Sep
How Pix compares to UPI and what FedNow can learn from both of them
Common features, key differences, and three ways FedNow can emulate their successful launches
Sulivan Rocha
Sr. Analyst
Pix (Brazil), UPI (India), and FedNow (US) are all payment infrastructures designed to interconnect various financial institutions within the countries in which they operate, facilitating the capability for instant 24/7/365 payments between these institutions. These Real-Time Payment (RTP) systems were developed either directly by the monetary authorities of each country or under their regulatory oversight and relied on the collaboration, either direct or indirect, of key players within the financial market of each respective country for their conception and development. In this piece we’ll cover these three RTP systems:
- In Brazil, Pix was developed by the Central Bank of Brazil, and it was launched in November 2020.
- In India, UPI was developed by the NPCI (National Payments Corporation of India), an umbrella organization made up of 65 institutions created by the Reserve Bank of India and the Indian Bank’s Association, and it was launched in August 2016.
- In the United States, FedNow was developed by the Federal Reserve System and launched in July 2023.
These real-time payment systems are not directly accessible to consumers. In other words, individuals access these systems through transactional account providers, such as banks and fintech companies. Monetary authorities provide the service to financial institutions within their countries, and these institutions, in turn, enable end users to utilize these systems.
Real-time payment systems are a global trend that has become pronounced in recent years, transforming the way people carry out financial transactions and how commerce works. Next, we’ll delve into the specific features of some of the most prominent systems to date: Pix, which has significantly transformed the dynamics of the Brazilian market, and UPI, which has had a profound impact on Indian society. Additionally, we will analyze FedNow, which is poised to become a crucial solution within the US market.
Key Metrics for Pix and UPI
| Pix (Brazil) | UPI (India) | |
|---|---|---|
| Number of participant institutions in the RTP scheme | 803 | 381 |
| Users of the RTP (as % of adult population) | 84% | 28% |
| Volume processed by the RTP in 2022 (USD bn) | 2,097 | 1,593 |
| Transactions processed by the RTP in 2022 (bn of transactions) | 24 | 74 |
| RTP Volume / Nominal GDP in 2022 | 114% | 47% |
| RTP Transactions / User in 2022 | 171 | 245 |
| RTP Transactions / Second in 2022 | 762 | 2,348 |
| Cards volume in 2022 (USD bn) | 637 | 265 |
| Cards transactions in 2022 (bn of transactions) | 39.2 | 6.4 |
| Number of RTP transactions for every 1,000 card transactions in 2022 | 613 | 11,550 |
Mapping Out Growth for Pix and UPI: 2021-2023
Similarities between Pix and UPI
Pix and UPI share the same basic precepts of RTP systems (instant payments and interconnectivity between different institutions), as well as the common goals of modernizing the payment infrastructure in their countries, promoting financial and digital inclusion, and improving the payment experience for their users. In addition, some common characteristics that have played a key role in the success of the systems are:
- Mobile-centric and user-friendly: Both systems were created with their users in mind, with a standardized UX between all providers, establishing the same functions and flows regardless of the institution where the customer has their transactional account.
- Payments between people and for purchases: Both systems enable payments between individuals and also to companies. Peer-to peer (P2P) payments have been of great importance for the adoption of RTP systems, enabling people to carry out transactions easily, free of charge, and instantly. In addition, both systems have become very important for e-commerce, facilitating online transactions based on QR Codes generated by merchants or PSPs.
- Financial and digital inclusion, as well as reducing the use of cash: The two systems were responsible for the first contact with financial institutions for a significant portion of their countries’ populations, facilitating transactions and payments, as well as reducing the informality of trade and the circulation of cash.
Key UX Differences between Pix and UPI
UPI was launched four years before Pix, so it’s only natural that it has more features, but without neglecting NPCI’s merit for developing such well-thought-out solutions to improve usability for the population. Pix has an extensive roadmap and an extremely qualified technical team working on its development, but there is still a big gap between the features offered by UPI and those offered by Pix.
