PIX and mix

Sweet spot:

People in Brazil have adopted PIX instant payments much faster than anticipated

PIXandmix PIXandmix

The Central Bank of Brazil’s instant A2A payment tool took less than a year to pass into the language on the street. Now, everyone knows you can ‘make a PIX’ anytime and virtually anywhere. But how has the payments industry responded? Edson Santos, Founder of Colink Business Consulting, and Eduardo Goni, Country Manager Brazil for ACI Worldwide, consider the opportunities and threats

The success of the Brazilian Central Bank’s instant payment system PIX has been breathtaking.

Within six months of its launch during the chaos of late 2020, the new mobile service with a simple QR and code key-driven interface, had moved more than BRL 1.109trillion (US $220billion), mostly in person to person (P2P) transfers. A year in, and it had clocked up six billion-plus payments, the total value of the transactions the rail handled had trebled and it was being used by six out of 10 Brazilians – increasingly, for retail payments, too, both on and off line.

It didn’t take much to persuade ordinary people – many of whom were in receipt of COVID-19 government support that could only be immediately unlocked digitally – that a payment method which was not only instant (taking roughly two seconds), but available 24/7, free to use, and available to anyone, with or without a bank account, was a good idea. But, for the payments industry, the speed of adoption was a shock – especially since, in theory, PIX could freeze out acquirers, card schemes and issuers: account-to-account rails don’t need them.

According to a survey of 90 senior executives among Brazil’s leading payment institutions, published in January 2022 by ACI Worldwide (Brazil) and locally based Colink Business Consulting, ‘the success of PIX poses an immediate threat to the maintenance of current acquirers’ margins’. Perhaps that’s because they can see what fintech commentator David Birch has described as ‘cardmaggedon on the horizon’.

“Ninety-five per cent of the executives we interviewed believe that PIX is going to cannibalise debit card transactions,” says Edson Santos, founder and partner of Colink Business Consulting. “They understand that the acquirer as we know it today, only capturing, processing and settling payment card transactions, maybe won’t survive. Back in 2020, the great majority weren’t concerned about PIX; they thought it was going to affect banking services more than the acquirer world. It’s an incredible change of attitude.”

To be fair, there was a lot going on in 2020. Simultaneous with the arrival of PIX, the industry was having to come to terms with legislation that makes it mandatory for acquirers to publish data to a credits receivable register – a record of future payments that will fall due to merchants from acquirers for credit card sales (usually in 30 days) and against which merchants can raise liquidity. And, of course, all financial institutions were impacted by the introduction of open banking, which has required major banks to integrate a standard set of APIs for the permitted exchange of customer transaction data since 2020.

The Brazilian payments apple cart is now being well and truly overturned and the industry – particularly the country’s 35 acquirers and 350 sub acquirers – has to work out how to respond.

But, worryingly, for Santos, the Colink Business Consulting/ACI study revealed that still only 47 per cent of payment executives see a business opportunity in integrating PIX at point of sale. Whereas, when it comes to the new regime for registering receivables, 95 per cent have already developed a strategy for using it to advance credit to merchants.

The report points out that: “In general, there is an understanding that the best way to monetise the new service should be through value-added services on top of PIX transactions and not exclusively through the capture and settlement of transactions. Thus, the opportunities depend on the integration of the payment method with the store’s automation system to enable the reconciliation of payments with sales, improving the store’s operational processes.”

“A lot of acquirers will take PIX inside the point of sale, inside the terminal, which can be a palliative solution, but not a definitive one,” says Santos. “The experience today of a merchant that does not have an integrated POS terminal is that they use two systems: one to prove the payment was made and another to reconcile it. If the customer wants to pay with PIX, there is a third system to confirm it was paid. It’s the biggest risk and also opportunity that we have identified.”

The interplay between PIX, where funds are transferred instantly from payee to beneficiary and are immediately available, and traditional credit/debit payments, where they’re not, is important in a country where, according to Santos, pre-payment of transactions with credit cards ‘was always one of the most important revenue streams for acquirers. “To the point that, for a lot of sub-acquirers, prepayment was a reason for their existence,” he says. “A lot of times, the transaction comes out at cost and they obtain the margin through pre-payment, [representing] up to 70 per cent of all the value transacted.”

Hence, the acquirers’ focus less on PIX and more on trying to get ahead of what could be a vanishing credit revenue stream by extending advances to merchants. And that was just as the central government intended; it has long wanted to erode domination of lending by five local banks (Itaú Unibanco, Bradesco, Banco do Brasil and Caixa Econômica Federal and Santander), who, together, own more than 80 per cent of the credit market.

“And it addresses something really important, which is that small and micro entrepreneurs weren’t being served well,” observes Eduardo Goni, country manager Brazil for ACI Worldwide.

“They didn’t have so many lending options available to them. I think it’s a great driving force for the Brazilian economy – new participants working within credit to improve and amplify lending, mainly related to receivables.”

Ninety-five per cent of the executives we interviewed believe that PIX is going to cannibalise debit card transactions

Edson Santos, Colink

Business Consulting

Coupled with open finance rules, it could be transformational, agrees Santos.

“We start with banks but it will extend to all financial services so that, eventually, if I am a merchant, I can authorise a creditor [acquirer] who’s making me an offer to access all of my transactions made with other acquirers. That can generate more value for me as a merchant – and [this change] worried the majority of the executives we spoke to. It’s going to be very easy for a merchant to ‘sell’ their receivable and that brings competition.”

So, PIX is part of a much wider game plan: a critical element in the Central Bank’s strategy to, ultimately, drive out cash (although PIX does allow users to withdraw cash from ATMs and as cashback from merchants) and bring everyone into the financial system, while at the same time, improving competition in financial services.

As Goni says, current players need to ‘open their strategic mind’, if they are to survive and thrive against such a backdrop.

One that’s demonstrating it can think beyond the threats to the golden uplands of opportunity is Itaú Unibanco, which has taken advantage of the Central Bank’s first regulatory sandbox to explore using PIX as a vehicle for buy now, pay later consumer credit. The ITAUCARD project was alone among seven projects in the first sandbox cycle to look at leveraging the PIX rails. But, as the raft of changes to Brazil’s payment systems and wider financial infrastructure begin to bed in and companies move beyond compliance to innovation, there will undoubtedly be more, especially as acquirers move out of traditional roles.

“If acquirers don’t use their technology to improve their services to increase the scale of their product offer, they will miss the history bus, that’s very clear,” says Santos. And, in his opinion, proprietary platforms will not be enough. They will need to embrace entire ecosystems – integrated communities of providers, some of which will offer a high degree of specialisation.

“Co-operate and collaborate,” he says. “Sub-acquirers in particular, can specialise in different segments and deliver a lot more value that way to the merchant and in a way that the main acquirer cannot achieve. So, the sub-acquirer turns into an important partner to deliver a service to a very specific economic segment or maybe even a specific geography. Brazil is very big. We have an enormous territory; there are many ‘Brazils’ inside Brazil. Every region has a different need and the sub acquirer can take advantage of that.”

So, what does PIX teach the rest of the payments world? That decisive intervention by central bodies can create a rapid, positive and seismic shift for ordinary consumers that leaves legacy players racing to catch up. That such intervention is best delivered as part of a well-thought-out wider strategy. That you should never under-estimate how quickly users will switch allegiance from payment methods that have stood the test of time across multiple channels for years – that rug can be pulled at any moment. And that account-to-account payment rails such as PIX are as much an opportunity as a threat.