#55 Send Pix - Brazil's Instant Payment Success

How to create a Fintech innovation flywheel using instant payments. What the African Payments industry can learn from Brazil.

Artwork by Mary Mogoi - Website

Hi all - This is the 55th edition of Frontier Fintech. A big thanks to my regular readers and subscribers. To those who are yet to subscribe, hit the subscribe button below and share with your colleagues and friends. 🚀

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Introduction

In 2007, Facebook was a few years old and growth was starting to plateau at around 90 million users. At around the same time, Chamath Palihapatiya had joined Facebook from AOL where he led a team that integrated AOL’s instant messenger to Facebook. Through this work, he developed a good relationship with Mark Zuckerberg as they had similar ideas around tech and business. Mark eventually convinced Chamath to join Facebook, though I’m sure not much convincing was required. He joined under an amorphous role of “Product Marketing and Operations”. Chamath’s early days at Facebook were actually a mess. He was responsible for a failed ad-targeting system called “Beacon” that was a disaster. It was so bad that he even volunteered to leave Facebook but Zuckerberg gave him a second chance. His next project was way more successful and he created what was called the “Growth Circle”. A hack team of sorts whose main role was to break past this 90m mark barrier.

Their principle was simply to experiment as much as possible with data. In fact to Chamath’s words “You know, look, we actually just looked at a lot of data, we measured a lot of stuff, we tested a lot of stuff, and we tried a lot of stuff.” One of the outcomes of this hyper-experimentation was the idea of “People You may Know”. Facebook launched this feature and it enabled users to see people that they may know and therefore invite them to be friends. This feature was creepy and it led to a number of unintended outcomes. For instance, A sex worker found Facebook recommending her clients, who did not know her true identity. A sperm donor got a suggestion for the biological child he never met. Despite the weirdness of it all, it worked, it was one of the features that led to hyper-growth. Today Facebook has billions of users worldwide. The key insight behind this growth was that if you got any user to 7 friends within at least 10 days then that user was likely to be hooked. This became the North Star of Facebook. 

These outcomes relied on the principle of critical mass in Physics. Critical mass is the smallest amount of material needed to keep a nuclear reaction going on its own. If you don’t have enough material, the reaction fizzles out quickly. If you have enough material then you can cause a self-sustaining chain reaction. Critical mass and the lessons from Facebook are one of the more useful mental models when understanding why some payment methods such as M-Pesa, Pix and UPI take-off whilst others fizzle out and cannot replace the existing methods.

I’ll use this same framework to map out payment systems in Africa and what they can learn from Pix which did a few very clever things to ensure that it could build critical mass. To do this, it’s important to set out an outline of why modern payment systems matter. Studies have shown that there’s a direct relationship between how easy it is for people to access financial products and economic growth. Building ubiquitous digital payment systems is therefore important for African economies. I’ll end up showing why SA’s PayShap is likely not to work, why M-Pesa cannot be copied and what Nigeria and other countries such as Ghana need to do to get critical mass.

State of Payment Systems in Africa

Generally there are three payment system archetypes in Africa. Bank-led systems like those in Nigeria and South Africa, Mobile Money led systems like those in East Africa and Kenya in particular and cash-based systems like those in Egypt and Morocco. This podcast conversation between Wiza and Tayo does a great job at breaking them down. I’ll give an overview below with some detail.

Mobile Money Markets

Mobile Money (MoMo) has been a standout success in Africa. The value of MoMo transactions in Africa stood at US$ 832 billion with East Africa accounting for the largest share of this. Over US$ 492 billion was transacted in East Africa. West Africa transacted US$ 277 billion in 2022 and was the fastest growing region in all other indicators except transaction value. There are 763m registered users in Sub-Saharan Africa with East Africa accounting for 51% of this user base. 

A deeper analysis of these numbers shows that ultimately, Saying Mobile Money is an African story is a bit like saying that the tech industry is a Western Hemisphere story. In as much as it’s true, it hides the fact that the US dominates tech. Some stats help to show this. Using 2023 M-Pesa figures then the following emerges;

1. From a transaction value perspective, M-Pesa accounts for 38% of total SSA transaction value given it transacted US$ 316 billion in 2023;

2. Globally, M-Pesa in Kenya accounted for over 25% of global transaction value;

3. Within East Africa which is the most ‘active’ region in the world, M-Pesa accounts for over two thirds of total transaction value;

