Why Everyone in Payments Needs to Pay Attention to PIX

India’s UPI had previously set the standard for free money transfer.

Initialized by India’s Reserve Bank, UPI set up a digital banking infrastructure that was accessible to even the most indigent of the population. So long as the user had a phone, they could essentially claim a UPI account.

India’s economy has been cash (and particularly gold) heavy for centuries, as their five major faiths place special emphasis on gold. Getting the economy to modernize, however, means that Indians needed to do away with nuggets of a precious metal and transition to a more instantaneous and fungible method of value transfer.

UPI is working.

UPI transactions were up 46% YoY while debit card transactions declined 6.6%. UPI recently enabled credit access on their platform so banks can underwrite transactions through credit extension. Note that only RuPay credit cards can now be linked to UPI accounts as well but many merchants have credit card acceptance disabled in UPI so they eschew the onerous fees associated with card acceptance.

Duh.

But as successful as UPI has been, Brazil’s PIX (also spelled Pix) platform has done it even better.

Like India, Brazil’s government saw the need to modernize its payments infrastructure. High uses of cash result in all sorts of abuse (not to mention that the government can’t track it for taxation and other purposes – not that we’re advocating for more government oversight) and the cost of cash as a tender type is well documented.

In November 2020, the central Bank of Brazil (BCB) launched Pix, a real-time, bank-to-bank payments platform.

Bro.

This thing is on fire.

In the ~3 years since launch, Pix is used by more than 86% of the adult population, powering 3 billion monthly transactions with an average ticket of $88. It runs 24/7, has no fees, and like UPI is enabled by QR codes on mobile devices, making the barrier to entry nearly negligible.

Even better, it only cost $4M to build and operating costs were $8M in 2022.

This just goes to show that you could literally run any of the credit card schemes (V, MA, AMEX) with a team of < 100 people, and proves that these things are monopolies (technically oligopolies).

As a quick reminder, here’s what’s happened to interchange costs on these networks over time:

And here’s what’s happened to the price of cloud storage, which competes in a free and open market:

It’s almost like monopolies increase price…

At any rate, Pix volumes are almost 5x greater than the combined volume of credit and debit cards in Brazil and 87% of banked merchants have already self-enrolled in Pix. Caveat: Pix powers a ton of peer to peer transactions whereas nobody would consider using a card for this. Therefore this inflates the Pix numbers.

Brazil credits the success of Pix to a few factors.

• 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. Most merchants do NOT charge consumers for Pix payments, however.
• 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. That said, banks are only obligated if they serve more than 500K accounts: out of the 799 active Pix participants only 34 were mandatory.
• 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.

The cost of moving money should go down, not up.

Especially digital money which moves on digital infrastructure, whose costs have experienced logarithmic declines over the past decade as the above graphic on cloud costs makes clear.

As we can see with monopolies (V/MA/AMEX), the costs goes up, even if operating costs fall by 10x.

America likes to thump our chests as leaders in innovation but Brazil literally built a Visa analogue for $4M and it costs $8M a year to run.

And that’s when it’s run by a massively inefficient government entity.

You bet your ass a startup could build Pix for $1M and run it for $1M a year.

The US has a serious payments problem.

The economy is pissing away tens of billions of dollars a year so a few thousand people can make money quite literally doing nothing in exchange for a W-2 from a monopoly card scheme.

“Rinky-dink, third world countries” are showing just how incompetent we are.