Roberto Campos Neto, president of the central bank of Brazil, recently shocked the financial world by declaring the impending end of credit cards, based on a new method of payment, Pix Credit, available through the central bank's Pix system. Given that Brazil's payments landscape is currently significantly more mature than that of the U.S., financial institutions and card companies alike should be taking note. The message is clear: Innovation and disruption are coming.
Campos Neto's declaration begs the question of whether the seemingly untouchable credit card industry could one day become a relic of our past financial lives. It seems nearly impossible in the U.S. today, given that card balances are up
Brazil has been an unsuspecting, highly surprising leader in digital payments. In 2018, the central bank of Brazil announced a plan that would mandate that all banks offer instant payments. For a number of reasons, instant payments were viewed as fundamental to modernizing the Brazilian economy — and the gamble has worked.
The account-to-account instant payment model espoused by Brazil, known as Pix, is now important for other parts of the world as well, including the U.S., because it solves many of the issues common in payments today. Such models remove the complexities of cards, tokenized numbers, processors, acquirers and collateral; they simplify the payments process significantly, enabling money to move from one financial account to another financial account within seconds; and, in the case of a consumer paying a merchant, once a merchant sees an approved transaction, the funds are already in their bank account, eliminating the need for reconciliation. Pix proved this value proposition, with
Today, the U.S. is in a position to take advantage of new opportunities in instant payments, similar to Pix, with the existing Real-Time Payments rail, as well as this summer's debut of the FedNow payments rail. There is also an enormous opportunity to move beyond instant payments into a new model for credit that has significant implications for banks, merchants, consumers and, of course, credit card companies.
Because instant payments are changing the way money flows between financial accounts, they now threaten to displace credit cards in a manner that was previously unthinkable. And it's not necessarily the rails themselves that will cause this disruption — it's the innovations that financial institutions and others can create on top of them.
The thriving payments ecosystem in Brazil provides a unique opportunity to study and assess the impact of instant payments on traditional payments in a real-world setting. Pix Credit is an innovation that banks and payment institutions have created that sits on top of the popular instant payment rail. With Pix Credit, consumers are able to make purchases on credit without a card, connecting directly to their bank.
Merchants benefit significantly from Pix Credit because they get their money instantly, avoiding a lengthy and complex reconciliation process. There is also less credit risk with Pix Credit because of the direct connection to the bank. And there's no network, acquirer or other payment processors in the middle of the transaction — just the consumer's bank and the merchant's bank. This lowers fees for the merchant and enables the bank to make money on the transaction. As a result, the merchant can afford to offer discounts to consumers. In many cases consumers can get more rewards or better discounts than they can with their 2% cash-back cards.
From a consumer perspective, they can not only get better discounts and rewards, but Pix Credit provides a similar user experience as paying with traditional credit cards. With Pix Credit, consumers pay at the same point of sale that they do with credit cards. If the money is not in their bank account at that time, they can pay their bank back at the end of the month, and they don't pay interest unless they pay late. Part of the hope in tying Pix Credit to their bank is that consumers don't incur similar levels of debt as they do with credit cards. Financial institutions can determine how much credit to extend in a more fluid manner based on consumers' banking habits.
More than two-thirds of Citi's U.S. commercial clients are using the platform, and a global rollout is next.
Pix Credit is not a theoretical idea. Banks like Nubank, Digio, Banco BV and others are already enabling customers to use their credit limit to make payments with Pix, which can be done all at once or in up to 12 installments. The payments arm of Mercado Pago is doing something similar with Mercado Pago Credit, offering consumers credit without the card — everything happens digitally outside of the credit card rails. While Pix Credit is not a replacement for cards yet, the open network effects are such that they can ultimately offer consumers and merchants something better.
It is important to note that while Pix was mandated by the central bank of Brazil, Pix Credit is not. This is simply an innovation that the banks came up with and started rolling out themselves. The lesson here for U.S. banks is that the RTP and FedNow instant payment rails are creating new opportunities for banks to make money in payments.
Pix Credit is an example of what's possible.
In the U.S., we've reached a moment that resembles the early days of the internet — a make or break time for many organizations because of the degree of transformation taking place. For the financial services industry, there are lessons to be learned.
For instance, brick and mortars that failed to embrace e-commerce inadvertently allowed the rise of industry disrupters like Amazon. Will upstarts and challengers upend traditional banks and rise like Amazon through rapid innovation?
Or will banks go the route of Microsoft, which realized it was late to the internet revolution? It was forced to buy, partner and innovate its way to ongoing relevance.
And what is to become of credit card companies? When technology is introduced that creates an open network, the closed loop networks get disintermediated. Instant payments connect bank accounts just like the internet connected computers.
Pix Credit shows that the race for dominance in financial services is open. What U.S. companies can take away is that in threat, there is opportunity. Each of the players in the U.S. payments ecosystem — even the credit card companies that have yet to respond in Brazil — has the chance to evolve their business and enable faster payments, with less friction and at a lower cost. It is up to them, at this moment, to determine their path forward.
