This paper discusses the key design features of Brazil’s instant payment system (Pix) that have contributed to its success and compares some of its features with those of instant payment systems in other countries. The paper also outlines some remaining challenges in the implementation of Pix.

Abstract

This paper discusses the key design features of Brazil’s instant payment system (Pix) that have contributed to its success and compares some of its features with those of instant payment systems in other countries. The paper also outlines some remaining challenges in the implementation of Pix.

Pix: Brazil’s Successful Instant Payment System1

This paper discusses the key design features of Brazil’s instant payment system (Pix) that have contributed to its success and compares some of its features with those of instant payment systems in other countries. The paper also outlines some remaining challenges in the implementation of Pix.

A. Background and Design Features Contributing to the Success

Recent Developments

1. In November 2020, the Central Bank of Brazil (BCB) launched an electronic payment scheme called Pix. The authorities’ objective was to reduce reliance on cash for transactions, increase financial inclusion, strengthen competition in a relatively concentrated banking system, and modernize the payment system for faster and more secure transactions. The ability of the new system to track payments and economic activity by geographical region, user characteristics, and transaction types, has turned out to be a highly useful benefit, though one which was not explicitly stated as an objective.

2. Pix has greatly exceeded usage expectations and fostered financial inclusion (Figure 1). In the two and a half years since its launch, the Pix system has been used by more than 140 million individuals (about 80 percent of the adult population) and 13 million firms, according to BCB statistics as of May 2023.2 There are now more than 3 billion transactions taking place each month, with an average ticket size of about US$88. Pix has also supported financial inclusion by facilitating transactions by 71.5 million individuals (as of December 2022) who had not made any electronic credit transfers over a one-year period prior to the launch of Pix and are Pix users now. Payment volumes for Pix are now almost five times greater than those for debit and credit cards combined. In comparison with electronic payment systems globally, including with advanced economies, Brazil has had the fastest adoption rate in terms of transactions per capita gained since implementation.3

Figure 1.
Figure 1.

Pix Activity Indicators

(May 2023 or Latest Available)

Citation: IMF Staff Country Reports 2023, 289; 10.5089/9798400249266.002.A004

Note: P2P – Person to Person, B2B – Business to Business, P2B – Person to Business, B2P – Business to Person, P2G – Person to Government, B2G – Business to Government.

3. Pix has also helped to strengthen competition in the financial sector. It has led to the growth of several payment services institutions, which have established banking subsidiaries, increasing competition for deposits with big banks. The open sharing of transaction information on Pix users has helped to strengthen competition in the sales of banking products and services, including for better and cheaper payment services, among various institutions.

How Pix Works

5. The Pix technology allows the provision of payment services. These are delivered by certain designated financial and payment institutions called “participants” or “payment services providers (PSPs)” to a wide variety of “users,” which include individuals, firms, and government entities. Pix has the following features:

  • The BCB is the owner of the payment scheme. It manages and operates a realtime settlement infrastructure (SPI), as well as a user address database (DICT). The latter contains identifying information on the users, including aliases, such as phone numbers, email addresses or randomly generated IDs, used for access to the Pix system and to prevent fraud.

  • Payment services may include instant or scheduled payments and transfers, cash withdrawals, and payment invoices.

  • Users may also incur short-term borrowing via Pix. This occurs, for example, between retail users and merchants operating via a PSP. The merchant could offer a user (payer) to pay for goods (or services) in installments, to be made to the PSP, though the merchant would receive immediate payment at a discount to the product sale price from the PSP.4

uA004fig01

Illustration of One Model of Installment Credit

Citation: IMF Staff Country Reports 2023, 289; 10.5089/9798400249266.002.A004

The authorities are now able to track monthly payment and related economic activity on a granular basis by geographical location, types of transactions, and borrowers, including by age group.

