Banco Central do Brasil launched an instant state-backed retail payment system back in November 2020 called Pix. You might know all about it already. If not you should.
Why? Pix is a powerful case of the state innovating to benefit its population, disrupting the rents collected by financial institutions & big tech.
What problem was Pix trying to solve?
Firstly, payment systems are expensive. McKinsey reckon that in 2019 payments revenues doubled over the last decade to around $2 trillion in 2019 – 2.6% of the GDP of countries covered by their work (and rising)! Running a payment system is super-profitable. To take Visa and Mastercard as examples, profit margins are comfortably north of 40%.
But that’s how capitalism is supposed to work right? Smart people get together to form banks, or firms like Paypal, Visa, Square etc, innovate better products that make our lives easier/ nicer/ more productive and get super-profits in return. Yes!
These super-profits are supposed to be competed away as they attract new competitors. The market is supposed to solve these problems, not the state! However, there has been little sign that these super-high margins are getting squashed. Network effects attached to payment systems can represent huge competitive moats!
As a non-profit state-backed retail payment system, Pix is much much much cheaper. Take a look at the chart below from the Bank of International Settlements’ recent report:
Second, payments systems can be slow. And this can be a problem for small firms. Nowadays, when I buy a sandwich with my debit card my phone buzzes to tell me the money has left my account. But it may not reach the vendor for days. So small firms will see themselves as essentially financing banks and others in the payment system. Pix delivers final settlement in seconds.
How successful has it been? Hugely. Pix has become the number one payment means by transaction volume, used by 114m people – 67% of the adult population – having been launched only in November 2020.
Okay, but why should you care?
The state is generally seen as good at funding a lot of the basic science, and even some quite advanced bits and pieces (like, er, the internet) that private sector firms then commercialise. But we tend to rely on market forces to eat away rents. Rents can prove very sticky. Pix offers an example of the state innovating, bringing to market what appears to be a superior product to its population, and in so doing leaning hard against these sticky rents.
But that’s just Brazil, right?
There’s an awful lot of work going on to bring the possibility of Central Bank Digital Currencies (CBDCs) into existence across the world. The BIS survey of central banks in 2021 found that around 85% of central banks were engaged in work on CBDCs. Pix is not a CBDC. But it does offer a glimpse into the way in which a retail CBDC might be successfully introduced, and the sort of impact low-cost digital state money could have on the payments market.