Nowadays, when we talk about electronic payments between people and businesses (which are no different from money transfers between an entity and another), the most common options in Brazil are credit and debit cards, as well as money transfers. In Brazil, the most used types of money transfers are Available Electronic Transfers (Transferências Eletrônicas Disponíveis, TEDs) or Credit Order Documents (Documento de Ordem de Crédito, DOCs). However, these models are being slowly replaced and one of the new alternatives will be instant payment, a new regulation from Brazil’s Central Bank that should go into effect in 2020.
According to Brazil’s Central Bank, the payment models currently used, such as TED and DOC transfers as well as credit and debit cards, have a few downsides:
- There is still a high number of payments being made in cash between entities (people and businesses), which have costs (cash production, circulation etc.) and risks (security, fraud etc.) that do not exist in digital transactions;
- TED and DOC money transfers offered by financial institutions are deficient. There are many negative factors in this model: difficulty in addressing the recipient of transactions, lack of confirmation in the money transfer, time restrictions, high cost per transaction;
- Transactions made through credit and debit cards are not universally accepted — not all businesses make this resource available and not everybody has credit or debit cards. Moreover, there are costs to the entity receiving the money and the amount is transferred to the beneficiary only days after the transaction.
Motivated by these deficits, Brazil’s Central Bank began, some time ago, to draft a project aiming the interoperability of payment methods through money transfers, which resulted in the “instant payment” method.
How does instant payment work?
The objective of the instant payment project is to lessen the downsides listed before. Thus, the new model will be available 24/7 and the amount paid will be transferred to the beneficiary in a few seconds. In addition, a great reduction in transaction costs is expected as another result.
According to Brazil’s Central Bank, this type of transfer will allow transactions in the following models:
- Peer to Peer (P2P);
- Person to Business (P2B);
- Business to Business (B2B);
- Person or Business to Government agencies (P2G and B2G, respectively);
- Government agencies to Person or Business (G2P or G2B, respectively), used for salaries and social benefits or services.
The solution seems headed to, in the big picture, something resembling the TED/DOC models we have today: set a recipient and the amount and, then, transfer the money. However, the structure of the new model will be different from current ones. Initially, an infrastructure in which any entity — such as banks, businesses and fintech companies (technology companies focused in the financial market) — will be able to connect to each other and make money transfers will created. Thus, money transfers will no longer be exclusive to banks and transactions will be done directly between entities.
Brazil’s Central Bank will be responsible for a centralized database with profiles for all entities in the network. As a result, entities will be able to find one another through an identifier, such as phone number or e-mail address. This will eliminate the necessity for personal information, such as social security IDs, or bank information when making a transaction.
The use of blockchain technology to manage transactions has also been speculated. With blockchain technology, all entities in the network will have access to data, sharing information and validating transactions. This makes intermediaries — such as banks, in the current money transfer model — obsolete.
Another technology that will be present in the instant payment solution is QR Code technology. Seen as the solution seems to allow transfers between people and businesses, it is expected that, when making a payment in a businesses, a QR Code will be generated so the buyer may be able to transfer the amount directly into the establishment’s account.
In summary, to the final user, it will only be necessary to have an account in any entity (either a bank or a fintech company). Through this entity‘s app, they will be able to transfer money to other users with accounts in any entity. All needed will be to identify the recipient through Brazil’s Central Bank database or through a QR Code generated by the transaction recipient.
The possibility of an electronic payment model without the need for intermediaries takes us to a scenario where TED and DOC money transfers will become obsolete and the use of credit and debit cards may become restricted to installment payments.
However, as the project has yet to be implemented, the scenario is still uncertain and speculative. Yet, financial institutions and card creditors — and, in some ways, fintech companies — are already beginning to develop products to try to avoid the loss of clients to this new instant payment model. These products involve the use of their own digital accounts, to support the electronic payment model, adding specific services to try to persuade their clients to use these wallets. Another front used is the creation of partnerships with businesses, with the objective of offering special services (discounts, extra points in a rewards system) so their clients will be rewarded for credit or debit card purchases in their partners’ businesses.
For instance, Cielo (a big Brazilian credit and debit card operator) has created its own digital account service and has been encouraging its clients to use it. Within this structure, it is possible to make transfers between entities part of the network. Mastercard and Visa have also been trying to bring products used in foreign markets to the Brazilian market model, aiming to remain competitive, offering a product parallel to the new electronic payment model.
What to expect?
As we have observed, since instant payments are not yet completely implemented in Brazil and there are some aspects still to be defined, some questions remain as to how the service will work in practice and if there really will be mass migration from the current payment model to the new one. What can be expected is that, yes, there will be migration, even if not immediate (and maybe not even in the long run). Moreover, all signs point to a final consumer that will beneficiate from the possibility to choose the service that pleases them most.