companies’ partnership isn’t in sync,” says Tellez-Merchan. “So Meu Dinheiro Claro isn’t going too well.”
Oi Carteira consists of a prepaid card linked to an m-wallet account, enabling customers to make purchases at merchants who are Cielo clients, top up their airtime, and transfer money to other Oi Carteira users. “Oi predominantly offers its m-wallet in the North-East, and it’s now marketing in Rio de Janeiro,” says Tellez-Merchan.
As in other countries, it’s still early days for NFC payments in Brazil. However, Frost & Sullivan ICT analyst Carina Gonçalves predicted in a webcast that NFC payments will become the predominant payment method in Brazil, winning over SMS and USSD due to the rapid growth in smartphone adoption.
“I believe that Brazil will become one of the accelerators for NFC payments, due to its high penetration of NFC-ready POS terminals,” says Lima. “Both Apple Pay, rumours of whose market entry have been growing ever more intensively in the past month, and, even more so, Samsung Pay will find a fertile ground in Brazil, once the consumer mobile device installed base renews.”
Brazilian newspaper Epoca Negocios reported in February 2015 that Bradesco and Itaú are negotiating with Apple to bring its Apple Pay NFC payment system to Brazil. Other reports suggest Banco do Brasil is also holding negotiations with Apple.
In March 2014, Bradesco and Claro announced the B.pay NFC-based payment service which could reach over 85 million customers once rolled out nationwide, according to Mercator’s Hugo-Webb. B.pay, which was initially available only in São Paulo State, uses NFC-enabled SIM cards, Claro-branded mobile wallets and TSM (Trusted Service Manager) technology from Giesecke & Devrient, and during 2014 was rolled out to 200,000 NFC-enabled POS.
Separately, in July 2014, Bradesco launched the B.wallet m-wallet which allows its credit and debit cardholders to make point-of-sale purchases from their Claro, Vivo and TIM smartphones. To make a B.wallet payment, Bradesco cardholders give the merchant their mobile number. They then receive a text message requesting that they authorize the transaction on their smartphone.
In June 2014, Oi, Banco do Brasil and Visa launched an NFC payments service for holders of Banco do Brasil’s Ourocard Visa credit card using NFC-based SIM cards supplied by Oberthur.
Itaú launched a pilot of an NFC payment service with TIM, acquirer Rede (formerly called Redecard), and Gemalto in February 2013 in the cities of São Paulo and Rio de Janeiro. TIM also launched an NFC pilot with Bradesco and Gemalto in June 2013 in Rio de Janeiro and São Paulo.