4. In most deployments, over two-thirds of transactions are cash-in and cash-out transactions. This means that people are using mobile money to receive cash and immediately withdraw it from an agent. In East Africa, P2P and P2B account for 35% and 12% respectively, driven largely by M-Pesa in Kenya;

5. All this despite the fact that Kenya only accounts for approximately 4% of Africa’s population and 6% of GDP.

When seen in this light, then it’s disingenuous to talk of Mobile Money as an African success story. It is in fact an M-Pesa success story. For sure, deployments such as Tanzania and Uganda have been relatively successful but nowhere near the scale of M-Pesa in Kenya. In fact, M-Pesa is roughly 3x larger than the entire Ugandan and Tanzanian markets combined. When you consider P2P and P2B volumes, M-Pesa is an extreme outlier.

The challenge with this is that everyone who has looked at the success of M-Pesa has tried to replicate its success. Nonetheless some things go over-looked when it comes to replicating M-Pesa’s success. I’ve run a mobile money platform before and I have a useful enough understanding of what it takes to succeed. I always argue that the biggest driver for M-Pesa’s taking off in Kenya was that the Telco, Safaricom already had market dominance in the telecoms space. Stats usually place their market share at 65% but I suspect that over 90% of Kenyans have Safaricom as their primary line. Using the critical mass approach, then when M-Pesa launched, all your friends, not just 7 of them, already had a Safaricom line. This was the fissile material that enabled a self-sustaining chain reaction. In other deployments, nobody achieves that scale because no player has ever had a dominant market share. That’s one of the reasons why these markets remain CICO markets.

It’s one thing to get a chain reaction, which is critical. It’s another thing to sustain it. M-Pesa and Safaricom at large is a unique commercial beast given that it has direct government shareholding as well as shareholding from Vodafone which is one of the largest companies in the UK. Given that Kenya was a British colony and still retains very important ties to the UK both commercially and diplomatically, the combination of government and Vodafone shareholding enables an incredible network of relationships and influence that is simply not available to most businesses in the country. This is important when it comes to protecting your commercial turf. If a similar deployment was owned by an African businessman in a market say like Zambia, the minute the business got to US$ 50m in annual revenues, the vultures would be circling.

So there are three points to be made here;

1. The standout success of Mobile Money in Africa is an M-Pesa story not a mobile money story;

2. Replicating M-Pesa is nigh impossible given that no telco has the dominance that Safaricom had and very few telcos have the relationships that Safaricom has;

3. Lastly, a huge chunk of Kenyas GDP goes through M-Pesa and it has become a systemic risk to Kenya’s payment system. The price that Kenya has had to pay for the standout success that is M-Pesa is that a private entity now controls Kenya’s GDP. It works great and is the 8th wonder of the world but it has come at a price.

The conclusion to this is that if you’re a regulator, you won’t achieve remarkable results in financial inclusion and digitisation of payments by embracing the mobile money model. It’s necessary, but it’s insufficient. Even if you do, there would be unintended consequences so don’t pursue this route zealously.

Bank Led Models

South Africa and Nigeria are the poster boys of bank led models. In this model, the onus on digitisation of payments has fallen into the banking system. I’ve written about Nigeria’s financial inclusion strategy here before. However, as a recap, in the late 2000s and early 2010s, Nigeria embarked on a series of reforms to drive financial inclusion with the key insight that financial inclusion has a positive impact on economic growth. Nigeria then built a world class payment system managed by the Nigerian Interbank Settlement System (NIBSS) called NIP. This was an inter-bank instant payment system and was built on a world class technology platform. On top of this was an identity system called BVN or Bank Verification Number.

How it all tied together was that banks would onboard customers through their normal channels and issue BVNs to each client. Through this BVN, clients could make instant payments to other people using the BVN as a unique identifier. This was to be a bank transfer model of payments. Ultimately, a bank transfer can enable all types of functionality and therefore on top of this infrastructure, agent models crop up given that a withdrawal or a deposit is simply a bank transfer.

In South Africa, the market is way more mature and has always been bank led. The success of these bank led models in terms of payment digitisation and financial inclusion fall apart when put under a microscope. In South Africa, inclusion was built in already. Getting to 84% financial inclusion was a factor of having a modern banking system and relatively advanced infrastructure in terms of identity, address systems and government infrastructure. Despite this high level of financial inclusion, payments are still largely cash based. In fact, a study done by Stitch showed that despite over 95% of people receiving their salaries into their bank accounts, 65% of them withdrew cash immediately to manage their payments. This rhymes with a survey done by the South African Reserve Bank. 

