COVID-19 continues to disrupt travel and commerce around the world. However, digital payment transactions are breaking records in a new, more socially distant economy. Remote payments have grown, fee waivers have accelerated small-dollar transactions, and many countries are pressing ahead with new systems to enable better, faster payments.
Launched in 2015, India’s Unified Payment Interface (UPI) remains at the forefront of these digital rails, with companies like Google advocating that other countries explore similar models. From Peru, to West Africa, to Pakistan, countries are backing new systems to support small-dollar payments in real time.
Among the newest and most exciting entrants in this space is PIX in Brazil.
Brazil’s new instant payments system was launched in October 2020 and has received a lot of press, but how does it compare to other heavyweight contenders like India’s UPI? We thought it would be interesting to have a friendly competition to decide: which system is doing more to drive digital payments among low-income customers?
More than ever, new systems are relying on aliases and other directory services to improve the customer experience through easier payment addressing. Back in 2016, UPI was among the first to let customers select between phone numbers, account numbers and domain-based aliases (e.g., [email protected]). This innovation gave customers flexibility in how they identified themselves for the purposes of receiving payments.
Five years later, UPI remains at the frontier. Many successful instant payment systems, such as InstaPay in the Philippines (launched in 2018), continue to rely on account and bank routing numbers, requiring recipients to share information that is hard to remember and sometimes sensitive. Schemes between mobile network operators in countries like Tanzania (launched in 2015) and Kenya (launched in 2018) leverage phone numbers but often require a separate menu for off-network transactions, meaning that senders must know the recipient’s account provider.
So how does PIX stack up? Brazil’s solution launched with many of the addressing features seen in UPI. The system allows users to select a phone number, e-mail address or other alphanumeric as their alias. User data is maintained in a centralized directory at the central bank of Brazil, as compared to the decentralized model of UPI’s domain-based addressing, in which data linking a person’s alias to their account is stored in their provider’s database. There are trade-offs with either option. Centralized models mean that more data is shared with the payment system for address resolution and routing. Decentralized models require some way for the sender to identify both the receiver’s account and financial institution, potentially limiting the options available to identify a customer.
One of the most notable features of UPI – and the feature that has driven tech companies like Google to champion UPI’s design – is that it separates customer experience from account ownership. Customers can use the app of any bank or non-bank to initiate a UPI-based payment, regardless of which institution holds their account. Even fintechs that do not directly participate in UPI (e.g., Google Pay) can access UPI indirectly through a participant, with commercial terms separately negotiated with that participant. While there is no requirement for UPI participants (i.e., banks) to offer access, the large number of participating banks all but ensures some way into the party.
Other markets have introduced third-party payment initiation, but few as elegantly as India. The European Union and United Kingdom have licensed payment initiation service providers (PISPs), with countries like Singapore and Japan developing similar rules. However, many of these solutions still require the customer to port (change apps) over to their account provider to complete payment authorization.
So what about PIX? Brazil’s system allows non-bank account issuers to directly participate, but the conversation around third-party initiation has been separated as part of an ongoing discussion around open banking in Brazil. Following the issuance of a resolution to implement open banking in 2020, Brazil’s open banking regime is being rolled out in stages through 2021.
While more is likely on the horizon from PIX, Brazil’s approach today favors directly participating financial institutions that offer accounts.
The global landscape of pricing policies for instant payment systems is complicated, to say the least. Some systems set interchange rates but leave fee setting to the market. Others do the opposite, setting rules around end-user pricing but leaving interchange more open. Still other systems (or regulators) set requirements in both areas.
In India, these rules have been revisited multiple times. Person-to-person (P2P) and merchant transactions were initially allowed to carry limited fees with interchange rates applied. However, India’s Ministry of Finance revised guidance late in 2019 to prohibit any customer or merchant fee over UPI, while mandating acceptance for businesses with > Rs 50 crore (about $7 million) in annual sales.
The elimination of UPI fees has created a debate in India that continues today. The central bank has previously experimented with reimbursing lost payments revenue to financial institutions, but it does not pursue this practice today. As of February 2021, the Indian government announced new funding of around $200 million as “incentive to promote digital payments,” but it remains unclear precisely how these funds will be directed.
How is PIX tackling pricing? PIX launched with a prohibition on any customer fee but allows acquirers to charge merchant fees without any limitation. There is also no interchange set by PIX, meaning the acquirer may keep the entire fee (unlike, for example, card transactions where fees are often shared with the issuer).
PIX is still new, so it remains to be seen whether this is a more effective policy. The prospect of an uncapped merchant fee with no interchange offers a strong incentive for acquirers to grow merchant networks, but the lack of fee share with the issuer may mean that account-holding institutions have little incentive to promote transactions off their own network.
While there isn’t yet much proof that either policy is better at driving merchant payments, the difference in ideologies is striking. Brazil is pursuing pricing policies that are sustainable in the long term but may do less to incentivize short-term transaction growth. Policies in India focus on driving aggressive transaction growth in the near term through subsidies and mandated acceptance without fees, but the longer-term business case for acquirers remains a question. The evolution of merchant payments in these markets will be interesting to watch.
Both systems have their strengths
Across addressing, payment initiation and pricing, UPI and PIX each have their relative strengths in driving digital payments among low-income users. Both systems offer great reference points for the instant payment projects ongoing in so many other markets.
For more information on building instant payment systems that work for everyone – and case studies from around the world – see CGAP’s new technical guide, Building Faster Better: A Guide to Inclusive Instant Payment Systems.