‘Pix’: Brazil’s Payment and Wire Transfer Revolution
Why is this publicly-led financial innovation so disruptive for Brazil’s economic environment?
The year 2020 will go down in history as one of the most challenging and unconventional periods of time in several decades for virtually every country in the world. Yet, on its turn, Brazil will be adding an extra pinch of novelty and disruption to that scenario by 16th November. After months of feasibility studies and development efforts, the country’s Central Bank will launch ‘Pix’, a non-private, centralized electronic transactions system for instant payments and bank wire transfers. Every commercial bank and financial institution with over 500 thousand clients in the country will be obliged to offer this service, which has the potential of setting the tone for Brazil’s financial and banking environment throughout the upcoming ‘roaring 2020s’.
Since early October 2020, Brazilians have been encouraged to register a maximum of five keys attached to personal easy-to-memorize alphanumerical references (e.g. CPF — the equivalent to social security number in the US –, e-mail address, cell phone number, etc) in their respective banking apps in order to be set for the new transactions method. Each one of these keys will be linked to one of the individual’s bank accounts and this information will be selectively available to all users of the system to make sure the money will be directed to the right recipients. Businesses will also be integrated into ‘Pix’, which will enable the formation of a robust and nationwide network of economically active actors suited for exchanging financial resources in the twinkling of an eye. Among other aspects, Brazil’s ‘Pix’ will be characterized by the following features:
1. Simplicity — It will be no longer necessary to provide a full name, bank name or code, branch number, account number and CPF to proceed with any bank wire transfer. All it will take is to mention your personal pre-defined key and the sender will be able to verify all the information before proceeding with the transaction.
2. Quickness — Transactions will take just 10 seconds to be processed, turning today’s regular wire transfer methods obsolete (these can take minutes, hours or even days to be completed). Recipients will be able to instantly confirm the receipt of the funds in the palm of their hands. In addition, the use of QR-codes will certainly expedite the whole experience with users relying on their cell phone cameras to do the job.
3. 24/7 availability — Again overcoming the current bank wire transfer reality, ‘Pix’ will be available 24 hours a day, 7 days a week, meaning that users will no longer be limited to business days or hours to pay for products and services or send money to friends and relatives.
4. Safety and reliability — The whole system was developed and will be powered by Brazil’s Central Bank, a longstanding public-sector autonomous entity linked to the Ministry of the Economy, which is relying on state of the art technology to implement ‘Pix’ in the country. All transactions will therefore be intermediated by the country’s main monetary authority.
5. Tackling Brazil’s existing banking oligopoly — For many decades, Brazil’s banking ecosystem and economy have been dominated by three privately-owned and two State-run banks: Itaú, Bradesco, Santander, Banco do Brasil and Caixa Economica Federal. With the potential of extinguishing today’s regular wire transfer methods, known in the country as ‘TEDs’ (Transferência Eletrônica Disponível) and ‘DOCs’ (Documento de Ordem de Crédito), these dinosaurs will certainly lose some footprint. As TEDs and DOCs cost BRL 10.00 (the equivalent to USD 1.80) on average (they can cost as much as the double in some cases) and ‘Pix’ will be free of charge for individuals (and 60 times cheaper for businesses), projections indicate that banks are about to lose 8% of their revenues.
6. Fostering nascent financial enterprises — By going against the interests of big players in the market, Brazil’s Central Banks is sending a clear message to nascent fintechs, digital banks and newcomers in general. Competition is key to achieve a more diverse and pulverized banking system. Countries like the US (with 4,519 commercial banks in 2019) and Germany (1,800 banks, which include 200 private banks, 400 publicly-owned banks, and 1,100 member-owned credit unions) are good examples of how Brazil intends to look like in the future.
7. Promoting financial inclusion — Nearly 50 million people (24% of the population) are currently excluded from the banking system in Brazil. These low- and middle-income households will certainly benefit from this new scenario in which one can open and maintain a bank account without any frequent out-of-pocket spending. This of course has a positive impact in the economy in the long run.
8. Empowering citizens and businesses — Again, ‘Pix’ has the potential of having a yet intangible macroeconomic impact in Brazil by removing invisible barriers for money to flow more freely among domestic individual actors. The intention of Brazil’s Central Bank is to enable a more vibrant, less costly and non-bureaucratic economic environment in which time and bank charges will no longer inhibit deals or transactions. Individuals and small companies are the most favored with this move.
9. Governmental tracking — Just like in any country, the gradual digitalization of Brazil’s economy allows increased monitoring and control over any transaction processed electronically. 17.3% of the country’s GDP remains informal, meaning that transactions occur through non-trackable channels. Therefore, ‘Pix’ intends to reduce the amounts of cash being circulated in the country. This represents an initial step towards fighting crimes such as money laundering, bribery, drug trafficking and electoral campaigns illegal funding schemes.
10. In line with international trends — Similar systems already exist in at least 50 other countries. The most successful experiences are the ones functioning in the United Kingdom and in India, where the populations really embraced the new instant payment / bank transfer method. Both countries showcase high adherence rates. China is also known for its ‘WeChat Pay’, developed by Tencent, with clear ties to the Chinese government. US’ Federal Reserve has been also planning the adoption of ‘FedNow’ in 2023.
It remains to be seen if the implementation of ‘Pix’ in Brazil will be a smooth one or if the Federal Government will once again face structural obstacles like the ones that hampered the emergency relief cash transfers (a.k.a. ‘Auxílio Emergencial’) between April and December 2020. The promises and expectations related to it are quite high at this point as Brazil is the kind of country that historically needs public policies like this one. With several persistent infrastructure, logistic, trade, fiscal, and financial constraints to overcome, Brazil seems like the perfect setting for ‘Pix’ to prosper.