In Nigeria, the story is mixed. NIBSS has been relatively successful. Last year alone, it processed close to US$ 370 billion in total electronic transactions and it ranked 6th behind countries like China and India in terms of the world’s most developed payment systems. So NIBSS has done a good job. However, closer inspection would show this;

1. Total electronic transactions were US$ 370 billion and therefore 78% of GDP. M-Pesa’s transaction volumes were US$ 316 billion or almost 3x Kenya’s GDP. Similar figures for PIX run at close to 2.8x GDP depending on where you get your stats. NIBSS is doing well, but it’s not pushing the envelope as hard as it can;

2. Financial inclusion in Nigeria stands at 64% whereas similar stats in Kenya are 82% and in South Africa it’s 84%. Kenya’s figures are driven by M-Pesa. 

Besides the statistics, anecdotal evidence from an on-ground experience is the most useful barometer of how great a country’s payment system works. I was in Lagos a couple of years back and the payments experience was quite bad to be fair. Probably because I didn’t understand the lay of the land. However, I had to navigate between POS machines that had issues with downtime as well as an ATM network that was patchy particularly for Visa transactions. The currency didn’t help either. Simply, you can’t quickly plug into the country’s payments infrastructure and transact freely with everyone around you. In such a situation, the logical thing is to default to cash.

There’s no point breaking down cash based models such as Egypt and Morocco. Nonetheless, I’d argue that saying that cash is dominant due to cultural issues is intellectually lazy. Prior to 2006, a similar argument could be said of Kenya i.e. that Kenyans prefer cash due to cultural issues. Simply, a system that is better than cash has not emerged. In Egypt specifically, an Instant payment system was launched but it’s almost as if it was designed to fail from the start. A look at the rules governing the Egyptian Instant Payment Network would validate this conclusion. Simply, even North Africa with its “cash culture” just needs a well designed payments system.

Pix and the Rise of a Global Payments Powerhouse

A picture of Ilan Goldfajn - Source Bloomberg;

The rise of Pix can be traced back to 2016 when Ilan Goldfajn was appointed by Michel Temer to be the Governor of the Brazilian Central Bank. Of course the story can be traced back even further than this, but this is a useful starting point. Michel Temer had just replaced President Dilma Rousseff who had been impeached by the Brazilian Senate. This brought to an end the 14 year reign of the Brazilian Workers Party. Michel Temer represented the more centrist MDB party which is considered a Big Tent party like the Christian Democrats in Germany. 

Ilan Goldfajn was an MIT trained economist who had spent his career both in the public and private sectors. His most previous role prior to joining the Central Bank was a stint at Itau, Brazil’s largest bank as the Chief Economist. Ilan got to work straight away and launched a project called Agenda BC#. The project was Structured around four key pillars;

1. More Financial Citizenship;

2. Modern Legislation;

3. More Efficient Financial System; and 

4. Cheaper Credit. 

Agenda BC# sought to address structural issues within the Central Bank and the broader financial sector to foster inclusivity, enhance competition, and boost efficiency. Brazil was known as a market dominated by a few very profitable banks who focused on a very small yet profitable segment of the Brazilian population. The market was defined by low levels of inclusion, high bank ROEs and very high net interest margin spreads. The same issues that led to the formation of Nubank also informed Agenda BC#. This situation is very relatable from an African perspective and that’s why this story matters. At core, Agenda BC# focused on instant payments, open finance, credit reforms and cybersecurity regulations. It looked at financial inclusion and digitisation from a holistic perspective.

What followed the launch of Agenda BC# was a raft of legislation that was centred on instant payment regulations, cybersecurity regulations, regulatory frameworks for Fintechs and payment companies and reform of the credit system. In particular, the issue of overdraft fees. This legislative framework paved the way for the development of an Instant Payment System. The system was to be built and operated by the Central Bank with mandatory participation by banks. Within three years, the regulatory framework had all been set up. 

Unfortunately, Dr. Golfajn had to leave as Jair Bolsonaro had been elected as President of Brazil. It would have been reasonable to expect that the reforms he instituted would slow down. However , they accelerated. Mr. Roberto Campos Neto was appointed by President Bolsonaro. It’s one thing to have one visionary in charge of the Central Bank. It’s another thing altogether to have two visionaries head the institution consecutively. Roberto Campos Neto understood the role of technology in driving Brazil forward. He wanted Brazil to be at the centre of the global Fintech revolution, and in particular, a world in which all assets are tokenized. This article does a great job in showing his thought process.

