Lessons from Brazil’s Banking Jungle

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    PCMI shared insights about Brazil and RTP during a recent guest appearance on a top payments podcast

    Making RTP Systems a Success in Latin America
    Marina Gil

    Marina Gil

    Director – Brazil Lead

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    “The land of samba is becoming a benchmark for banks, fintechs, and central banks, with a booming environment for innovation and new technologies,” says Gabriel Falk, an economist, fintech advocate and host of Banking Jungle, one of the hottest podcasts on payments in Brazil.

    Recently, he invited PCMI Brazilian team  to be a guest on the podcast, and we covered a lot of interesting ground on payments in Brazil—and also why the land known worldwide for samba, sertanejo, forro, choro, MPB, and bossa nova may soon become just as famous for its financial innovations.

    Below I offer a helpful recap of what Gabriel and the PCMI team discussed, adding some recent research from PCMI’s team to add context and depth.

    From Concentration to Innovation

    We kicked off our podcast discussion by discussing the remarkable strides made by Brazil’s Central Bank over the last 10 years or so.

    In the past, Brazil’s banking system was highly concentrated, consisting of a few large traditional banks. At that time, the Central Bank was not focused on creating new systems or changing practices. But as financial technology took off in the 2010s and consumers clamored for more flexibility for their finances, the Central Bank’s role shifted considerably.

    In 2013, a new law established the Central Bank as the regulatory body responsible for payment arrangements and for adopting measures to promote financial inclusion and competitiveness in the sector. Shortly thereafter, Brazil’s Central Bank started supporting innovation in the financial sector. One hugely significant measure was the Banks’s approval of making the account opening process fully digital: without this, neobanks and many fintechs could not exist. This reform allowed fintechs such as Nubank to enter the market—and flourish as Brazilians embraced digital banking. In July 2023 Nubank became the fourth[1] biggest bank in Brazil, with 77.6 million clients that surpassed the total of the giant Banco do Brasil, which has 74.5 million customers.

    That was just the beginning. Other key developments include:

    >>>2016: The Central Bank implemented its strategic agenda to promote “financial democratization” in the country, focusing on tackling structural issues of the national financial system by fostering technological innovation. This strategic agenda laid the foundation for several new products and structures, including Pix, Open Finance and Real Digital, which is now called Drex.

    >>>2020: The Central Bank launched Pix, the country’s instant payments system. To help ensure Pix’s success, the Central Bank made it mandatory for all financial institutions in Brazil. Once Pix was launched, banks started losing revenue from TED/DOC and started offering Pix without any fee for P2P transactions. Ultimately, Brazilians seem to love Pix: as of July 2023, 81% of all adults in the country—139.4 million people—have adopted Pix, and more than 8.77 trillion transactions were completed on the system during the first half of 2023.

    Upcoming Initiatives from Brazil’s Central Bank

    >>>OPEN FINANCE. The Bank is pushing for agradual implementation of open finance. More than 800 financial institutions throughout Brazil will be participating (via payment initiation and data), there will be more than 31 million authorizations to share data and there are 13 developed APIs, with another 16 in development.[2]

    >>>DREX. This is the new name for the digital real. It’s an initiative to digitize Brazil’s currency to promote tokenization and other financial innovations. Drex will allow Brazilians to access various types of secure financial transactions and promote smart financial services, which in turn will open the market for new financial services providers and new models. One of the key goals with Drex is for it to reduce the costs of traditional transactions and promote financial democratization. In July 2023 the Central Bank selected 16 initiatives that will be incorporated into the Drex pilot platform to test it and fine-tune its development for an eventual launch.

    Comparing Banco Central do Brasil to Other Bancos in Latin America

    After Gabriel and I highlighted these innovations by Brazil’s Central Bank, we then looked at other central banks in Latin America to see if they also were spurring new practices, technology and approaches.

    While there is no standardized way to measure how innovative a central bank is, based on past actions and future agendas, we created a table to classify some of LatAm’s central banks in this respect:

    Breaking Down the Banks

    Below we dive deeper into our classifications to explain why we grouped these central banks this way:


    INNOVATORS

    • It’s easy to see why Brazil’s Central Bank can be considered an innovator. It works closely with financial market players and establishes rules and practices to promote market development—instead of stopping it.

    • The Banco Central de Costa Rica (BCCR) is always open to test and adopt ideas and best practices from other countries. To combat the use of cash and improving the government’s ability to collect taxes, the BCCR updated the Sinpe network, which used to work like a traditional ACH, and transformed it into a product called Sinpe Móvil. This real-time payments product provides an infrastructure for low-value transfers to accounts that are only linked to a telephone number. This transfer system expanded significantly during the pandemic and has been able to quickly connect payments to the economy. SINPE Móvil is mostly used by merchants who are unable to offer a POS to accept card payments.

