The central bank of Brazil launched a direct payment system two years ago. It has become an amazing, worldwide success story – unfortunately also for criminals.
The Central Bank of Brazil in Brasilia, Brazil, on Wednesday, Feb. 2, 2022. Brazil’s central bank is expected to lift the benchmark interest rate above 10% for the first time in nearly five years, and perhaps signal that it’s ready to start moderating the world’s most aggressive monetary tightening campaign. Photographer: Andressa Anholete/Bloomberg
In September two years ago, the Brazilian central bank introduced its latest 200 real banknote. Because of the high level of social assistance during the pandemic, money watchers expected cash transactions to increase rapidly. But things turned out differently: To this day, hardly anyone in Brazil has touched the note with the maned wolf. The reason is: Brazilians are using less and less cash.
Anyone who wants to pay for a beer in the bar, a taxi ride or a haircut in cash these days usually gets the answer: “Não tem pix?” – Don’t you have a pix?
Pix is the money transfer system that the Brazilian central bank introduced two years ago – shortly after the new banknote was introduced. The service was immensely successful from the start. In the first year of use alone, cash consumption fell by ten percent. Brazil was one of the major economies with one of the highest cash payments in the world. In 2014, Brazilians made 40 percent of all transactions in cash.
It works around the clock – and free of charge
On the one hand, the rapid success of Pix is due to its ease of use: You register access to the payment system via your private account with your smartphone. Mail, telephone number, tax number or a randomly generated code are sufficient for identification. This channel (called a pix key) then connects one’s account to another. So if you want to pay a craftsman, you only need to enter the person’s telephone number instead of an IBAN number or other complicated bank details. The system is roughly comparable to the Swiss Twint.
This system works in real time, 24 hours a day, all year round, including public holidays and Sundays. It’s free for private users. Businesses pay fractions of what banks or credit card issuers charge.
Just two years after the launch, 140 million private users have registered, plus 11.4 million companies, which is more than half of the commercial users – from backyard businesses to multinational corporations. According to ACI Worldwide, an American provider of payment systems, Brazil is the country with the most users of instant payment systems worldwide, after India, China and Thailand.
One of the reasons why Pix was able to establish itself so quickly is the internet affinity of Brazilians and the smartphone density in the country. There are more smartphones in Brazil than people, which number 215 million. At the same time, Brazilians look at their mobile devices for five and a half hours a day. Together with Indonesia, Brazil is the country with the highest usage rate among the 17 most populous countries in the world. Brazilians download apps and share personal data online without any inhibitions.
Nobody wants the dingy bills anymore
As in many other emerging countries, the share of the informal economy is high: 40 percent of the people work without contractual ties with an employer. They are sometimes paid daily. Pix is great for money transfers, even if they’re only a few dollars.
In retrospect, the timing for the launch was perfect: Brazil, like the whole world, was stuck in the pandemic. Cashless online purchases increased rapidly. Since then, no one wants to pick up the dingy Real banknotes.
In the meantime, beggars have also switched: They ask for a gift by pix – and have immediately written down the cell phone number for the transfer on their cardboard signs.
The high crime rate also helped Pix to get started: In Brazil it is always a risk to be out and about with cash. ATM and bus robberies on paydays are a problem.
The banks in Brazil, who were initially skeptical, are also benefiting from this: The logistics in the country, which is the size of an entire continent, cost them around two billion dollars a year – not counting the security or printing costs. Roberto Campos Neto, the head of the central bank, says that the banks have had to accept losses on fees. “But on the other hand, accounts are opened, new business models are created and we reduce the money in circulation, which meant enormous costs for the bank.”
The big banks had to join Pix
The banks had no alternative: the large institutes were obliged to participate in Pix. The smaller financial institutions quickly followed suit in order not to lose customers.
Economically, the system has brought income gains on several levels: Money circulates faster – and with it goods and services, especially in the informal sector. Bricklayers, hairdressers and gardeners usually need the money they earn directly for the daily expenses for their families. Brazil’s poverty rate has risen to around a third of the population since the pandemic. The daily income of many people determines what is put on the family dinner table in the evening. Waiting three days or even a month for the money to arrive in the account is not acceptable to them.
According to Rodrigo Henriques, head of financial innovation at think tank Fenasbac, Pix brings other benefits to Brazil’s poor: Many of their low-value transactions are not even recorded in the financial system, are invisible. “They could not previously be used as data for a credit analysis,” says Henriques. “With the help of Pix and Open Finance, this data can now be used to access better and cheaper financial services with the user’s consent.”
For the Bank for International Settlements in Basel (BIS), Pix is a success story that shows why the control and development of direct payment systems should be promoted and controlled by government money watchdogs. This is the only way to prevent private providers from grabbing the market. “Big tech payment services can quickly gain significant market power to siphon off high fees and valuable data,” says the BIS in a Pix study. Low costs and financial inclusion of the poor are not guaranteed if there is no effective competition.
“As easy as sending photos,” Zuckerberg purred
The Brazilians have also experienced this. Mark Zuckerberg wanted to launch his first mass-market payment system through subsidiary Whatsapp (WA) just months before the central bank in Brazil in mid-2020. Zuckerberg chose Brazil to launch his Whatsapp Pay because the country is the second largest Whatsapp location in the world – but also because it hadn’t worked out in India, the number 1 Whatsapp market. WA negotiated with the regulatory authorities there for two years and could not come to an agreement.
One wants to make money transfers as easy as sending photos, Zuckerberg advertised on his blog with a friendly whisper. For private users, payments should be free but capped monthly. Commercial users should pay a fee of about four percent. Who owns the data – that remained open. The central bank halted the attempt just a week later. In retrospect, Zuckerberg was strategically quite naive: Whatsapp wanted to compete with the regulator, of all things.
Meanwhile, Pix is struggling with another typically Brazilian problem: the number of raids in which the bandits target Pix has increased rapidly. In the case of short kidnappings, the victims are forced at gunpoint to digitally clear their accounts and transfer sums of money to fake accounts via Pix. There, accomplices distribute the money across a whole network of fake accounts and withdraw the money in a matter of seconds.
Many middle-class Brazilians now only take to the streets with a replacement smartphone that doesn’t have any financial apps loaded on it. The central bank now wants to increase the minimum retention period for funds in accounts and blame banks for fake accounts.
But despite the security problems, Pix will certainly continue to displace cash: the central bank is not planning any new banknotes for the time being. Only a fifth of the new 200 real bills are in circulation.