Cash, debit, or Pix?

Next month, Brazil will launch its first nationwide digital instant-payment system. On November 16, Pix will go live on banking apps, digital wallets, and other services throughout Latin America’s largest financial market. 

Pix was created by Brazil’s Central Bank, which has the power of life and death over all Brazilian financial institutions. The system is virtually free to use, a novelty in a country with a very efficient but expensive banking system.

Although it will be mandatory only for the largest banks, Pix will be available for all Brazilians whose bank or credit union opts in. Already, people are embracing the new system; on the first registration day ahead of launch, millions of users signed up for the service. 

But not everyone is so enthusiastic. Pix’s simplicity and low cost will eat into the revenue streams of big banks, which typically charge users for fast transfers. It also complicates the business models of some of Brazil’s most successful startups. And by combining these features with a countrywide mandate, Pix might finally accomplish something that up until a few years ago was unthinkable: killing cash transactions in Brazil.

Why did the Brazilian Central Bank create Pix?

Pix has been in the works since mid-2018. Back then, there were a few instant-payment systems available in Brazil. Yet those that did exist were either limited to a specific bank’s clientele or had been launched by startups. 

“We had been signaling the need for instant payments to the market since 2013,” said Mayara Yano, an analyst at the Central Bank. But, according to Yano, there were too many barriers and not enough incentives for a private company to create a service to be adopted by the banking system as a whole.

With Pix, the Central Bank also means to restrain the use of paper money, still popular in everyday life. It’s typical of mom and pop shops to offer 5% to 10% discounts for cash payments to avoid card-processing fees, for example.

Limiting paper currency with Pix would help the Central Bank with two other problems: limit its expenses with producing and distributing bills and coins, and boost the government’s investigations of financial fraud, a hot-button issue in Brazil. After all, cash transactions are almost impossible to track, but Pix payments will be all saved in their users’ banking apps.

Pix isn’t the first government-imposed payment mandate in Brazil’s history. In 2002, the Central Bank created a money transfer mechanism that took less than one hour on weekdays and would be completed by the next working day on weekends and holidays. The mechanism, called TED, was mandatory for all banks.

Pix, of course, isn’t mandatory for everybody. But it may as well be, since it is mandatory for banks with more than 500,000 clients; the group comprises 34 banks, which serve 90% of the 175.4 million Brazilians who own bank accounts. It is optional for smaller banks, fintech startups, credit unions, and other financial service providers.

How will it work?

Pix relies on identifiers like QR codes, email addresses, and telephone numbers to perform money transfers in up to 10 seconds, including on weekends and holidays. It will be incorporated into banking and payment apps, digital wallets, and other kinds of financial services. Once available, Pix will provide an alternative to existing fast money transfers, which cost an average of 10 Brazilian reais each in fees ($2).

The system functions virtually for free; the Central Bank charges financial institutions just 1 Brazilian centavo ($0.0018) for every 10 Pix transactions, and it’s up to them if they will pass along that cost to their clients.

To sign up, a user must submit up to five pieces of personal information, such as an email address, a cell phone number, or a tax ID, that will be used as a “Pix key” to identify them in a money transfer. Users will also be given a QR code, which can be used to send or receive payments. If they have a bank account, they can use their checking account information to process a Pix transaction, much like a traditional bank transfer.

How will Pix affect Brazilian banks and fintech startups?

The government hasn’t disclosed any studies of how Pix could impact Brazil’s economy. But it’s clear that the new technology will hit big banks the hardest, as well as big-name payment intermediaries, like point-of-sale and card-machine operators Cielo and Rede. German consulting group Roland Berger forecasts that the latter could lose up to 13 billion reais ($2.6 billion). 

Pix also threatens what has been a lucrative revenue stream for Brazil’s “Big Five” banks — Itaú, Bradesco, Santander, Banco do Brasil, and Caixa Econômica Federal — which collectively make 2.2 billion reais ($440 million) a year from fees for same-day money transfers.

But a potential loss in transfer revenues isn’t the only danger to the Big Five. Now that they’re on the same footing when it comes to transfer fees, they risk losing clients to digital wallets and online-only banks. As of 2019, more than 80% of Brazil’s total credit operations, valued at 2.90 trillion reais ($580 billion), were concentrated in the Big Five. “Pix will challenge the entire market to provide quality digital services at lower prices,” said Cláudio Guimarães Júnior, executive director of the Brazilian Association of Banks. 

Traditional banks such as Itaú e Bradesco have voiced concerns about the system’s security and complained that the launch date is too early. “[Battling Pix] is like trying to stop the wind with your hands,” said João Bragança, specialist in payment methods at Roland Berger. 

But the effects of Pix could cut both ways. Established digital payment startups like PicPay, with its 20 million active users, and PagSeguro, which raised about 13.2 billion reais ($2.3 billion) during its initial public offering on Nasdaq, may be in trouble. One of their services is instant digital payments, something Pix will provide universally and for free.

But whether you’re a big bank or a small fintech firm, there’s no fighting the Central Bank. The Brazilian government will also allow big retailers to adopt Pix as a payment option, often with cashback offers, a novelty in Brazil. In order to compete, PicPay and other digital-payment companies will need to diversify their services. 

What will change for Brazilians?

Even with Brazilians being as fond of cash as they are now, financial experts are expecting Pix to gain a stranglehold on non-cash payments and money transfers within the next few years. An analysis by Accenture anticipates some 48 billion reais ($9.6 billion) to move through the Pix system by the end of its first year. 

The study predicts that Pix will achieve mass adoption (i.e., be used for 25% of all household payments) within five years and move between 1 trillion reais ($200 billion) and 1.5 trillion reais ($300 billion) per year. That’s close to 20% of Brazil’s current GDP of 7.3 trillion reais ($1.46 trillion). “The Brazilian card industry, both debit and credit, moved 1.8 trillion reais ($360 billion) in 2019. So Pix can have practically that same size in 2025,” said Ricardo Pandur, payment specialist at Accenture.

But it remains to be seen who exactly will turn to Pix. The Central Bank is betting on its appeal to the 36 million Brazilians with no bank accounts. For them, Pix could serve as an entry point to financial services.

For consumers, Pix will be an alternative to cash and debit cards, a cheap, fast method of money transfer, and even an easy way to pay taxes. For retailers, Pix will be cheaper than card operators, with potentially zero cost to them or their customers.

But access to Pix is conditional on access to a smartphone or a computer as well as a stable data connection. Even with increased connectivity and phone use, 40% of all Brazilian adults still don’t have a smartphone. Potential users might have trouble understanding the system of personal keys and QR codes. “Understanding a payment mechanism is not as simple as learning to use social media,” said Ricardo Rocha, a professor of finance at Insper in São Paulo.

With new technology comes new vulnerabilities to scams and phishing attempts. Pix will be incorporated into banks’ native apps and websites and have the added benefit of encrypted transactions. But it will be up to the same banks to explain the risks while pushing for widespread adoption.

Some startups might have been pushing for adoption a little too far. Clients of online banks Nubank and C6 and digital wallets PagSeguro and Mercado Pago took to social media to complain that the companies registered their keys without their explicit consent. The Central Bank started a formal investigation and Brazil’s primary consumer defense entity questioned their methods, but the corporations claimed they followed all guidelines and that their clients were notified via apps.

Even so, the future of Pix looks promising. Between October 5, when the Central Bank started to allow users to enroll their Pix keys ahead of the November launch date, and October 22, there have been 50 million enrollments. On the first day alone, 3.5 million keys entered the system, and the demand was so high that many banking apps crashed.