#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;