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  • Laura Ceitlin

Brazil’s Pix as a Blueprint for FedNow

As announced in July 2023, the United States has introduced its instant payment system, FedNow, to the market. The government-owned and managed infrastructure can draw valuable insights from the success of Brazil’s Pix system. Launched by the Central Bank of Brazil (“Central Bank”) in 2020, Pix transformed digital payments in the country. Here we explore how these insights can inform the implementation of FedNow while addressing the unique challenges that come with this endeavor.

 

Brazil’s Pix Background 

In a study from 2019, the Central Bank concluded that approximately 77 percent of retail transactions in Brazil used cash – an unsurprising fact for a nation with a significant unbanked and underbanked population. The same study indicated that credit cards were perceived as the most expensive payment instrument. Pix was developed to address these issues. Guided by its mandate, the Central Bank took the lead aiming to enhance financial inclusion and boost competitiveness by digitalizing the payment sector. Three years after its introduction, Pix boasts over 150 million users and more than 700 participant institutions, surpassing credit and debit cards in transaction volume. 

 

What is Pix?

Pix operates as a payment scheme, following rules and procedures established by the Central Bank. Participants must adhere to these guidelines for exchanging essential user data and conducting fund transfers.

 

The system’s infrastructure enables real-time payments around the clock, every day of the year. With Pix, fund transfers can originate from checking accounts, savings accounts, or prepaid payment accounts, often incurring significantly lower or no costs in comparison to traditional payment methods.

 

The Role of the Central Bank

The Central Bank assumes two crucial roles within the Pix system: (i) regulatory oversight, where it establishes the fundamental framework, and (ii) operational management, providing the technological infrastructure for transaction settlement. 

 

What Contributed to the Success of Pix?

The success of Pix owes much to the Central Bank’s role in establishing a level playing field for all participants. The infrastructure standards ensure interoperability while delivering a user-friendly experience. Since Pix is not limited to banks, it allows other financial and payment institutions to offer the service, thereby fostering competition in the market.

 

By mandating participation for duly authorized institutions with a minimum of 500,000 consumer accounts, the Central Bank ensured widespread adoption of Pix. To join the system, those institutions must meet specific technical standards for usability and security. When all participants adhere to the same standards, the likelihood of system failures, errors, and vulnerabilities is reduced.

 

Lastly, Pix transactions are free for individuals, unlike traditional bank transfers, and have significantly lower business costs. From an individual’s standpoint, it promotes financial inclusion, since it is a free, 24/7, instantaneous (transactions are settled in up to six seconds) and everyday method of payment. From a business perspective, especially for small and medium-sized enterprises, the system reduces operational expenses related to payment processing.

 

It is important to mention that, as of now, there is no private sector initiative to create a network like Pix. Therefore, there is no doubt that the success of Pix also lies in being a unique network connecting multiple participants. This might indeed be one of the key distinctions between Pix and FedNow, and one that presents significant challenges.

 

The U.S. Context

In the U.S., the financial market differs from that of Brazil. It already features well-established solutions such as Venmo and Zelle, alongside networks like the Automated Clearing House (ACH) and Real-Time Payments (RTP).

 

The ACH network, which provides fast payment options, operates under the oversight of an independent organization, with executives representing both large and small banks, as well as credit unions, on its board. The Clearing House Payments Company LLC (TCH), which also operates the ACH, is owned by the largest commercial banks in the country. In response to a gap left by the ACH, TCH introduced the RTP network in 2017. This network empowers consumers and businesses to send and receive payments around the clock, facilitating direct transactions between accounts.

 

In other words, the launch of FedNow occurs in a context where private initiatives already offer “fast” and “instant” payment solutions. This alone presents a challenge to its implementation. Also, being a system managed and supervised by the Federal Reserve certainly raises questions about its potential impact on market competitiveness.

 

FedNow, however, promises to be different from existing payment solutions and is intended to be used alongside them. While many popular payment apps and services enable fast payments, they are often used for peer-to-peer transfers. FedNow aims to integrate solutions for use in all types of payments, including business-to-business and business-to-consumer transactions.

 

Lessons From Pix

Lessons from Pix can be summarized in key factors, including mandatory adoption; technical and operational standards; accessibility and interoperability; and the role of the Central Bank in setting rules and overseeing the market.

 

For the U.S., the first obstacle is that FedNow is not yet compatible with existing networks, and the success of an instant payment system largely depends on interconnectivity and interoperability. This means that institutions will need to implement different networks to offer the service or opt for one of the existing solutions. The associated costs will certainly be weighed, especially by smaller institutions.

 

Additionally, joining FedNow is not mandatory. Its implementation depends primarily on the market players’ interest in offering the service. Therefore, the service needs to be highly attractive to users to encourage adoption by banks and credit unions nationwide.

 

Furthermore, the network must be secure. The Brazilian Central Bank plays a crucial role in creating a robust regulatory framework designed to address liquidity concerns, cybersecurity, data treatment, as well as Know Your Customer (KYC) and Anti-Money Laundering (AML) procedures. This is an ongoing challenge as regulation needs to remain compatible with evolving market dynamics.

 

In general, as in the Brazilian experience, the primary role of the Federal Reserve should be to create a favorable ecosystem for the national adoption of an easy, accessible, and efficient infrastructure for instant payments. The challenge is to support innovation initiatives for interoperability while maintaining stringent technical and operational requirements for service providers without creating barriers to entry for new players.

 

Laura Ceitlin is a Corporation LLM candidate at NYU, where she serves as a Graduate Editor of the NYU Journal of Law & Business and as the Brazilian Legal Society’s Alumni Officer. Laura is a licensed attorney in Brazil and, prior to attending NYU, worked at a top-tier law firm in Brazil specializing in Corporate Law, Financial Transactions, and Banking Regulation.

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