When Brazil’s central bank launched its cost-free digital payments programme called PIX in 2020, it was hailed across the world as a great example of governmental innovation helping the country’s large unbanked population.
The Brazilian banks welcomed it publicly, despite expectations of transaction fee erosion. Besides, bankers told me, fee payments were already being eroded by the fintechs and digital banks – a sector that was more reliant on these revenues. “What’s bad for them could ultimately be good for us,” they mused.
And, after a couple of years of living with PIX, there has been little negative impact – those lower revenues have been offset by lower ATM costs as cash withdrawals have fallen – and boosts to customer satisfaction scores.
Now the central bank is planning PIX’s evolution. And new PIX services will likely not only provide the banks with commercial opportunities, but they will do so at the expense of the payments industry.
Two schemes
The two main new PIX products will be PIX Garantido (Guaranteed) and PIX Credito (Credit) – both payments completed in instalments.
The details have yet to be released from the central bank, but it appears that, with Garantido, purchasers will be able to pay retailers through regular instalments. By working with a bank, the retailer is taking on the credit risk of the bank rather than the customer, and the bank takes a fee for underwriting the transaction.
These new products should shift the transaction payments power back to the banks and away from the payments industry
It is in effect a government-created competitor to the retail financing or point-of-sale financing that has become a popular niche for fintechs.
The Credito product is similar to buy-now-pay-later schemes, with an agreed financing rate at the time of acquisition.
The retailer receives payment up front from the bank and the customer enters into unsecured credit financing with the same bank. And while individuals cannot be charged transaction fees, retailers can. Currently a typical credit card transaction has a total cost of around 3.8% for the merchant (to receive funds the day after a transaction) – while for a four-instalment transaction the cost is around 8.3% (to receive all funds up front).
Bankers expect that the monthly financing rate in Brazil will start at around 3% – steep but far below the 346% APR of credit cards.
Theoretically, this leads to the risk of cannibalism – growing a lower margin business by reducing credit-card profitability. But, in reality, those high credit-card rates are misleading.
No one finances acquisitions at this rate – it’s a screamingly high interest rate hit for customers who can’t clear their balances on a monthly basis.
Last month, Banco Pan’s CEO, Eduardo Carlos (Cadu) Guimarães, told me as much when I asked if him credit cards in Brazil were actually a loss-leading product – necessary only to drive client engagement and cross-selling.
“Yes,” he said, "because you only start being able to charge interest when the debt moves into non-payment – and then you’re pricing in delinquency."
Today, Banco Pan’s total loan portfolio is 90% skewed to secured credit, and given high interest rates and macroeconomic headwinds, Guimarães says that could rise to 92% by the end of 2024.
Payments power
While much of the detail has yet to be confirmed, analysts at UBS BB have run some numbers that suggest that if banks charge 3% a month over four months (the expected typical tenor), the return to the bank will be more than two-times the direct revenues of a credit-card transaction.
Assuming a monthly 2.5% charge and a four-month transaction period for Garantido purchases, UBS BB estimates that banks would end up with around 3.7% of a total transaction’s value, which is a higher share of transactions that, on average, is generated today by credit-card purchases.
These new products should shift the transaction payments power back to the banks and away from the payments industry. They also raise the concept of regulatory risk to a new level: if central banks shift market dynamics through launching their own products, then market participants must be aware of what is being developed within these institutions.
Ultimately, as the banks’ experience with PIX shows, sometimes you’ll lose. And sometimes you’ll win.