6. Participants in the system are subject to BCB regulatory requirements. They include institutions regulated by the BCB as well as other institutions that technically fall outside the regulatory perimeter but become subject to certain regulatory requirements and supervision (as discussed below) if they are allowed to participate in Pix. While Pix activity is mostly carried out via domestic and foreign banks (about 57 percent of the annual volume of transactions), payment institutions and fintech entities are not far behind (39 percent), and the remainder is mostly comprised of credit unions (about 4 percent). Utility companies are not included as they are considered end users. Regulated participants with more than five hundred thousand accounts are required to participate in the system (“mandatory participants”); others may participate voluntarily. As of end-May 2023, there were 799 active participants, of which 34 were mandatory.

  • Participants that fall outside the regulatory perimeter may still provide payment services but only indirectly by going through a regulated institution. They must still satisfy certain requirements established by the BCB, which include (i) a signed contract with an existing direct participant; (ii) the technical and operational capacity to operate within the Pix system; and (ii) equity of at least BRL 1 million.

  • All participants are subject to proportional risk-based supervision by the BCB and basic regulation for liquidity risk management, cybersecurity, data usage, and AML/CFT procedures. The BCB also sets some standards for participants to provide users with simple and intuitive access to the Pix system, which includes registration, transactions, and user authentication.

7. The BCB monitors system liquidity carefully. The BCB now remunerates the balances of all direct participants’ accounts in SPI, recognizing that by reducing the opportunity cost of funding there is an increase in liquidity provision for SPI Accounts. It provides liquidity lines to participants that have direct access to the SPI. It also allows a 30-minute window after the normal operating hours of the BCB’s Reserve Transfer System (STR) (6.30pm-6.30pm Monday through Friday) for transfer of Reserve Requirements and Electronic Currency balances to SPI Accounts. Banking participants may carry out short-term reverse repos of government securities with the BCB in exchange for liquidity to be used outside of normal business hours.

Design Features Contributing to the Success of Pix

8. Several design features have contributed to the success of Pix. The following features are noteworthy:

  • Pix transactions take place almost instantaneously. A Pix payment settles in 3 seconds on average versus 2 days for debit cards and 28 days for credit cards.

  • There is no limit on the size of a transaction set by the authorities; however, participants may impose limits on users based on their risk profile. According to the authorities, this provides flexibility to the system, allowing it to handle different types of users, encompassing both households and corporates, which would have different operating sizes for normal transactions. The authorities also note that the real-time availability of both payment and credit information on users makes it possible for participants to set these limits.

  • Transaction costs are low. The authorities have set a requirement on Pix to be free for individuals, and the cost of a payment transaction for firms/merchants is only 0.33 percent of the transaction amount, versus 1.13 percent for debit cards and 2.34 percent for credit cards.

  • Participation by big banks is mandatory. The biggest banks in the system worked together to overcome interoperability challenges and developed an effective network from the start.

  • The BCB is the infrastructure provider and regulator. This has prevented some big technology companies from quickly gaining market share and extracting fees from participants.

  • Rules for governance and technical standards were defined at an early stage. Key rules were decided via public consultation, and Pix participants must follow a procedural “manual.” There is also Pix forum, which allows for dialogue between public and private stakeholders, including the government, banks, press, business associations, and law firms.

  • There is an emphasis on network security. The authorities have put in mechanisms to ensure appropriate user identification and compliance with KYC rules. Participants are required to flag suspicious transactions and to assign transactional limits according to the risk profile of a user. The Pix rulebook allows extra time for settlement of suspicious transactions. There is also a centralized fraud database (DICT), a precautionary block and a special refund mechanism, which draws on technology to trace through transactions, even though these have been set up as irrevocable.

  • The user interface and experience are standardized. This has made it easy for users to switch between providers. Regardless of the PSP, individuals experience a standardized journey on the apps, and companies use a standardized API to link Pix with their systems. Pix has been developed as a brand with a logo.

