Brazilians are adopting digital payments faster than anyone else — what lessons can we learn?
David Vélez, Founder and CEO, Nubank
- Digital payments are an essential tool of financial inclusion and enfranchisement.
- Brazil is leading a Latin American boom in financial inclusion, with FinTech companies and Central Bank-led initiatives providing access to bank accounts for the first time to millions of people.
- The World Economic Forum has partnered with the Inter-American Development Bank to launch an initiative aimed at further expanding financial inclusion and unlocking digital trade opportunities in Latin America and the Caribbean.
Digital payments are driving a profound change in Brazil’s banking sector. Over the past 10 years, a silent revolution in Brazil has led to increased competition, more financial inclusion and lower banking fees.
The explosion of digital payments in Brazil has created an innovative financial ecosystem that works for ordinary people.
This progress is the result of a combination of an overhaul in the payments regulatory framework, intensive use of technology, entrepreneurship and a focus on creating products that address the needs of Brazilian customers.
Brazil’s financial inclusion boom
Since the beginning of the COVID-19 pandemic, around 16 million people have been enfranchised into the Brazilian financial system. In fact, the increased migration to online services during this period means 85% of Brazilians now have access to financial services.
This represents one of the highest increases in the banked population in decades.
Despite this improvement, there are still barriers to digital payment adoption — but some of Brazil’s promising FinTech companies are looking for the solution in collaboration with other actors.
Nubank, founded in São Paulo in 2013, is today one of the largest digital banking platforms in the world, offering financial products to more than 53 million customers. More importantly, recent data shows that Nubank has opened access to the financial system for 5.6 million people who had never previously had access to banking services.
But innovation alone cannot carry the mantle of financial inclusion — governments must assist in this effort.
Government policies or regulations can, in fact, create barriers to entry for payment providers or new players trying to innovate in the market. Onerous licensing requirements, capital requirements, domestic processing and data restrictions are adopted by many countries in an effort to enhance security, control costs, or address privacy concerns, but may have the unintended consequence of creating market access barriers.
Some countries, however, have managed to avoid this. The Brazilian Central Bank has done an excellent job encouraging the entry of new institutions through proportional regulation, for example.
Unlocking the potential of digital payments
The World Economic Forum’s Shaping the Future of Trade and Investment Platform has partnered with IDB Lab, the innovation laboratory of the Inter-American Development Bank, to launch the Payments to Advance Growth for All (PAGA) initiative.
The PAGA initiative aims to unlock the true potential of digital payments in Latin America and the Caribbean (LAC). This initiative is brought together by stakeholders from the public and private sectors to promote practical recommendations for greater adoption of digital payments in the region.
The following recommendations of the PAGA initiative will facilitate access to the financial system for the disenfranchised, while protecting their rights and privacy and ensuring the sector remains competitive.
- Build good regulatory practices to reduce market barriers and promote innovation
Encouraging interoperability, adopting global industry standards and promoting a level playing field in digital payments and financial services are the foundations of a thriving digital payment ecosystem.
- Encourage public-private sector collaboration
Innovations in payments are accelerating. To ensure these developments are inclusive, sustainable and secure, the public and private sectors must work together to deliver products and services that meet individual and business needs.
- Explore digital trade agreements to secure safe cross-border digital payments
Regulators may consider codifying their commitments to international standards in trade agreements that encourage the adoption and promotion of international standards to enable technical and network interoperability.
- Facilitate new technologies and innovation
Technological innovations are creating new digital payment and trade opportunities and addressing important barriers. Governments can facilitate innovation by designing flexible regulations and policies that promote a level playing field for all players.
The Brazilian success story
In Brazil, the pro-innovation regulatory landscape allowed digital banks to leverage new technologies, which have been critical for the growth in financial inclusion seen during the pandemic. However, that is not the case for every LAC country, especially for micro, small and medium enterprises (MSMEs).
One study found out that merchant onboarding processes are one of the main obstacles for the inclusion of 80% of MSMEs in the formal economy, and the reason they remain informal.
Another catalyst for financial inclusion through digital payments in Brazil was the introduction of Pix, a real-time payment system launched in 2020 by Brazil’s Central Bank.
Pix allowed over 40 million people to make their first ever bank transfer. Between November 2020 and March 2022, the number of Pix users skyrocketed from 41 million to over 124 million, and a recent report by the Bank for International Settlements (BIS) found that Pix had the fastest adoption curve amongst all surveyed real-time payment systems in the world. The system is now widely used to pay for social welfare programs such as CadUnico and Bolsa Familia.
Pix has shown how the creation of real-time payments infrastructure can be an important tool for Central Banks to foster financial inclusion in the region.
Despite the challenges facing the region, LAC has seen incredible growth in the digitization of payments and the benefits that come with it. People and MSMEs have been empowered through the provision of accessible financial services.
To further develop digital payments, governments and the industry must adopt new technology to help modernize payments.
This would facilitate innovation in the payments ecosystem, allow individuals and businesses to take advantage of new innovations, and facilitate investment by intergovernmental and multilateral institutions in the development of FinTech and other technologies — all of which are essential for financial inclusion in a digitalized world.