Santander says ‘Yes to bitcoin’ in Brazil

Spain’s largest bank, Banco Santander, recently published a report, “Brazil : Banks & Financial Services: To Bitcoin Or Not To Bitcoin?.” The Equity Research paper discusses a meeting on August 23 between local investors and the CEO of Mercado Bitcoin, Rodrigo Batista.

“We believe that the question in this report’s title will eventually be answered with a resounding ‘Yes, to bitcoin.’ This suggests that one day we must be ready to face the potential challenges and opportunities we describe in this report for the banks and financial services companies we cover.”
— – Santander

Brazil is the world’s seventh-largest economy with a population of 207.8 million and GDP of US$1.775 trillion in 2015. An independent report by PricewaterhouseCoopers (PwC), published in August, shows a thriving payment cards market in Brazil. Approximately 40% of adults held a bank-issued debit card in 2014, with a transaction volume of US$109 billion. 35% of the adult population held a Credit Card, generating US$272 billion in transactions.

However, settlement times are abnormally slow in the Brazilian market. “The average settlement period for credit card transactions in Brazil is D + 28,” PwC wrote, indicating the number of days it takes for banks to internally settle each payment. In most western markets it only takes two days, prompting the Central Bank of Brazil to ask the Brazilian Association of Credit Card Companies to formalize the fundamentals of the local model that would justify the existing settlement period and evaluate a potential change.

PwC noted that the long settlement time generates most of the revenues for the issuers and acquirers, such as in the merchant’s fees they can charge for the prepayment of receivables. Santander believes that the high-speed and low-cost nature of bitcoin transactions will threaten credit and debit card companies.

Cielo is the biggest payment system company in Latin America by revenue and market value. As the largest Brazilian acquirer, the company “could be materially affected by acceptance of bitcoins, as its entire business model could be challenged,” Santander claims. The credit and debit card operator’s primary revenues are from net merchant discount rate and point of sale (POS), which would be at risk. Similarly, issuer bank revenues would also be threatened, mainly from interchange rate.

With widespread bitcoin adoption, acquirers and issuer banks “could suffer the most,” with increasing risk as more merchants and suppliers accept bitcoins, Santander states. Card suppliers and POS manufacturers will also be affected, “to a much smaller extent,” the report explains.

According to PwC, Brazil has almost 4.5 million POS terminals, but use has been low because of a “lack of interoperability among networks.” Meanwhile, smartphone penetration is skyrocketing and the adoption of mobile devices for POS transactions is exploding. “Many merchants are seeking to replace the traditional fixed payment terminals and cash registers with tablets linked to mobile POS devices.”

“In Brazil, there are over 22 million [small and medium-sized enterprises] and micro-businesses and a mobile penetration of upwards of 132%, which has created a fertile ground for mobile payments.”
— – PwC

Card network brands such as Visa and MasterCard, “could be safer from the bitcoin threat,” the Santander report says. Blockchain technology could boost their earnings by lowering transaction, IT, and back-office costs.

The Santander report briefly discusses Visa’s various blockchain projects, including the latest one on interbank transactions with BTL Group. MasterCard has also been exploring how to include blockchains with their core systems. MasterCard President of International Markets, Ann Cairns, told EurActive that they have already built use cases of the technology in their laboratories.

The Santander report echoes the sentiment regarding payment networks in an independent August report by Credit Suisse Equity Research. “We see limited risk from blockchain as a technology to replace the existing payment rails” currently fulfilled by Visa and Mastercard, according to the report. Apple Pay and others electing to use “the existing "rails" and make the networks the "guardians" of the tokenization process,” have largely strengthened the roles of Visa and MasterCard, Credit Suisse analysts wrote.

“One of the key benefits of a distributed ledger is that it removes the need for a central party clearing house. In some regards, we view Visa and Mastercard as fulfilling this role currently[…] However, while this is technically possible, we see it practically improbable that this will disrupt the card networks.”
— – Credit Suisse

For Brazilian banks and exchanges, it is “too soon for any definitive conclusion and action” according to the Santander report, but it added that banks could benefit from significant cost savings. Many banks are conducting their own blockchain experiments. Citigroup, JPMorgan and Goldman Sachs, for example, are working on their own digital currencies. Even more financial institutions are experimenting with blockchains individually or through consortiums. “We believe the blockchain concept has the potential to redefine money transactions in the banking world,” the report reads.

"Financial institutions are moving so that does not happen to them what happened to Kodak, after the popularization of digital photography, or Blockbuster after the success of Netflix," Batista told Bitcoin BTC News Brazil.

Brazil leads most nations in terms of bitcoin merchant adoption, despite having only one Bitcoin ATMs in the whole country. Fabio Anjos, CEO of Brazilian bitcoin consulting startup, Rexbit, told BraveNewCoin that his company knows of 202 bitcoin-accepting merchants across Brazil at last count in December. 62 of those merchants are located in his hometown of Aracaju.

Trading volume lags behind merchant adoption, but is clearly growing. Six major bitcoin exchanges, LocalBitcoins among them, handle the majority of Brazilian real trade. Their volumes have been growing regularly, sometimes exceeding 100 bitcoins weekly. One week in  June they collectively reported volume exceeding R$300 million, or $91 million USD.

Weekly bitcoin volume on LocalBitcoins

There are some barriers to bitcoin adoption, however. Money laundering, fraud, and stolen personal data by hackers have been some of the major deterrents. Large banks were skeptical but “this situation has started to change already,” the report reads, citing the Bank of England’s conclusion in October 2015 that “the overall risk that digital currencies could be used for money-laundering purposes is low.”

“Although we believe the potential impact of a broader acceptance of bitcoins to be more of a long-term issue, we acknowledge that “long term” in the technology world can sometimes go by in a flash.” – Santander