| Pix (Brazil) | UPI (India) | |
|---|---|---|
| User access | Users can use the Pix system through transactional account providers and it is very common for them to carry out transactions directly from the applications of the institutions they have accounts with, be they banks or payment institutions. | Users commonly use the UPI system through Payment Apps (payment gateways that are connected to their bank accounts). In other words, most of the users’ interface with the system is via apps such as PhonePe, Paytm, or Google Pay, and not their banks’ apps. |
| Payment initiation | The initiation of payments was only possible after the regulation and structuring of Open Finance in the country and was only launched two years after the start of the RTP operation. | The participation of third parties to initiate payments, without being the providers of the transactional accounts (e.g. PhonePe) has already been a native option of the system since its conception. |
| Recurring payments | Pix’s recurring payments solution, “Pix automático”, is currently under development and is expected to be launched in the first semester of 2024. | UPI has been accepting recurring payments since 2020, with a solution called UPI AutoPay. |
| Offline payments | The Central Bank has announced that offline payments are in Pix’s vision for the future but are not yet on the development roadmap. | UPI has a solution for offline payments (called UPI123PAY), in which the user can carry out transactions by calling an interactive voice response number. |
| Cross-border payments | The Central Bank mentioned that the system could be used for cross-border payments in the future, but it is not yet under development. | The payment system is already used in several other countries such as Singapore, UAE, and Nepal through cross-border payment agreements. |
| Funding source | Officially, the only way to fund a Pix is through an account balance, but there are some financial institutions that are enabling consumers to fund Pix transactions through their credit cards. | The sources of balance to fund a payment are varied: overdraft accounts, saving accounts, prepaid wallets, credit cards and, more recently, credit lines. |
Key Differences in Infrastructure Development and Regulation
| Pix (Brazil) | UPI (India) | |
|---|---|---|
| Storage of user data | User data is maintained in a centralized directory at the Central Bank, the DICT — the database that links users’ aliases (phone number, email, etc.) to their transactional account. | User data is decentralized in which the data linking users’ aliases to their account is stored in their provider’s database. |
| Fees | The Central Bank prohibits charging fees to individuals using Pix, but allows merchants to charge fees, which are set by the account/payment provider carrying out the operation. | Despite starting out by charging fees, the Indian government has banned any charges for using UPI since 2019, whether for consumers or merchants. However, there’s already an interchange fee for prepaid payment instruments, such as gift cards, up to 1.1% on transactions over INR 2,000. |
| Acceptance by merchants | The Central bank has mandated all large financial institutions (more than 500,000 customers) to offer Pix as an option, but there is no mandate on merchants to accept. | The government made it mandatory for merchants with more than USD6 mn in annual sales to accept UPI payment, with a penalty to be enforced in case on non-compliance |
| Settlement of transactions | Pix uses the cross-settlement model, where participating financial institutions need to send the entire volume of transactions processed, even if they send to and receive from the same institution. | The UPI uses the net-settlement model, where participating institutions only settle the remaining balance of the volume processed among themselves. As the NPCI does not have central banking authority, it does not have the capacity to intermediate these transactions, so the participants settle directly with each other. |
Future Developments with Pix and UPI
| Pix (Brazil) | UPI (India) |
|---|---|
| Credit solutions are being studied by the Central Bank to be implemented through Pix, called Pix Garantido, possibly affecting the credit card market. | Investing heavily in the expansion of cross-border payments, positioning itself as an alternative to SWIFT. |
| The Central Bank is investing in improving Pix’s security system to minimize the risk of fraud and the use of the system as a way to move money from scams and money laundering. In addition, the Central Bank is developing a second communication channel for processing non-priority transactions (transactions scheduled by users to take place on a given day), increasing the system’s robustness and reducing the risk of system overhead. | The NPCI, the body that administers the UPI, has proposed a market share cap of 30% for all payment companies, possibly limiting the dominance of BigTechs and new onboardings of leaders such as Walmart’s PhonePe and Google Pay. |
UPI’s success is impressive due to the number of transactions carried out, more than 3000 transactions processed per second in June 2023, almost double what Pix processed at its all-time high. However, while Pix is already used by more than 80% of the adult population, UPI is far behind with less than 30% penetration. This difference in adoption can be explained by a number of factors, such as cultural differences, technology usage and literacy, accessibility to technology, and financial inclusion. One way or another, the impact of RTP systems is already being felt in both countries and tends to increase as the next features are launched and generations mature with the use of technology.
In cultural terms, Pix was one of the first solutions developed by the Brazilian government (specifically the Central Bank) in recent decades that is unanimously recognized nationwide as a benefit and facility for the population. Before Pix, bank transfers were expensive, time-consuming, and therefore not widely used by the population. The ease of use has greatly promoted the digitalization of the economy and financial inclusion, with some people even being surprised that the government has developed such a good and effective product.
On the other hand, NPCI is an entity that has already developed several products and services that make life easier for Indians, and they are already used to certain technological innovations that are created by the organization and facilitate the daily lives of the population, for example, the unified digital ID system Aadhaar or the local RuPay card network. This cultural difference and the fact that the NPCI is a consortium with the participation of all the major financial institutions in the country was a determining factor in the success of the system, which even without financial gain for the participants and with participation not being compulsory, achieved the success mentioned above.
How FedNow Can Learn from the Success of Pix and UPI
Launched in July 2023, FedNow represents a significant milestone in the world of Real-Time Payments and has been introduced by the US Federal Reserve to both stimulate adoption and present a viable alternative to The Clearing House’s RTP offering. At present, FedNow has established connections with only 35 banks, which are regarded as early adopters. While these institutions play a pivotal role in the project’s development, it is crucial to underscore that large entities, be they banks or merchants, are integral to the system’s success — their involvement will ensure the necessary interoperability that will allow the system to scale effectively.
Here are several ways that FedNow can use features or practices from Pix and UPI to ensure a successful launch and strong rates of adoption:
Standardize the user experience. Consistency and ease of use are paramount in enticing users to embrace RTP, and both UPI and Pix are very user-friendly.
Competitive pricing. FedNow should be very close to, if not below, competitor systems, even if achieving this necessitates a reevaluation of existing revenue streams. Pricing is one of the key factors in the success of both Pix and UPI.
Creation of a centralized or decentralized alias database. This feature simplifies usability by linking users’ transactional accounts, thus enhancing the overall experience. The choice between a centralized and decentralized model has its pros and cons, but the existence of such a database, which allows users to readily identify their transactional accounts, will be crucial to the success of FedNow.
Next Steps
Contact us to understand more about how RTP can impact your business and how your company can best take advantage of this innovation. We can also delve further into user attitudes and behavior and other aspects of specific RTP systems to deepen your understanding even further and strengthen your decision-making.
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Sources
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https://paymentscmi.com/wp-content/uploads/2023/08/230802_Indias_UPI_Growth_EN_03-o.jpg