Roberto Campos Neto had the honour of launching Pix in November 2020 and as they say, the rest was history. Prior to discussing Pix’ success so far. It’s useful to go through some design choices. I will list down some features;

1. The BCB is the owner of the payment scheme. It manages and operates a real time settlement infrastructure (SPI), as well as a user address database (DICT). The latter contains identifying information on the users, including aliases, such as phone numbers, email addresses or randomly generated IDs, used for access to the Pix system and to prevent fraud.

2. Moreover the BCB sets rules and guidelines for the entire Pix system. Key rules were decided via public consultation, and Pix participants must follow laid down manuals. 

3. Pix is available to banks as well as any licensed institution that wants to be a participant. Of note is that participation is mandatory for banks that have over 500,000 users. Additionally, licensing requirements, particularly capital requirements are flexible for participants and depend on the volume of transactions a participant undertakes. Currently, 845 institutions are licensed as participants;

4. Pix allows for real-time payments, enabling funds to be transferred within seconds, 24/7, including weekends and holidays.

5. For settlements to happen, the Central Bank maintains settlement accounts for each of the 845 participants called an SPI (Sistema de Pagamentos Instateneos) account. This maintains system liquidity. When a payer from Nubank pays a beneficiary at Itau, Nubank moves an equivalent amount from its SPI account to Itau’s SPI account. The key thing here is that All Participants including non-banks have SPI accounts.

6. The BCB to incentivise Participants for the opportunity cost of maintaining liquidity in their SPI accounts, remunerates all SPI accounts. Simply, a non-bank not only gets access to a Central Bank payment account but can also earn interest;

7. P2P transfers are free and business payments are charged 0.33%, a fraction of debit card or credit card fees;

8. Pix was built using modern technology standards. It has Open APIs, utilises webhooks and has advanced cybersecurity features. This enables participants building on top of Pix to really innovate;

9. Pix supports QR codes natively;

10. Pix does not set limits on the size of transactions but leaves this to participants to decide. Participants therefore decide based on their own risk and liquidity circumstances;

11. Some additional features are being launched with many others in the pipeline;

    1. Pix Agendado - Enabling scheduled payments for users who want to schedule their payments;

    2. Pix Agendado Recorrente - For users who want to schedule recurring payments. Useful for subscriptions such as gym memberships, rent and other recurring payments;

    3. Pix Automatico - With Pix Automático, the payee (business) will set up a recurring billing instruction that must be authorised by the payer so that recurring transactions can be made directly from the payer’s account, with a fixed or variable amount. It’s different from Agendao which is managed by the payer. Automatico is scheduled to be launched in Q4 of 2024;

    4. Pix Internacional - Intended to enable cross-border payments with Brazil integrating to other payment schemes such as Faster Payments in Europe. This is expected to go together with changes in Brazil’s FX regulations enabling easier flow of capital. Despite this, Wipay and PagBrasil have already launched Pix payments for Brazilians in Spain;

    5. Pix Guarantido - Monthly instalments - This will be like BNPL and will be an alternative to credit cards;

The outcome has been tremendous;

1. As of August 2024, there were 168m Brazilians registered on Pix or roughly 78% of Brazil’s population. At a similar stage i.e. 4 years after launch, M-Pesa had slightly less than half of Kenyans fully onboarded. In terms of Monthly Active Users, the number for Pix is 159m;

2. There were 530m registered accounts in the DICT - (Diretório de Identificadores de Contas Transacionais) including businesses and individuals. Remember, a person can have multiple keys;

3. In August 2024, there were 5.6 trillion transactions recorded in the Pix system, this is an annual run-rate of around 70 trillion transactions;

4. In the same month, the total amount transacted was US$ 454 billion equating to an annual run-rate of US$ 5.45 trillion. This equates to around 2.8x GDP almost similar to M-Pesa numbers despite being only 4 years old;

5. P2B transactions by number are almost equal to P2P transactions. However, B2B transactions by volume are larger than P2P showing a high rate of usage amongst SMEs in Brazil;

6. 35% of transactions were initiated by QR code with another 45% being initiated by keys;

7. Apart from this, Pix has driven increased innovation in the Fintech space and subsequently substantial FDI including VC investments;

The success of Pix can be seen by its quick adoption in terms of number of users and transaction value to GDP ratio. Moreover, unlike many parts of Africa where mobile money is largely a cash-in cash-out issue, the widespread use of pix for B2B transactions and merchant purchases is a testament to its ubiquity.

