How a credit card interest rate cap could affect Brazil’s fintech industry

Few government measures have recently worried Brazil’s fintech industry more than the possible capping of interest rates on prepaid cards.

A few weeks ago, amid an intense campaign to push through several reforms in the Brazilian economy, Brazil’s Minister of Finance Fernando Haddad criticized the “stratospheric” revolving credit card interest rates and said he would seek to limit how much banks and fintechs can charge customers in this regard.

Revolving credit card interest fees are charged when the customer misses a bill or pays only part of the total amount. In Brazil — a country where defaults have increased substantially in the last few months — this modality is one of the most used by consumers.

The revolving credit rate reached 411.5% per year in January 2023, representing the highest level since August 2017.

Fernando Haddad is the Minister of Finance of Brazil. — Fernando Haddad, Brazil’s Minister of Finance.

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Fintechs could be affected the most

Despite strong resistance from the financial sector, which fears losing an essential part of its resources, the Ministry of Finance will implement measures to reduce the rates in the coming weeks.

The final design is still uncertain. But a recent report by Goldman Sachs pointed to see a higher downside risk to the return on equity (ROE) of fintechs like Nubank and Banco Inter.

“Still, from this perspective, we see higher downside risk to the earnings of Inter (38%-56%) and Nu (16%-24%), while incumbents would have negative variance between 2% and 9%,” the report pointed out.

These assumptions by the U.S. bank are based on analyses of a mix of revolving loans disclosed by the companies themselves and on the industry average for companies that do not disclose this information. In addition, the 60-day default rates of 50% of the revolving portfolio, the other half of which does not accrue interest, were also considered.

For Goldman Sachs analysts, implementing a cap on revolving credit card rates may be quite challenging. Given the widespread use of interest-free installment plans by the Brazilian population, such a charge cap may negatively impact banks, retailers, and consumers.

The social side of the issue

On the other hand, Haddad said two weeks ago, in a meeting with bankers to discuss the issue, that “the current structure (of revolving credit cards) is hurting the low-income population a lot. According to the minister, a good part of the delinquent population can’t escape the spiral of high fees charged for late payments on credit cards.

Interest-free transactions represent the majority of the total transactions in the Brazilian banking and fintech system, at 73%. This makes it so that the entire credit risk is priced into revolving and financing installments to be viable for card issuers.

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Last week, Nubank CEO David Vélez said that the eventual setting of a cap on credit card interest rates could be ‘very damaging’ to the financial system and could potentially strip away the ability to offer credit to millions of people.

“If this were to happen arbitrarily, tens of millions would lose their cards the next day because the operation would no longer be profitable. It would be a shock to the system”, said the executive in an interview with Valor Econômico.