Banco Central do Brasil (BCB), Brazil’s central bank, launched a new real-time payment (RTP) system in November 2020 called Pix. Evangelists at the central bank hoped that Pix would offer a low-cost alternative to existing payments systems and would entice some of the country’s tens of millions of unbanked and underbanked adults into the banking system.
A recent review of Pix, published by the Bank for International Settlements, claims that the payment system has achieved these goals and that it is a model for other jurisdictions. However, the BIS review seems to have been written with rose-tinted spectacles. This is perhaps not surprising, given that the lead author runs the division of the central bank that developed Pix. In a critique published this week, I suggest that, when seen in full color, Pix looks a lot less pretty.
Among other things, the BIS review misconstrues the economics of payment networks. By ignoring the two-sided nature of such networks, the authors claim erroneously that payment cards incur a net economic cost. In fact, evidence shows that payment cards generate net benefits. One study put their value add to the Brazilian economy at 0.17% of GDP.
The report also obscures the costs of the Pix system and fails to explain that, whereas private payment systems must recover their full operational cost, Pix appears to benefit from both direct and indirect subsidies. The direct subsidies come from the BCB, which incurred substantial costs in developing and promoting Pix and, unlike other central banks such as the U.S. Federal Reserve, is not required to recover all operational costs. Indirect subsidies come from the banks and other payment-service providers (PSPs), many of which have been forced by the BCB to provide Pix to their clients, even though doing so cannibalizes their other payment systems, including interchange fees earned from payment cards.
Moreover, the BIS review mischaracterizes the role of interchange fees, which are often used to encourage participation in the payment-card network. In the case of debit cards, this often includes covering some or all of the operational costs of bank accounts. The availability of “free” bank accounts with relatively low deposit requirements offers customers incentives to open and maintain accounts.
While the report notes that Pix has “signed up” 67% of adult Brazilians, it fails to mention that most of these were automatically enrolled by their banks, the majority of which were required by the BCB to adopt Pix. It also fails to mention that 33% of adult Brazilians have not “signed up” to Pix, nor that a recent survey found that more than 20% of adult Brazilians remain unbanked or underbanked, nor that the main reason given for not having a bank account was the cost of such accounts. Moreover, by diverting payments away from debit cards, Pix has reduced interchange fees and thereby reduced the ability of banks and other PSPs to subsidize bank accounts, which might otherwise have increased financial inclusion.
The BIS review falsely asserts that “Big Tech” payment networks are able to establish and maintain market power. In reality, tech firms operate in highly competitive markets and have little to no market power in payment networks. Nonetheless, the report uses this claim regarding Big Tech’s alleged market power to justify imposing restrictions on the WhatsApp payment system. The irony, of course, is that by moving to prohibit the WhatsApp payment service shortly before the rollout of Pix, the BCB unfairly inhibited competition, effectively giving Pix a monopoly on RTP with the full support of the government.
In acting as both a supplier of a payment service and the regulator of payment service providers, the BCB has a massive conflict of interest. Indeed, the BIS itself has recommended that, in cases where such conflicts might exist, it is good practice to ensure that the regulator is clearly separated from the supplier. Pix, in contrast, was developed and promoted by the same part of the bank as the payments regulator.
Finally, the BIS report also fails to address significant security issues associated with Pix, including a dramatic rise in the number of “lightning kidnappings” in which hostages were forced to send funds to Pix addresses.