Achieving Financial Inclusion in Brazil

Brazil is doing something different around payments. It is driving increasing levels of financial inclusion using digital payments, something much talked about but seldom delivered. Brazil has achieved this by the central bank overhauling its payment regulatory framework and encouraging its fintech and financial sector to use technology and be entrepreneurial to meet the needs of the people.

The pandemic has driven increased adoption rates, with some 16 million people entering the financial system. 85% of Brazilians now have access to financial services, a significant increase in the banked population. There is, of course, more to do.

One bank in particular, Nubank, has opened access to the financial system for 5.6 million people who had been outside of the banking system. Nubank is a digital banking platform which was only founded in 2013. It now has 53 million customers.

The Central Bank of Brazil has sought to avoid onerous licensing and capital requirements. It has not insisted on domestic processing or imposing data restrictions. That is not to say that it has not introduced regulations, but it has tried to keep them proportional.

Impact of Pix

The central bank introduced a real-time payment system in 2020 called Pix.

Between November 2020 and March 2022 the number of Pix users increased from 41 million to over 124 million people. The Pix system is widely used to pay for two key social welfare programmes in the country. The Bank for International Settlements (BIS) believes this is the fastest rate of adoption of any country.

The BIS also estimates the number of transactions to be far ahead of other countries. If Brazil has nearly 35 transactions per person per year made using its Pix faster payments system (achieved in under two years), Singapore achieved about 10 million in 18 months, Denmark just under 50 million in its fifth year and the UK is almost 40 million in its seventh year.

A new report by the BIS and the central bank also found that Pix is cheaper than card payments for merchants, which must also have helped encourage its adoption. Pix costs merchants, on average, 0.22% of the transaction value, while debit cards cost just over 1% and credit cards can be as much as 2.2% in Brazil. Card fees in the US are 1.7%, 1.5% in Canada and 0.3% in the European Union. The report does include a disclaimer saying it does not necessarily represent the views of the BIS or central bank.

Pix is free of charge to individuals. The central bank does not set costs for merchants. Person-to-business transactions are growing fast and have reduced person-to-person payments to 75% of all transactions.

About 9.1 million companies are signed up to Pix, 60% of all firms that have relationships with banks or payment organisations. Pix continues to evolve with the ability to make direct debits and electronic bill payment expected to be possible in the near future, which will drive even higher levels of usage.

PAGA recommendations for financial inclusion

Financial inclusion in Latin America and the Caribbean region (LAC) is receiving considerable attention currently. While Pix is an example of what is possible, progress is not evenly spread. In this context, the World Economic Forum’s initiative, Shaping the Future of Trade and Investment Platform, is partnering with the innovation laboratory of the Inter-American Development Bank, the IDB lab. Together they have launched the Payments to Advance Growth for All (PAGA) initiative. The goal is to unlock the potential of digital payments in LAC.

PAGA has published recommendations to facilitate access to the financial system for those currently outside it, whilst also protecting their rights and privacy and keeping the financial sector competitive.

The recommendations are:

• Build good regulatory practices to reduce market barriers and promote innovation

It sees interoperability, adopting global standards and having a level playing field in digital payments and financial services as the basis for growth. Given the adoption and promotion of international standards is key to enabling technical and network interoperability, regulators can play a key role in ensuring these are adopted. Flexible regulations and policies can also be used to promote a level playing field for all players.

• Encourage public-private sector collaboration

Given the rate of innovation, it believes public and private sectors need to work together and, as in Brazil, focus on meeting individual and business needs.

Pix has shown how the creation of real-time payments infrastructure combined with a sound regulatory environment can foster financial inclusion. The work of the Brazilian central bank and the fintech community is an example of PAGA’s recommendations working in practice.