Lessons from Brazil’s “Pix” fast payment system

In a recent post devoted to a BIS report summarising the results of interviews on what a small group of central banks had been doing with regard to Central Bank Digital Currencies, I posed the question whether central bankers might be better placed using their resources and powers to foster the development of fast payment systems rather than Central Bank Digital Currencies (CBDCs) and offered the following perspective:

the business case for a retail CBDC seems to have the most weight in the emerging market and developing economies with relatively poorly developed financial infrastructure

the business case for a retail CBDC in an advanced economy is less obvious

other initiatives such as central bank sponsorship of fast payment systems might be a better use of central bank resources

not explicitly referenced in the paper, but the recent experience with the roll out of fast payment systems in Brazil and India offer interesting case studies

the central bank focus on CBDCs seems to continue to be heavily weighted toward account based systems

token based CBDCs are mentioned in passing but do not seem to be high on the list of priorities

From the Outside – 15 March 2022 – “Central Bank Digital Currencies: A new tool in the financial inclusion toolkit”

For anyone interested in CBDC’s and fast payment systems, the BIS has published another report exploring the lessons to be learned from Brazil’s adoption of the “Pix” fast payment system. The authors identify three takeaways from Brazil’s experience which I think broadly support the thesis that fast payment systems often have the potential to achieve many if not all of the public policy objectives associated with CBDCs:

Public payment infrastructures build on the central bank’s foundational role in the monetary system by promoting competition and interoperability between payment platforms. They can reduce costs for users and promote financial inclusion.

Brazil’s recent experience with the Pix retail instant payment system illustrates the potential gains. In little over a year since its launch in November 2020, Pix has signed up 67% of adults in Brazil, with free payments between individuals and low charges for merchants.

The two key ingredients in the success of Pix are, first, the mandatory participation of large banks to kick-start network effects for users, and second, the central bank’s dual role as infrastructure provider and rule setter.

It is important to note however that these benefits do not flow automatically from just building the payment system infrastructure, the report highlights the importance of the central bank using its power to:

  • mandate the participation of large banks and other large players in payment services in order to kickstart the network effects and
  • to set rules that promote competition

I may be missing something here but it still feels to me like CBDCs are over-rated and (well constructed) fast payment systems under-rated. There are no doubt some economies where a CBDC has a role to play but I for one am paying more attention to the roll out of their less glamorous sibling.

Tony – From the Outside

Author: From the Outside

After working in the Australian banking system for close to four decades, I am taking some time out to write and reflect on what I have learned. My primary area of expertise is bank capital management but this blog aims to offer a bank insider's outside perspective on banking, capital, economics, finance and risk.

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