    MODERATES

    • In 2014, the Banco de la República, Colombia’s Central Bank, created the Financial Inclusion Law and thereby set the stage for a new type of financial institution called “SEDPEs,” which are Specialized Companies in Electronic Deposits and Payments. The goal of the SEDPEs is to allow fintechs to join the banking system by holding and transferring funds. But still it is not easy to be approved, because the SEDPE process can take years. As a result, payments players who wish to expand quickly in Colombia are looking for a partner instead of applying to be a regulated company. But still, Colombia is the grey area moving to become and innovative Central Banks especially due to the inclusion of very innovative topics such as: the current discussions of SPI (sistema de pagos instantaneous), the well-known collaboration with Colombia to replicate Pix, and open finance agenda.

    • In its strategic planning for the next four years, the Central Bank of Chile established that one of its main objectives is to promote the development of payment systems, according to technological changes and user preferences. At the beginning of 2023, Chile published its Fintech Law, which defines the legal parameters of what a fintech is, what it can do and what it cannot do. This was a crucial step to take, because there cannot be innovation without a minimum regulatory infrastructure that allows innovation to exist. But still no progress has been made, real time payment (“TEF”) in the process of gaining traction.

    • On one hand, the Central Bank of India (CBI) developed UPI, a highly successful real-time payments platform. On the other, it seems to avoid other topics such as cryptocurrency, which is not regulated—and there is no intention to do this. So the CBI is not as fully committed to innovation as other banks are, despite its impressive success with UPI, and that’s why we classified it as a “Moderate” in terms of innovation.

    CONSERVATIVES

    • Although Banco de México (Banxico) pushed for the country’s Fintech Law in 2018 (which classified companies as fintech financial entities and fintech non-financial entities), it’s far from being considered innovative. This is because the process to gain a fintech license in Mexico is extremely complex and has difficult requirements. Fintechs face hard regulatory entrance barrier when willing to expand into Mexico.

    Replicating Pix’s Success

    As we looked at the different instant payment systems launched in Latin America, Gabriel asked us if it were possible for other countries to replicate what Pix did in Brazil.

    Before discussing that, it makes sense to compare these instant payment systems across markets:

    Pix
    UPI
    CoDi
    Sinpe movil
    MarketBrazilIndiaMexicoCosta Rica
    Launch date2020201520182016
    Adoption139 mn Users300 mn Users11.4 mn valid accounts 3.5Mn users
    Penetration (%Adults)81%29%12% 84%

    It’s certainly possible for other countries to replicate the success of Pix: we can see clearly that UPI in India and Sinpe Móvil in Costa Rica have strong adoption levels and increasing penetration of users.

    However, central banks have to commit the way that Banco Central do Brasil did, making participation mandatory for financial institutions, opening all APIs and other support practices. Without full central bank support, it will be difficult for other countries to create their own successful versions of Pix or UPI. One encouraging example is Colombia: in 2023, its central bank published a draft regulation on the interoperability of its low-value payment system—which was based on collaboration between Colombian and Brazilian central bank.

    What’s Next

    From there, Gabriel asked me what we at PCMI think about the future of payments, if cash can be displaced and how digital payments are evolving. I responded that we’re living an exciting moment in which we can reconfigure the payment system towards interconnectivity of bank accounts and increase of multi rails capabilities. In the past we saw a similar movement but at that time it was oriented toward interconnectivity of the card networks.

    However, given that currently, 71% of Latin Americans have access to a financial account and 66% of them are shopping online, it’s clear that digital payments will keep growing and alternative payment methods will keep challenging traditional ones, such as cash.

    Innovation through Collaboration

    We wrapped up our talk with Gabriel by pointing out what the technology is clearly showing us: digitization is driving the next wave of payments in Latin America as countries launch real-time payments systems and focus more and more on connectivity, interoperability, and a seamless, fantastic user experience.

    As we discussed on Banking Jungle, central banks have a key role in fostering the development of its market financial system by approving laws, building interoperable systems, and allowing the increase of competition among financial providers, which in turn leads to a better and more accessible product offering for the population.

    The Banco Central do Brazil and other central banks have also shown what can be achieved when they employ a proactive agenda — built with the support of market players — that focuses on developing the market. In fact, by acting like a partner instead of just as a regulator, central banks are showing that they can change the financial landscape of their countries for the better and promote a true development of a market-based financial system.

    Next Steps

    Given the significant growth and digitization trends in emerging markets, leveraging our market intelligence can be instrumental in addressing your strategic inquiries and enhancing your planning efforts in payments.

    PCMI highly qualified team is prepared to provide your organization with an extensive analysis of the real-time payments landscape, e-commerce, digital banking, lending and much more. We can decipher complex regulatory environments, identify suitable local partners for market entry, or assist you in evaluating the numerous opportunities in the region and globally. Contact us for more information.

    Sources:

    [1] Central Bank, 2Q2023

    [2] Central Bank, Relatorio de Economia Bancaria July, 2023


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    Marina Gil
    Marina Gil
    marina@paymentscmi.com

    Marina oversees payments sector research projects in Brazil. Based in São Paulo, she has more than a decade of experience in the banking industry. B.S. in Business from the University of São Paulo. MBA in International Business and Foreign Trade from the Fundacão Getulio Vargas.