Bank or Payment Institution?

Each type of institution has its own rules and regulations, and that is what this article covers.

Today, Financial Institutions and Payment Institutions are part of the same ecosystem, but they are classified differently and have distinct roles within the national financial system regulated by the Central Bank of Brazil. Understanding the differences between them is crucial for individuals and companies alike when choosing the solution that best fits their needs.

What is a Payment Institution (IP)?

Making transactions between people and companies easier is one of the most sought-after activities in financial services. The main role of a Payment Institution (also known as an IP, for Instituição de Pagamento) is to move funds intended for payments. That is both its specialty and its definition.

IPs focus on enabling individuals to make payments and companies to receive them, regardless of their relationship with banks and other financial institutions.

In 2018, the Central Bank issued Circular nº 3.885, introducing new rules for payment institutions. The BCB also supervises these institutions and oversees the entire Brazilian financial system.

According to the Central Bank, IPs must be part of a Payment Arrangement, the framework that makes money transactions possible through credit or debit cards, boletos (Brazil’s bank payment slips) or mobile devices.

IPs operate together with a payment arrangement institutor: the legal entity responsible for creating and organizing the arrangement, such as the card networks Mastercard, Visa and others. The institutor sets the rules and procedures that govern the provision of payment services to the public, including settlement times, conditions for payment or financial institutions to join the arrangement, and security rules to protect consumers and merchants against risks, fraud and card cloning, among others.

That is why IPs must know these rules before joining an arrangement, so they can create the best conditions for payers and payees.

In short, to operate, an IP must:

1. Be part of a payment arrangement with an institutor.

2. Have a payment instrument.

3. Have payment accounts.

What types of payment institutions (IPs) are there?

Under the Central Bank’s framework for payment institutions, they can offer one or more of the following three types of service:

1. Electronic money issuer

Manages prepaid payment accounts, in which funds must be deposited in advance. Examples include issuers of meal voucher cards and prepaid cards in Brazilian reais.

2. Postpaid payment instrument issuer

Manages postpaid payment accounts, in which funds are deposited to pay debts already incurred. Examples include credit card issuers.

3. Acquirer

Enables merchants to accept payment instruments such as debit or credit cards, boletos or digital wallets. Examples include institutions that provide services so merchants can accept card payments.

What are the main differences between a payment institution and a financial institution?

1. Scope of services

Payment institutions (IPs) offer services related to buying, selling and moving funds for payments. Financial and banking institutions, on the other hand, can offer their clients payments, loans, financing and investments.

2. Type of account

Banks offer checking or savings accounts to their clients, while IPs offer payment accounts. Both allow transfers, bill payments, purchases, withdrawals and deposits, but the main difference is that funds held in bank checking accounts are protected by the Fundo Garantidor de Crédito (FGC, Brazil’s deposit insurance fund), up to R$250,000 per CPF (individual taxpayer ID) per institution. In payment accounts, the client’s money is not commingled with the institution’s assets and cannot be used to pay the Payment Institution’s debts. If the institution becomes insolvent, the recorded balances belong to their respective holders and must be returned to them, as required by law.

3. Size and operating costs

IPs are generally leaner, digital companies with lower operating costs, which lets them offer lower fees to clients. Banks, by contrast, are larger and highly hierarchical companies, which results in higher final costs.

4. Digitization

At traditional banks, many services can only be done at physical branches, while payment fintechs let most transactions happen on smartphones or digital platforms. This saves time, cuts costs and gives users convenience, while ensuring security and regulatory compliance.

Conclusion

The main advantage of using Payment Institutions is that their solutions are built around the customer experience, technology and ease of use, without red tape. These solutions adapt easily to companies of every size, letting entrepreneurs access financial services and automate their businesses.

In December 2023, Trio received its license from the Central Bank to operate as a Payment Institution. The company offers a payment management layer on top of banking infrastructure and is building the technology to process Pix as a Direct Participant, connected to the BCB.

By working with a payment institution, your company gains control over its buying and selling operations, which in turn lets you use cash flow to fund products and innovation, giving you a competitive edge.

If you are looking for a payment institution to integrate with your company, offer payment methods, modernize operations and manage your cash, find your segment under “Markets” and get answers to your questions from our consultants.