(Adds comments by bank executives, details of app, industry background)
By Carolina Mandl
SAO PAULO, May 13 (Reuters) - Brazil's largest private-sector lender, Itaú Unibanco Holding SA, will launch an instant payments platform by the third quarter that uses QR codes, adding fuel to the fierce competition among card processors.
Itaú's new platform, called Iti, will work through an app connecting individuals and merchants and will be available to both clients and nonclients of the bank, it said on Monday.
Merchants using Iti will pay a fee of 1% per transaction and will receive payments instantly - cheaper than fees currently charged by many card processors. The app also does not require merchants to buy or rent card reader machines.
Shares of Brazilian card processors, such as PagSeguro Digital Ltd, StoneCo Ltd and Cielo SA , fell sharply after Itaú's announcement.
A QR or quick response code is a bar code that contains a matrix of dots, which can be scanned with a QR scanner or smartphone with built-in camera.
Marcos Magalhães, CEO of Itaú's card processor Rede, said Iti is more likely to attract small merchants, which do not seek customized services. He did not provide estimates for the number of clients it targets.
In terms of individuals, the bank is targeting all income brackets, including consumers with no bank accounts, as Iti will work as a digital wallet with no fee, said Itaú's general director, Marcio Schettini.
Roughly one-third of Brazil's adult population does not have a checking account, according to the World Bank, a higher ratio than China or India.
Besides using QR codes to pay for products and services, clients will be allowed to transfer money using a kind of in-house messaging service.
Itaú is also considering offering investments, loans and insurance products through the new app, although it did not elaborate.
Reporting by Carolina Mandl in Sao Paulo Editing by Jonathan Oatis and Matthew Lewis