Against the hype: the story of PIX
2021 has been the year in which crypto has come to dominate narratives in the fintech industry: sky-rocketing asset prices, rampant startup valuations, and a constant inflow of talent have brought unprecedented attention to the crypto space.
Such a bonanza of media coverage wasn't really reflected by user adoption as the ever-sharp Ben Evans pointed out in his monthly newsletter. The number of wallets involved in non speculative activities is growing, but still represents a small niche: approximately 4-5M defi wallets ever interacted with a DeFi protocol and less than half million users were active last month on Opensea.
Conversely, one of the most interesting and successful projects in the fintech space has gone essentially unnoticed by the global fintech community: PIX, the new Brazilian instant payment scheme.
The goal of this post is to analyze PIX’s main characteristics, its success factors, and the impact that a widely adopted centralized instant payment scheme can have on the Brazilian financial ecosystem.
What is PIX?
PIX is an instant payment scheme launched in October 2020 by the Brazilian central banks (Banco Central do Brasil - BCB). The scheme allows the transfer of any amount of money at any given time (24 hours - 7 days a week) in a few seconds.
PIX is not a blockchain-based scheme. On the contrary, it is a fully centralized infrastructure supported by the BCB. The scheme doesn’t consist of a single ledger where all users' accounts insist on (similarly to what crypto protocols do). Instead, it piggybacks the existing network of transactional accounts (bank accounts) provided by commercial banks and non-regulated institutions to distribute the new scheme to the customers.
The user experience is very simple: every user can generate a PIX key through its bank. The key is nothing but an address of the PIX network, added on top of the existing bank account. The key stores the transactions account data and activates it in the PIX network. Once the key is active, users will be able to send and receive money in seconds.
A very crucial improvement introduced by PIX over pre-existing schemes is that transactions are not only debited and credited in a few seconds, but they are also settled as quickly: an innovation that is orders of magnitudes better than traditional payment schemes like SEPA or ACH - where transactions take at least hours - but typically days - to settle.
The main actors and systems involved in the scheme are the following:
Banco Central do Brasil: it is the epicenter of PIX, it coordinates the different agents and supports the two most critical infrastructures of the system.
DICT: it’s PIX’s address book, the database that links key aliases to users transactional accounts
SPI: the system that allows to settle transactions between different institutions, enabling participation of both regulated and not regulated entities
Transactional account providers: these institutions provide access to DICT and settle transactions (either directly - 17% - or indirectly - 83%).
Special settlement Agent: newly created agents that provide settlement service to other participants
Payment initiator: licensed payment institutions that initiate a payment on a customer's request but don't allow to hold transactional accounts.
PIX was released in November 2020 and its success among the Brazilian population has been impressive. Approximately 109M users - over 60% of the Brazilian adult population (older than 15 years old) - have started using it.
More than 1.5 billion transactions are now executed monthly, with a total value exchange in January of R$716B (equivalent to $135B) and an average transaction size of R$ 491 (~$92).
The adoption has been very strong also among small and medium businesses. As the chart below demonstrates, over a third of the value processed is exchanged among businesses.
There are many factors that are contributing to the success of this initiative.
First, PIX is a very user-friendly product. It was built with the end-user in mind: its user experience is incredibly simple (both the activation and its usage); it is cheap as its fees are very low: it’s totally free for private whereas it’s paid for businesses but cheaper than traditional schemes like DOC and TED; it is very fast: transactions take seconds to be settled.
Second, PIX leveraged the existing banking infrastructure to distribute its keys. BCB didn’t try to replace banks, it’s partnering with them to achieve the widest possible diffusion of the new scheme. Testament to this close relationship was the fact that, at launch, the scheme implementation was made mandatory for banks with over 500k current accounts
Third, PIX is an open scheme where new joiners can easily integrate and start operating on top of it - actually many POS providers have already integrated it on their hardware products.
The mix of these elements has created an unprecedented success in the adoption of a new payment scheme.
Impacts on the banking and payment industry
PIX's massive success will take the Brazilian payment and banking industry by storm.
Traditional banks have been seriously hit by the new system. Moody’s expects missed revenues in money transfer fees for approximately R$ 16B (~$3B). The impact is even stronger for card acceptance companies that are seeing massive volumes migrating to the PIX ecosystem.
A direct victim of this phenomenon is the debit card. If you are a merchant in Brazil, it makes much more economic sense to drive your customers from a debit card payment towards PIX: your PIX fee is usually lower than the interchange fee paid to you acquirer, and your money is settled in a matter of seconds.
Credit cards are a more complex beast to tackle. Brazil is a very credit-hungry country: a majority of the household consumption is paid through Credit Cards (~43% in e-commerce, ~34% at the POS - based on the latest Global Payments report by FIS).
For credit card users, PIX is still not a viable option as credit is not extended through the PIX network yet, so merchants can’t incentivize the usage of PIX over credit cards. But the creation of PIX credit is an inevitable evolution and it might represent an interesting inflection point for agile organizations that will be the first movers in that market.
Two other services that PIX will inevitably eat are cash lifecycle and direct debits. Some account providers, like Nubank, are already proposing alternative means via PIX to ATM withdrawal, through supermarket chains or retail networks. For direct debits, the BCB has already declared that they are planning its release for 2022 (roadmap available scrolling down).
As mentioned, PIX is not a decentralized system that wants to cut out all the intermediaries - in a blockchain-like fashion - and connect all users to a single balance sheet (a scenario that I described in a previous post) - it still maintains a hierarchy of money and roles. In this context, I imagine that it will be crucial for all the incumbents to jump as soon as possible on the PIX train and build financial services within that ecosystem.
Being able to build and distribute over PIX rails quickly and efficiently will probably be the main competing factor in Brazil over the next few years.
Thanks to my friend Daniel Endler for his valuable review of this post.
PS. I’ll be in São Paulo (Brasil) for the first ten days of March. If you are active in the Fintech and DeFi ecosystem and want to hang out just drop an email at email@example.com