Central Bank opens public consultation for proposed BaaS model regulation

On October 29, 2024, the Collegiate Board of the Central Bank of Brazil approved a public consultation regarding the proposed regulation for operational partnership models offered to third parties—usually merchandising companies (“partner companies”) — by financial institutions and other entities authorized by the Central Bank to provide financial or payment services known as “Banking as a Service” (“BaaS”).

The Central Bank’s proposed regulation establishes rules to increase security, prevent and mitigate risks in the financial system, and improve efficiency and competition among products and services offered by the supervised entities. By providing specifically for BaaS activities, the Central Bank aims to offer a more organized operational environment in which risks and liabilities can be transferred among institutions authorized to operate under supervision and respective partner companies.

The proposed regulation provides for responsibilities, rules, and conditions for delivering BaaS services and defines the entities involved, the scope of services, and contracting requirements. If this regulation is approved, it will transform the current contractual structures between financial institutions and partner companies. Furthermore, it would improve current business models by requesting more security and transparency in contracts and demanding individual accounts and transparent information regarding the service provider.

Key points of the proposal:

• “BaaS provision: Financial and payment services provided by the BaaS provider to the end user/client through the partner company upon the integration of systems, including the enforcement of contractual procedures, complying with the applicable regulations;

• The concept of BaaS does not include: 
  • Customer service on behalf of the BaaS provider, as established in the regulation that provides for correspondents in Brazil;
  • The processing and storage of data and cloud computing, as provided for in the specific regulation; and
  • Open Finance partnerships.

• BaaS service provision contract scope:
  • Opening, maintaining, and closing deposit or payment accounts;
  • Payment services related to digital currency, postpaid payment instruments, and accreditation of payment instruments in payment arrangements;
  • Offering and contracting loans.

• The BaaS provider is responsible for procedures and controls related to:
  • Identifying, verifying, and assessing the risk profile of clients;
  • Preventing fraud;
  • Preventing money laundering and terrorism financing.

• BaaS providers cannot be:
  • Credit unions;
  • Leasing companies;
  • Service confederations formed by central credit unions;
  • Consortium managers; and
  • BaaS clients.

Public Consultation Notice No. 108/2024 highlights special interest services, such as accreditation for accepting payment instruments, payment transaction initiation (ITP), payment and international transfer (eFX), and loan offering and contracting.

The proposal is available on Portal Participa + Brasil and the Central Bank’s website. Contributions can be submitted by January 31, 2025.

Demarest’s Banking and Finance team is monitoring the topic and remains available to provide any further clarifications that may be necessary.