Why did Pix Succeed?

I like focusing on personalities because it’s people who make things happen not processes and procedures. When it comes to such broad decisions regarding payments and financial markets, you need leadership. The critical aspects of leadership that are required centre on first principles thinking and decisiveness. If you have decisiveness without critical thinking, you do dumb things. If you have critical thinking without decisiveness then you get stuck. If I put myself in Brazil and sat in on some of the meetings that centred on Pix, I can clearly see how the leaders were both decisive and critical thinkers. Some examples would suffice;

1. Opening participation to the SPI to all participants i.e. every licensed participant had a settlement account with the Central Bank. In Egypt for instance, you have to have an account with a Bank. The critical thinking is simple, if banks have been known to be the hindrance to payments modernisation, then why are you making them a choke point?

2. The Central Bank remunerated SPI accounts. The critical thinking here is that “If I’m mandating free transfers and low cost merchant payments, I must give banks an incentive to place their liquidity in the SPI system, if not they will have a plausible reason for making the system fail”. The decisiveness was actually to make it happen;

3. The Identity Directory (DICT) -Every successful payment system not only sets the rules but owns identification. Visa issues your card number not the bank, M-Pesa owns your phone number and SWIFT owns the SWIFT number. Having an identity framework that relies on easy markers such as a phone number or email creates the same virality framework for Whatsapp where as soon as you download whatsapp, all your contacts are already on Whatsapp. Remember the 7 friends in 10 days framework;

4. Decisiveness manifested in two things; all banks must join and fees are waived for P2P payments. Contrast this with PayShap in South Africa where fees charged by banks are set by the banks and joining is not mandatory;

5. The Central Bank as the owner and regulator of the payments system. It’s critical to remember that the ability to pay is a public good. In markets where instant payments have shown success e.g. India, Brazil and Nigeria, the Central Bank governs the payments system. In Brazil it’s directly, In India it’s indirectly through the NPCI. In Kenya and South Africa, Pesalink and Bankserve are owned by the banks and the result has been that instant payments haven’t taken off in these markets. As much as PayShap is new, I can already predict that it won’t take off. It’s a case of show me the incentives and I’ll show you the outcome.

The table below compares payment systems by features and it shows why some have succeeded and others haven’t.

What Lessons are to be Learned

First, we must accept the conclusion that Mobile Money is an M-Pesa story and not an African story. Moreover, M-Pesa is a unicorn of a commercial enterprise, started at the right time, by the right people and under the right circumstances. I doubt anyone will replicate this soon. Therefore as a Central Bank regulator or advisor, you can’t look to M-Pesa as a model for payments innovation. It simply won’t work.

A more reliable approach for payments modernisation is the Brazilian model as the lessons can be easily replicated. However, this will require foresight, leadership and courage. Banks are not incentivised to think about creating a ubiquitous payment system that serves everyone. That’s not their job. Their core function is to maximise shareholder returns not to create a public good. It’s not their fault. It’s why PesaLink for instance hasn’t been the success they thought it would be. The following should be the some guiding principles for instant payment systems;

1. Take time to think through the goals of your payment system considering where technology is headed to and design your system according to this. In Brazil, they are soon launching their own CBDC called Drex;

2. Take time to ensure all the necessary pieces are in place including legislation not only for payments but also for cybersecurity. Like Einstein said “Everything should be made as simple as possible, but no simpler”. The equivalent here is listen to banks, but not too much.

3. The Central Bank should own and regulate the payment system. NPCI owns UPI but when you drill deeper, UPI is effectively governed by the Reserve Bank of India;

4. In-built identity management is critical to enable virality. The Whatsapp framework for finding everyone already on the platform drives usage. Remember critical mass theory;

5. Boldness is required in terms of demanding that banks participate and that P2P payments are free;

6. Commit to a product road-map, share it with the market and deliver against that product roadmap;

7. Commit to the success of the system and ensure you deal with all potential bottlenecks. In Brazil, it was genius to not only remunerate SPI accounts but also to ensure that all PSPs can open settlement accounts;

8. Ultimately remember that the success of a payment system is not down to how good the underlying technology is but down to how well the rules are set up and how all participants are incentivised. Visa can succeed with bad technology due to its incentive and rule system. M-Pesa uses STK and USSD. Great technology is a bonus. 

As always thanks for reading and drop the comments below and let’s drive this conversation.

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