Brazil’s Central Bank Just Revolutionized Instant Payments
(Bloomberg Opinion) -- Earlier this year, my kitchen sink sprang a leak. With Brazil bracing for coronavirus, how to find a repairman willing to risk Rio de Janeiro’s pathogen-friendly public transit for a one-off job in a stranger’s home? Lucky for me, Antonio was game. A freelance plumber, Antonio is part of Latin America’s vast shadow economy, where today’s gig is tonight’s meal. Unfortunately, most Brazilian handymen prefer cash, just the sort of high-touch tender I had foresworn in times of Covid-19.
We settled on a bank transfer, and a few pecks at my phone app and a hefty transfer fee later, I’d whisked the money from my account to his. Or so I thought. Two days, four phone calls and several worried text messages from Antonio later, the funds finally landed.
Fortunately, those anxious days may be numbered. Next month, the Central Bank of Brazil will debut a new instant payments tool. Called PIX, it promises hassle-free transactions within seconds for anyone with a mobile phone and a bank account. And it comes free of charge. The bank has already logged more than 39 million requests by prospective PIX clients, both corporate and individual, eager to lock in access “keys” to the service.
Brazilian banking was long due for a shakeup. Latin America’s signature economy boasts some of the world’s biggest and most lucrative banks, where dexterous moneymen finessed hyperinflation and the shell game of serial government stabilization plans through market acumen and innovation. Yet these sophisticated brand banks still deliver many of their headline services on last century’s clock — Monday to Friday from 10-to-4, and 10-to-2 during the pandemic — and often at bruising lending rates and fees.
“Brazilian banking has long been dominated by a few big players who enjoy a practically captive clientele,” said Paulo Bilyk, chief executive of Rio Bravo Investimentos, a Sao Paulo asset management firm. Reinforcing this sweetheart market is the cozy system that deposits the paychecks of 11.4 million relatively well-paid public employees in banks they did not even choose. “The new system facilitates exchanges by making it simpler, faster and cheaper to pay bills. That’s a win for the economy and for social inclusion,” Bilyk said.
Sensing the opportunity, regulators began preparing early last decade to disrupt the financial monopoly by greenlighting virtual banks, which peddle checking and savings accounts, credit and debit cards exclusively online and at considerable discounts. Investment in Brazilian fintech has since soared, from $52 million in 2015 to $1.6 billion last year. Brazil is now home to the world’s largest digital-only bank, Nubank, with 20 million clients nationally and operations in Argentina, Colombia and Mexico.
Brazil is actually a relative latecomer to instant digital payments. Kenya launched its M-Pesa system (42 million subscribers) via mobile phone in 2007; India’s four-year-old Unified Payments Interface clocked 1.62 billion transactions in June; China’s two biggest digital wallet competitors, Alipay and WeChat Pay, have more than 2.2 billion active users.
Yet those are competitive businesses, each of which takes a cut per transaction. PIX, by contrast, is a public good, launched by the Central Bank and free of charge. The initiative was an attempt to lay the ground rules — and perhaps get a jump on the competition — in the relatively cloistered Brazilian economy for an aggressive frontier business dominated by international giants. Tellingly, the Central Bank in June withdrew authorization for WhatsApp Payments, the Facebook-owned phone-based payment tool, a week after its Brazilian rollout.
A rare oasis of institutional continuity in the Brazilian policy desert, the Central Bank has already helped promote a more inclusive financial market by eschewing the monetary populism that has kept inflation high and lending dear. Brazil’s interest rates hit record lows this year. The surging digital culture — 150 million internet users and 205 million mobile phones in a country of 212 million people — has only sharpened the public appetite for innovation.
“Brazilian society is much closer to China than to the U.S. or Europe,” said Claudio Lucena, technical director for the National Data Protection Institute. “We have millions of low-income people with limited access to market information, but who have mobile phones. For them, reducing the cost of banking could be a major incentive.”
Legacy banks, understandably, are less enthusiastic. They stand to forfeit a bundle in fees for moving money. The bank transfers nest egg has grown 31% since 2017, according to Moody’s Investors Service, which says banks could forfeit as much as 8% of their annual winnings in traditional transfers to PIX users. The Sao Paulo market research company Eleven Financial Research projects a much smaller hit of around 1% of their yearly fee income. “Traditional banks might have wished that PIX had never come along,” said Bilyk.
Indeed, they had no choice. The Central Bank has ordered all financial institutions with more than 500,000 clients to offer account holders the option to sign up for the no-charge pay app. Lenders have joined the October scramble to lock up PIX accounts.
Brazil’s enterprising bandits have been right behind them, hoping to lure unwitting early adopters to divulge their identities and banking information on fake websites. “The rollout for PIX will probably be gradual,” said Eleven Financial’s head of equity research Carlos Daltozo. “Security and fraud are key concerns.”
Instant payments won’t revolutionize Brazilian productivity, stanch fiscal incontinence or fix the regressive and enterprise-choking tax system. “We basically know what we have to do put the economy right,” Bloomberg Economics analyst Adriana Dupita told me. “But by making it easier and more affordable to pay bills and transfer money, you invite more people into the system and make financial transactions more accessible.”
At a time when Brazilian politics has devolved into a contest over how to spend more, a tool allowing individuals to spend better is already a blessing.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Mac Margolis is a Bloomberg Opinion columnist covering Latin and South America. He was a reporter for Newsweek and is the author of “The Last New World: The Conquest of the Amazon Frontier.”
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