Features in the Pipeline

9. Several new features are under development. These include:

  • Functionality for recurrent payments. These would include, for example, regular payments on a mortgage, subscription services, or utility bills to take place automatically. This feature would enhance interoperability with other BCB projects (e.g., Open Finance and the Digital Real platform). An ultimate end goal would be to allow customers to access financial services from different financial institutions using either Pix or Digital Real wallets.

  • Pix international. Cross-border transactions are not enabled yet, but Pix international would permit cross-border payments with currency conversion. In this context, the authorities are discussing the possible integration of Pix with the instant payment schemes of other jurisdictions, including the BIS Nexus system.

  • Security-related improvements. These would be aimed at making the centralized antifraud database more robust and adding new features to the special refund mechanism.

B. Cross-Country Comparison

10. Cross-country differences in the design of instant payment systems reflect local factors, policy choices, and emphasis.

  • In some countries, there is a separation of the payment system operator from the regulator and supervisor of that system. This happens to be the case in India and China, whereas in Brazil, these separate functions are all handled within the BCB (though by different departments).

  • It is also noteworthy that there are centrally imposed limits on the size of transactions in India and China, while in Brazil, participants set this limit for users (Table 1). In India, the transaction size limit is around US$2000, while it is significantly higher in China. These differences may be due to the absence or availability of appropriate credit information on users, which could allow banks to make that determination. They could also reflect differences in the perception of risks, including those related to participant liquidity, which could arise from very large transactions, or perhaps even due to fraudulent transactions, which could be difficult to reverse.

  • Transactions are revocable in both India and China, but they are typically irrevocable in Brazil. Some mechanisms in Brazil do allow refunds to take place in certain situations (e.g., in case of fraud or operational failure).

  • There are some cross-country differences in the settlement process for transactions. In Brazil, transactions are settled in real-time, whereas in India and China, these are netted out on a deferred basis a few times a day. The latter approach reduces the volatility of liquidity fluctuations in the system.

  • Another difference relates to the use of identifying information on users or aliases. Brazil allows a great variety of different aliases, including phone numbers, taxpayer IDs, email addresses, and randomly generated strings. India also allows multiple aliases, but China only allows mobile phone numbers. While multiple aliases increase flexibility for the creation of accounts, they could also increase risks of ML/TF and fraud.

  • Unlike India and China, Brazil’s instant payment system, stores user information centrally. This allows the BCB to track transactions by types of users and geography providing valuable insights on economic activity (Figure 1).

Table 1.

Selected Country Comparison of Instant Payment Systems

article image
P=persons, B=businesses, G=governmentsNotes: BCB: Banco Central do Brasil; CNCC: China National Clearing Center; IBPS: Internet Banking Payments System; IMPS: Immediate Payment System; NPCI: National Payment Corporation of India; PBoC: People’s Bank of China; RBI: Reserve Bank of India; SGF: Settlement Guarantee Fund: UPI: Unified Payments Interface. Sources: World Bank Project FASTT, and Fund staff.

C. Some Implementation Challenges and Related Measures

11. Even with a highly successful instant payment system, the Brazilian authorities face some implementation challenges, which are shared with other countries. Some of these challenges, along with measures taken by the authorities in response, include:

  • Appropriate supervision of real-time activity. The challenge arises from the sheer volume of transactions taking place (two thousand per second and over 90 million per day). The authorities have put in place technologies to monitor compliance with regulations in real-time (RegTech) and to monitor participant activity (SupTech), and they also apply proportional risk-based supervision to all participants in the system.

