Payment Initiation in Brazil

There is no shortage of headlines on how Pix — Brazil’s instant payment system — is breaking records in transactions and volume. Or on how the adoption of Open Banking is rapidly advancing in Brazil. However, the newest evolution of the Central Bank’s digital payment agenda leverages the combination of Pix and Open Banking working in tandem and creates the basic infrastructure needed for faster money movement across the economy.

Payment Transaction Initiation, in which users can send a Pix transfer from a digital environment other than their banking app — such as a merchant’s website — will have wide implications for e-commerce and beyond. Instituted by BCB Normative Instruction n° 171 of 11/10/2021[1], the Central Bank’s main objectives of payment initiation include:

• to foster competitiveness among players
• to encourage innovation
• facilitate the process of payments and transfers via Pix
• strengthen the use of Pix, especially in e-commerce

What is Payment Transaction Initiation and Who Are Payment Transaction Initiators?

Payment transaction initiation is an action performed by an institution authorized by the Central Bank that connects users to their financial institutions in order to facilitate digital payments. In practice, payment initiators “initiate” the transfer of funds from the user’s bank account thanks to the connectivity between institutions that is provided by Open Finance (or the user-consent-driven data sharing between financial institutions); the goal is to make the online shopping journey with Pix a more fluid experience with fewer steps.

Payment Initiation Service Provider (PISP) is a license provided by the Central Bank qualifying participants — banks, PSPs, fintechs, merchants, and others — to optimize the Pix payment process. In a normal purchase using Pix, the user must be redirected to their bank account to authorize the transaction, copying and pasting the provided Pix code, before the transaction can be approved — a multi-step process that takes around one minute, according to ABFintechs.[2]

With payment initiation, the user can initiate a Pix transfer without a redirect to their bank account because they previously shared their financial information under Open Finance. As such, access to the user’s bank account is embedded in the merchant’s website. This process is performed in just 30 seconds, which represents a reduction of up to 50% in the time spent by the consumer. For those who buy, one of the main advantages is the optimization of the payment stage, while for those who sell, the advantages include the reduction of operational costs, fraud, and cart abandonment, among others.

According to the last update published by the Central Bank[3] (on Feb 7th, 2023), there are 23 active Payment Initiators, among them traditional banks such as Bradesco and Banco do Brasil, digital banks such as PicPay and Mercado Pago, payment processors such as EBANX, open banking providers such as Belvo, and also some credit unions. Today, retailers like KabuM! [4] (from the Magazine Luiza group) are already using the Payment Transaction Initiator service in their checkout process.

The Payment Initiation Flow

The main use case is during the checkout process. Imagine a customer making a purchase on the website of a particular store using his mobile device. When he or she reaches the checkout screen and selects Pix as the payment method, the payment process is initiated and automatically the virtual environment of the store requests transaction confirmation, using the virtual environment of the customer’s bank application embedded into the merchant website (enabled by Open Finance), with the corresponding security authentications. When the customer approves the purchase via password or fingerprint, the purchase is made automatically, with no need for a redirect the customers’ bank app and unnecessary friction.

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Pix has already been widely adopted for purchases, especially in e-commerce, which totaled $50 billion in 2022 as per PCMI estimates. Yet, with Payment Initiation and large PSPs becoming Payment Initiator Service Providers, adoption of Pix for online purchases will accelerate even faster in 2023, including for cross-border transactions. EBANX, Brazil’s largest cross-border payment service provider, received its PISP license in February of 2023, enabling cross-border merchants to accept Pix as a payment method in the fastest and most seamless way possible. This will support the growth of cross-border e-commerce along with the domestic market, even in the face of new tax implications on product imports that may go into effect in 2023.[5]

Initially, Pix is the only payment method available in the payment initiation service, but other payment methods are also planned to be included in the system, such as traditional bank transfer TED, Boleto, and also sending credit proposals.

Beyond e-commerce, Payment Initiation has other potential use cases, that will bolster the use of Pix and speed up money movement across the economy. These include:

• Pulling funds from one bank or fintech account or instantly sending to another
• Funding crypto exchanges
• Funding of online gaming or gambling accounts
• Funding of merchant digital wallets for loyalty purposes
• Payment of invoices from CRM, accounting or ERP platforms
• Instant funding of investment accounts
• Enabling P2P or remittance payments from any digital platform

In short, as Open Finance grows to include more digital financial service providers, Payment Initiation enable liquidity to move easily across platforms and give consumers full control over where their money sits and where they want it go. Just as card franchises use their networks to send money, Payment Initiation works to turn users’ bank accounts into payment credentials that can be used to make payment wherever they please, in real time.

Payment Initiation in Other Regions

Globally speaking, perhaps the best example of Open Banking execution is the United Kingdom, which already has 6.5 million users and is growing exponentially since it was launched. In this country, the service already allows installment payments. With this new payment initiation flow, there has been a 46% increase in the number of conversions in payments made by users.[6]

Open Finance Development in Colombia

In October 2021 Colombia published the first draft of the decree establishing Open Finance in the country, and discussions were started with the entire ecosystem interested in the topic in the country. In July 2022 the final decree establishing Open Finance was published, dealing with four main topics:

• Payment initiation
• Treatment of personal data
• The commercialization of technology and infrastructure
• Open finance standards

After the Decree being published, the regulator has twelve months to develop any additional rule and set standards in technology, security, and other important areas. Colombia should have a fully functional, regulated open finance environment by the end of 2023, if not sooner.

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Additional Benefits and Risks

Besides the benefits in terms of UX improvement during the payment process, there are also some other benefits that should be mentioned:

• Payment orders are initiated from the user’s account and will go directly to the receiver. These payments are considered “push transactions”, i.e. the consumer cannot say that he did not make the transaction, as it happens with card transactions. This greatly reduces the risk of chargebacks.
• The entire data-sharing process will start and stop with the customer’s authorization, and the customer will need to authenticate all transactions.
• The entire transaction will be done in the same environment as the purchase. The user will not need to access his or her bank app. No online payment interface, other than the shopping site, is used.

Risks also abound, mostly unaccounted for, since this payment flow is so new. Many warn that embedding banking app interfaces into merchant sites is risky, since these connections may be more subject to attacks by cyber criminals who may try to intercept that connection, mimic the layout of its banking application, and cause the customer to make an fake transaction. Many vulnerabilities still cannot be predicted because of how new both Pix and payment initiation are. The entire industry will learn more as payment initiation is rolled out and its true implications become evident.

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Sources

[1] INSTRUÇÃO NORMATIVA BCB Nº 171, DE 11 DE OUTUBRO DE 2021

[2] E-Investidor, 2022. “Open banking: entenda como a terceira fase impacta os pagamentos“

[3] Lista de participantes do Pix. Atualizado em 07/02/2023

[4] Magalu, 2022. “Fintech Magalu lança sistema de pagamento mais simples que o PIX e KaBuM! é o primeiro cliente“

[5] Initially, the government announced that it would end the tax exemption for items up to 50USD bought online, but it has now reversed this decision and the Minister of Finance has now commented that it will create a “digital tax” that will be levied on cross-border e-commerce retailers, but that in his words, “will not be passed on to the consumer”. More info on Reuters.

[6] Finsiders, 2022. “Artigo: Iniciação de pagamento e a popularização do Open Finance“

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