The COVID-19 crisis has fundamentally changed the way we consumers participate in the marketplace. And, as a result, main streets across South and Central America have been hurting. Governments are preparing their long-term responses, and regulation – as well as an understanding of the role that regulation plays in impacting payments and business ecosystems – is a critical component to the recovery. This is particularly true in Latin America where legal parameters around business are still in the works; new regulations will deeply influence the direction of markets in the area for years to come.
Written, executed, and communicated properly, regulation can actually help us get out of an economic downturn rather than impede progress as is so often believed. It can help inform new and effective products and facilitate the creation of young companies and services to meet demand. But importantly, it needs to be done right. Regulation requires a careful ear for market concerns and a humble authority willing to put themselves into someone else’s shoes.
The principles of regulation don’t necessarily offer specific solutions to our current dilemma but a decision-making framework by which regulatory bodies can chart their path. They provide guidelines to help create a more friendly economy for Latin American consumers and businesses alike in the strange and difficult years to come.
What makes for good regulation?
First and foremost, regulations need to be proportional to market development. If a market has few players and the volume of activity is small, then the regulatory burden ought to be proportionately small as well. There just isn’t much systematic risk to account for. However, once the economy develops, regulations need to advance in step, allowing for sustainable growth while mitigating the risks to participants and everyday people adjacent to market activity.
Consider the case of sub-acquirers in Mexico and Colombia. In Mexico and Colombia, foreign sellers have a difficult time finding local payment partners as there is no legal infrastructure regulating the activity of a sub-acquirer that serves international merchants. The laws are too locally focused and leave out any considerations for international commerce. In Mexico specifically, sub-acquirers are required to settle payments within a merchant’s national bank account (among other requirements), which, consequently, excludes the activity of international payment facilitators from the sub-acquirer regulations currently in place. So, international merchants, who are accustomed to high levels of regulation around transactions, become reluctant to do business in Mexico and Colombia due to a lack of security and assurance.
In short, Mexican and Colombian regulation hasn’t fully scaled to meet market demands.
It’s also important to distinguish between low and dense regulation versus good and bad regulation. Regulation levels can be both high and good so long as the governance is coherent with the marketplace and encourages competition. On the other hand, you can have very little regulation but each rule act as an obstacle to growth. In this instance, you might anticipate backlash from businesses.
Brazil offers an example. In Brazil, there is no such thing as a client fund account like there is in Europe, Asia, and the United States. This means that a payment service provider (PSPs), not the actual capital provider, is the owner of an account and the funds within. Unsurprisingly, this comes with a number of complications, especially if the PSP were to go bankrupt – a reasonable outcome during a pandemic.
So, to fix this situation, Brazil made sure that merchants were recognized as the owners of receivables, authorizing funds to flow to the primary beneficiary of a payment scheme. This regulation did not come at a cost (other options, such as adding collateral requirements, would have), did not hurt competition, and gave merchants the power to offer their receivables as collateral elsewhere, thereby increasing access to loans. Brazil increased regulation while helping businesses prosper.
The process that made this possible highlights another principle: the need for the regulator and market to engage in dialogue. In Brazil, the Central Bank publishes their intended wording for new regulation and then businesses (anyone from the market) raise their questions and concerns. The Central Bank then takes the feedback, studies it, and incorporates it into an amended version. Their process is constantly trying to match regulation to the reality on the ground.
Payments, Latin America, and recovery
In LATAM, the payments industry stands at an unique intersection between regulation and business. Payment companies themselves face few regulations but work alongside highly regulated entities like banks. So, if a payment company’s country of operation isn’t developed, a bank may not choose to partner with them for fear of instability. This is commonly a pain point in Latin Americas market and can inhibit foreign investment into the region. During a recession, countries should work to ensure this is not the case.
Revisiting the Brazilian example about client fund accounts, when the Central Bank first announced the new ruling, many market players started asking for collateral – the exact approach the Central Bank decided against. There was a misunderstanding of the regulation because companies failed to put themselves in the regulators. At the end of the day, best practice in regulation means little if the communication is lacking.
This is especially pertinent in Latin America because the regulatory environment is shaping today, there is no Juris prudence nor standard to fall back on. Businesses cannot just read a regulation – they must understand the mindset and goals of regulators and, critically, recognize that routes not taken are as important as those that were.
What does all this mean for economic recovery during pandemic? For one, countries determining their best plans forward should look to the principles of regulation and past examples of success. They should be asking: How can we scale regulation to meet the scope of economic downturn? Or: how can we lower regulation to stimulate growth, while making sure that the laws we keep are sufficient? Good regulation is a conversation between the market and the authorities who keep it safe.
The personal and financial health of consumers, business owners, and everyday investors is at tremendous risk these days. And although COVID-19 has proven a challenge for everyone, smart regulation is one massive tool we should be leveraging to get the global economy back online safely.
About Gabriela Vieira
Gabriela Vieira is the Global Director of Legal and Compliance at PrimeiroPay, a role she assumed in 2016 after joining the firm as a legal counselor in its inception the year prior. In this role, Gabriela leads and oversees legal compliance efforts to ensure policies and practices meet legal requirements and operational risk tolerances where PrimeiroPay operates. Previously, Gabriela led the corporate law and contract department at Amaral Lewandowski Advogados. Gabriela holds a Master’s and PhD in International and Comparative Law from the University of São Paulo.
About PrimeiroPay
PrimeiroPay is a payment service provider offering payment and financial solutions for merchants looking to expand their online businesses into Latin America, without the need for a local entity. The firm combines technology with a deep understanding of the payment and regulatory landscape in the markets where they operate to deliver automated, reliable and customisable cross-borders solutions. Based in Luxembourg, PrimeiroPay has a presence in Europe, Brazil, Mexico, and Colombia.
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