  • Assurance of sufficient liquidity for participants. There are some timing issues, as the BCB’s STR liquidity transfer mechanism is closed at nights and on holidays and weekends, and participants must handle any liquidity shortages via the interbank market. The authorities note that the settlement SPI accounts of non-banks are now remunerated, as has been the case with banks. Correspondingly, all participants can now conservatively fund their settlement accounts without facing an opportunity cost, which helps to minimize liquidity risk on nights and weekends.5

  • Consistent capital regulations. As noted earlier, the Pix payment system fostered significant growth in the assets of some payment institutions, which subsequently established banking subsidiaries. An issue that occurred at the outset was that the regulatory capital requirement of each financial conglomerate was set up on the assumption that a bank would be its apex institution. Initially, conglomerates with a payment institution at the apex would then face lower capital requirements, which contributed to their competitive advantage versus large banks. Recently, the authorities have addressed this issue by establishing commensurate capital regulations among these two types of conglomerate models.

  • Testing of crisis management arrangements. While capital requirements are a first line of defense for direct and indirect participants, there may be scope to carry out an operational test of crisis arrangements, which could involve simulating the failure of one or more institutions. The authorities do not expect potential failures of one or more participants to trigger contagion in Pix, and correspondingly do not classify it as a systemically important payment system under Brazilian regulation. They consider that customers of failing participants could be affected, but they would have access to other means of payments, including credit cards, debit cards, and credit transfers, to fulfill their obligations.

  • Mitigation of AML/CFT risks. The Pix system also elevates risks of fraudulent and ML/TF activity. Banking sector interlocutors indicate that the ease of account creation can lead to individuals creating dummy accounts with payment institutions, which can then be used for cash transfers. There are also cases reported of individuals with an account blocked for fraud at one institution being able to open an account at another institution. The authorities do not have a separate policy or procedures relating to AML/CFT for the instant payment system. However, they note that every Pix participant, including both banks and non-banks, must comply with Brazil’s AML/CFT rules, under BCB’s supervision. The authorities also note ongoing improvements to the centralized database of accounts and aliases to prevent the issue of dummy account creation and minimize related fraud. PSPs already obtain key information on user transactions, which include the date an account was opened, the historical volume of transactions carried by that account, as well as fraud and scam warnings related to the Pix alias and its owner. Going forward, they will receive additional information regarding the number of times a particular user alias has been flagged as a risk by other participants and the number of accounts associated with that alias.

D. Conclusion

12. The Pix system is highly successful. The authorities designed the PIX system after careful and deliberate study of instant payment systems in a number of countries. Several carefully selected design features, including speed, cost, flexibility to cover multiple use cases, ease of access for individuals, interface standardization, and mandatory participation by major banks, have all contributed to rapid adoption of the high-tech payment system in a country where there is wide dispersion in financial literacy.

13. The authorities’ ongoing focus on remaining challenges will serve to cement Brazil’s global leadership in instant payment systems.

  • While Pix does not have a credit functionality, the widespread adoption of Pix has supported the rapid growth of payment institutions, which have then fostered the growth of risky credit to households in other lines of business. Given the powerful functionalities that are already available to users in Pix and others that are being developed, the authorities’ ongoing financial literacy initiatives will be important to ensure that these features are used safely by households.

  • The authorities are also appropriately strengthening the monitoring of account creation at PSPs and could consider whether reducing the number of possible aliases for accounts could also help to reduce the risk of fraud.

  • There may be a case for carrying out simulations and drills of procedures to support confidence in case of one or more potential participant failures, even though these may not be systemic in nature.

References

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1

Prepared by Mustafa Saiyid.

2

See: Pix Statistics (bcb.gov.br). There may be some duplication of individuals and firms due to different identifiers.

3

Source: BCB Pix Seminar; Bech and Hanock et al (2,3).

4

There is no specific functionality for credit in Pix (“Pix Credit”), though some PSPs combine Pix with a credit line. There are models in which PSPs charge interest and fees from the payer only, and others where PSPs charge both the payer and the merchant (payee).

5

They also note that STR’s liquidity provision, which exceeds US$6 billion per day, reflects the high availability of resources in SPI, especially after its normal working hours when Reserve Requirements and Electronic Currency balances can be freely transferred to SPI Accounts.