The democratisation of payments in Brazil – PIX national instant payments system (I)

Pagos is an association of payments companies in Brazil, most of them are payment service providers. Among others (Blackhawk Network, Edenred Soluções Pré-pagas, Incomm, Good Card, Senff, Pagpop, Pago, Celer, Neo Payment, Logbank, Pinbank, Starpay, Rede SysData), Pagbrasil is also among them. 

Among the objectives of the association can be named contributing to the regulatory framework to accompany innovation and promote market growth, promoting isonomic treatment in tax and regulatory matters, to prevent banking concentration and excessive verticalization from harming free competition and market efficiency, and seeking greater traceability and security to protect consumers and improve fraud prevention.

What is PIX and what are its main objectives?

According to Brazilian payments association Pagos, PIX will be the name for the infrastructure that will allow for instant payments, electronic money transfers in which the transmission of the payment order and the availability of funds to the receiving user takes place in real time and whose service is available 24 hours a day, seven days a week and every day of the year. Transfers occur directly from the paying user's account to the receiving user's account, without the need for intermediaries, which provides lower transaction costs.

As the most important objectives that the system has set out for itself, the following can be named: to increase the speed at which payments or transfers are made and received; to leverage competitiveness and market efficiency; to lower costs; to increase security; to improve the customer experience; promoting financial inclusion; and to enable innovation and the emergence of new business models and the cost reduction related to the use of paper-based instruments.

In 2018, BCB specifically created a working group in order to step-by-step develop all the features of this product. That working group now has more than 200 participants and institutions, Pagos being one of them. Following the chronology, in December 2018, we released a formal communication in which we established the main roles of the instant payments system in Brazil. 

A Direct Participant is every financial or payment institution that offers services to the user. Each person who has an account at that institution can make payments, transfers, among other transactions. To be a direct participant, the institution must have an account with the Central Bank and connection to the settlement infrastructure. Thus, it makes the direct connection between payer/recipient and BCB infrastructure. Direct participants are banks, because they have to connect physically and logically with the central bank, following the ISO\a 20022 protocol implemented for this type of service.

An Indirect Participant refers to a financial institution that has no account with the Central Bank and no connection to the centralised infrastructure but offers instant payments. Indirect participants are, for instance, fintechs and other companies that are not required to have a central bank account. The ones who don’t have to follow all the rules in terms of language, message standards, or even hardware, in order to connect to the central bank. Even a small company, without many resources, can be a part of this ecosystem, but indirectly.

The indirect participants have to contract a facilitator, a payments service provider, who acts as an intermediary that enables the connection with the Central Bank. To be clear, the indirect participant does not need to be licenced by the Central Bank, however, the PSP contracted to facilitate the connection to the Central Bank needs to be licenced accordingly. Thus, it is necessary for it to perform the operations through the indirect participant.

How would a payment take place, under the PIX system?

When a payer wants to make a transfer, he sends the money through the indirect participant, who transfers the information to the direct participant. The latter sends the data to the settlement infrastructure, which does the reverse process to the recipient.

The transactions undergo a simple flow, from the payer to the payee. We also have to mention that there are many forms of initiation. First and foremost, we have to mention memory – you enter the information of the payee manually on your phone. Alternatively, a payer can use a key in which you can create an alias containing all the information of the payee, avoiding to key in all the information every time. As a third option a payer can also use a QR code – either static, dynamic or a QR code that is generated by the payer. Next year, in 2021, the Central Bank is planning to use other emergent technologies, such as proximity, contact – NFC. The QR codes that are generated for the BCB in this system function under the EMV standard. 

Figure 1. Central Bank of Brazil Instant Payments Settlement System Scheme

When the payer decides to send some money to the payee. He then sends the solicitation to the SPI – a centralised and sole settlement infrastructure of the BCB instant payments ecosystem, a chamber for settling all the transactions in real time. The sender can key in from memory all the information of the payee or use the alias that he can find in the DICT (brazil: Diretório de Identificadores de Contas Transacionais) – it is a repository of aliases, that faciliates the payer to find all the information of the payee. All this information is sent to the SPI, which routes all the information to the PSP of the payee – the entity which facilitates all the transactions, by offering the payee security, user experience, by customizing the screens of the smartphone and so forth. The PSP can be the same for the payer and the payee, its role is merely to facilitate the transaction. 

The SPI is the point of connection for person-to-person or company-to-company transactions such as the one mentioned above. The DICT contains all the information of the payees and the payers (ID, email, phone number etc.). In order to perform transactions under PIX, every user needs to be enrolled within the DICT repository. This system is also meant to prevent fraud and correctly identify who is the payee on the other side and if by any chance a payee is not found, the payer gets an error message. So the payer in this case needs to notify the payee to be enrolled into the DICT first and foremost, in order to be identified. This is what makes it a secure and closed system.

Once the SPI correctly identifies the payee, through its PSP, it will notify the payee that somebody wants to send money to them. The payee recieves the notification containing all the information that was previously confirmed. All this process takes place in fractions of a second.

The important thing to keep in mind is that once this transaction is made, there is no way to cancel it. There are no chargebacks in this case. A facilitator that is not connected to the SPI can be used, however this facilitator has to be conected to a direct participant in the system, in this case, banks – who can route the information on to the SPI. 

What about costs?

The instant payments system is designed to be low cost so that financial inclusion would work. The fees that the Central Bank charges for processing these transactions are very low. If you want to do a regular bank transfer, you need to do it through the bank account, and the bank decides how much it wants to charge. While with the PIX system, it is going to be completely open, so every fintech company will be able to offer the possibility to send money and if the banks will continue to charge a high amount, people will tend to stray away from those services (and opt for lower cost services of competitors). 

Regarding pricing, BCB allows competition on the market. It will be an open system and in terms of liquidity, the system will have proper reserves in order for it to permit free flow of cash. In what concerns transaction limits and digital identity, there is no regulation coming from the part of the Central Bank. This will be up to each PSP to define. 

The final fee of a PIX transaction will be depending on what kind of service is contracted. If you are contracting a complex PSP, that will be able not only to customise the transaction in order for it to be easier for the user, but also take care of the security aspects. Of course, this would bring the transaction to a somewhat higher cost overall, but it will still be significantly lower than anything that Brazilians have access to currently.

About Carlos Ogata

Graduated in Computer Technology from ITA. Postgraduate in Business Administration with emphasis in Marketing from FGV and MBA from Fundação Instituto de Administração (FIA/FEA/USP). He has worked on the main global payment schemes: Amex, Visa and MasterCard. Also served as chief executive officer at Payment Fintechs.  Co-founder and president of PAGOS.