Instant payments are poised to accelerate in the U.S. now that FedNow has launched. There’s an opportunity for banks and credit unions to take the lead again in payments. They can offer a cheap, convenient, fast and secure way to move money that U.S. consumers and businesses didn’t know was possible.
Like ACH, value can be created on instant payment rails that doesn’t necessarily require a catchy name that later becomes a verb. Consumers don’t know ACH, but they do know direct deposit – 94% of Americans get paid that way.
Unlocking instant payments in the U.S. will require innovation. When it comes to instant payments innovation and adoption, Brazil is one of the best markets to learn from. Pix is Brazil’s instant payments scheme and is arguably the most successful scheme worldwide in terms of adoption. In less than 3 years, the number of Pix transactions exceeds both credit and debit combined. Some 70% of Brazilian adults use Pix and there are over 3 billion Pix transactions per month (vs. ~30 million in the U.S.).
The innovations happening on top of the Pix rail are remarkable. Below are just a few examples that are enabling Pix to reach its full potential that may serve as inspiration for the U.S. market.
Pix Credit is a product that allows a consumer to pay using Pix and re-pay their financial institution over time. Nubank, Digio, Banco BV and MercadoPago offer this today, and other very large Brazilian banks are gearing up to launch their version of Pix Credit soon.
With Pix Credit, cards don’t need to be issued, the payment networks and acquirers don’t need to be involved in transactions. And, Financial Institutions can charge interest much like with credit cards.
There are several reasons why consumers might use Pix Credit.
- If they have an urgent need to make a payment, but don’t have balance in their account (e.g. emergency medical or utility bill).
- When a store offers a discount on purchases for payment with Pix – consumers can take advantage of the discount, but pay back over time.
- Repaying for purchases over time may align better with their incoming cash flow.
Pix Credit is a way for financial institutions to offer a credit card-like product using the instant payment rails, but profit in a way that doesn’t hurt merchants by offering a more efficient payment system with fewer players.
QR codes are accelerating consumer-to-business instant payments in Brazil.
Currently, over 30% of the 3 billion Pix instant payments a month are person-to-business transactions (up from 13% two years ago).
This P2B Pix adoption was made possible by QR codes. When consumers go to a store to pay with Pix, they don’t share their bank account information with the cashier at checkout. Instead, the merchant presents a QR Code, the consumer scans it from their mobile phone, reviews the transaction details on their phone, hits pay, and the transaction is done.
This P2B instant payment is simple, fast and all that’s needed is a mobile phone. The exchange of bank accounts and related information is all handled behind the scenes via QR code.
Merchants and billers love Pix. It’s 1/10th of the cost of credit cards and they get their money instantly. As a result, they are offering material discounts to consumers if they pay with Pix, using QR codes. Amazon, for example, offered consumers an additional 10% off if they paid with Pix on Amazon Prime Day this year.
Amazon isn’t the only company that presents a QR code to a consumer at online checkout. QR codes are commonly used to initiate instant payments across many verticals and at many recognizable brands. Examples include large retailers, mobile operators, fast food (e.g. McDonald’s, Burger King, Pizza Hut), Gasoline (Shell), e-commerce and many others.
Instant payments to all of these verticals and companies wouldn’t be possible without QR code technology. Also the use of QR codes grew much faster than cards in the past because there were no hardware requirements. The QR code can be presented on the payment terminal, cashiering system or printed on the receipt. Any payment alternative requiring new hardware in every store is likely to fail.
Loyalty Point Redemption
One of the most creative applications of the Pix rail is its ability to process different currencies—such as loyalty points.
With over 400 partners around the world, ties to more than 40 Financial Institutions, and approximately 40 million consumers on their platform, one of the biggest rewards programs in Brazil recently began leveraging the Pix rail for points redemption. It’s a win-win for both consumers and merchants.
Consumers earn points when making purchases from select partners. When they redeem those points, they pay directly from their mobile app and the transaction flows over the Pix rail. The merchant receives cash instantly in its bank account, and the loyalty points are deducted instantly from the consumer’s loyalty account.
RTP and FedNow enable U.S. financial institutions to meet modern digital demands with a 21st century payments solution. Adoption of instant payments requires pairing innovation with these rails. And, the blueprint of what’s possible is available in other countries who are 3-5 years ahead of the U.S.
“For FedNow to reach its full potential, we’ll need to harness the creative energies of all kinds of people including fintechs to think about how we enable this platform for innovation.” – Mark Gould, Chief Payments Executive, Federal Reserve on Fintech Takes Podcast Aug 23, 2023
No one in Brazil thought Pix would be a success when it launched. Financial institutions who weren’t prepared lost commercial business as a result. While it’s impossible to predict the inflection point of when instant payments will accelerate in the U.S., it is widely-agreed that instant payments are coming. What are you waiting for?