In just three years, Brazil’s immensely popular Pix payment system has emerged as the nation’s preferred method of payment, frequently taking the place of cash and wire transfers. It is currently posing a threat to credit cards’ hegemony in the rapidly expanding e-commerce industry.

Online merchants benefit greatly from Brazil’s central bank’s rapid payments, which undercut the legacy businesses of banks and fintechs based on the country’s pre-existing credit card infrastructure and ease cash flow in an industry with narrow margins.

In a conversation about open finance and the Pix platform almost two years ago, central bank director Roberto Campos declared, “I think credit cards will cease to exist at some point soon.” “This system eliminates the need to have a credit card.”
Since then, market developments have strengthened his prediction.

According to central bank data and industry organisation Abecs, the use of Pix increased by 74% last year to about 42 billion payments across the Brazilian economy, exceeding the combined costs from credit and debit cards by roughly 23%.

Customers have found switching to Pix to be almost effortless because they no longer need to pull out their wallets—instead, they can just scan a QR code with any banking app. However, it has completely changed the game for sellers in the historically profitable card payments sector.

Neotrust, an e-commerce research organisation, reports that in December, orders paid with Pix accounted for about one-third of all purchases made in online shopping, a 22 percentage point increase in just two years. Orders using credit cards decreased by 5 percentage points to 51% during that time.

The Federal Reserve’s announcement that an interest rate cut might not happen so soon caused Wall Street to close much lower on Thursday.

As the central bank announces more Pix innovations this year, such recurring payments and purchases in installments, that tendency is probably going to gather up steam. According to one official, this is expected to increase the system’s importance in retail.

Paying with a debit or credit card requires sellers to pay discount fees that are split between card issuers, which are usually banks, and payment processors like Cielo, Rede, Stone, Getnet, and PagBank. This is something that Brazilian consumers rarely notice.

Pix is applying pressure to the card networks—who do not profit from these transactions—and payment processors—who take home a far lower portion than they do from credit or debit card purchases—by eliminating middlemen.

According to a Bank of International Settlements (BIS) report, pix costs shops an average of 0.22% of each transaction, while debit card fees exceed 1% and credit card fees can reach 2.2% of each sale in Brazil.

“Can limit the use of credit cards and pre-payment volumes,” Goldman Sachs informed clients in a report about Pix’s growth. Analysts observed that payment processors Stone (49%), PagBank (34%) and Cielo (9%), receive a sizable portion of their revenue from the additional costs associated with early credit card sales payment.

These businesses declined to respond.

As storm clouds gather, major participants in Brazil’s credit card business are changing their strategy.

The two main owners of Cielo, Banco do Brasil and Bradesco, declared in February that they intended to take the company private. Getnet, a competitor that is owned by the Spanish bank Santander, had previously gone private in 2022.

Going private gives flexibility to offer a package of integrated products, becoming less dependent on the traditional business of connecting retailers to credit cards, two people familiar with the operation told Reuters, under condition of anonymity.

In response to inquiries, Banco do Brasil stated that “BB and Bradesco opted to carry out Cielo’s public offering as a way to make the company’s governance more aligned with the new configuration of the sector,” adding that previous “transformations” had made the industry more competitive.

Bradesco chose not to respond.

“Pix has been and will continue to be the most disruptive technology in the financial segment in the country for the next few years,” said Eduardo Lopes, public policy director at Nubank , Latin America’s largest digital bank.

When Nubank first opened for business in Brazil ten years ago, it only offered one product—the recognisable purple credit card that has no fees. However, since then, it has expanded into a number of other markets, adopting Pix, which is currently used by numerous top banks and fintechs.

13.6 million consumers were using Pix on credit at the end of the fourth quarter, allowing them to borrow money for Pix transfers up to their Nubank credit card limit. Users increased by 166% over the previous year.

The American billionaire Warren Buffett’s investment company, Berkshire Hathaway, which owns 2% of Nubank, announced in February that it has completely sold its holdings in Stone.

In November 2020, the central bank of Brazil introduced the Pix protocol, which requires banks to incorporate instantaneous digital transfers that are free of charge for individuals into their accounts. Consumers welcomed the substitute for expensive, time-consuming wire transfers and cash.

Many payment applications, such as Venmo and PayPal, have proliferated worldwide, but none of them can compare to the authority of a central bank controlling, managing, and owning the system to ensure speed, effectiveness, and seamless connection with banks right from the start.

Because of this, the central bank was able to create the protocol for less than 14 million reals and charge banks for its implementation while guaranteeing them the advantages of a more flexible and inclusive financial system.

Due to Pix’s success in Brazil, which saw transactions of over 17 trillion reais ($3.4 trillion) in 2023, payments between individuals and businesses (P2B) have grown rapidly.

With the number of tiny and informal companies accepting payments to an owner’s personal account, the central bank believes that P2B payments have increased from 5% of Pix transactions at launch to 38% in March. This is a conservative estimate.

Despite the fact that Pix does not provide the customary fraud protections on credit card payments, many businesses prefer it because of its wide acceptance and cheaper transaction fees for sellers.

The banking division of retail business Magalu, Fintech Magalu, handles its own Pix transfers to save expenses and give consumers who choose the payment method discounts. “Pix is definitely a game-changer,” said Carlos Mauad, CEO of Fintech Magalu.

Mayara Yano, senior advisor to the central bank’s Pix management and operations department, says the bank is getting ready to launch additional features that will increase Pix’s attractiveness for P2B use.

The first, called Pix Automatico, is slated to be live in October and enables the automatic payment of recurring payments.

It might replace credit cards that are used for online and media subscriptions as well as the common bank invoices that are used for phone, utility, and tuition expenses.

A new feature called Pix Garantido, which enables monthly installment payments—a significant benefit of credit cards for Brazilian consumers—may have an even greater impact.

According to Carlos Netto, CEO of Matera, a software company that assists businesses in integrating with the new payment platform, such modifications are probably going to hasten Pix’s ascent, which is currently controlling the payment landscape in Brazil.

“It is setting the standards for a digital finance revolution, representing the most concrete threat to credit cards,” he stated.

(Adapted from Reuters.com)