As the rise of instant payment systems rapidly transforms the landscape of the global financial industry, governments worldwide are actively considering the introduction of central bank-led instant payment systems. Amidst this trend, Brazil's Pix and India's Unified Payments Interface (UPI) offer significant lessons for building successful instant payment systems. This article delves into an in-depth analysis of the Pix and UPI cases to examine the profound impact of government-led instant payment systems on financial inclusion and market structure, as well as how decisions made in the early stages of system design affect the dynamics between domestic and international market participants. Based on this, it proposes an evaluation framework for governments considering the introduction of new instant payment systems and discusses the specific implications provided by the Pix and UPI cases.
Pix and UPI: From Inception to Growing Pains
Over the past decade, India and Brazil have revolutionized their respective payment environments by introducing nationwide instant payment systems: UPI and Pix. Currently, UPI boasts 350 million users, and Pix has 140 million users, meaning that one in eleven adults worldwide uses one of these two systems for instant payments.
Pix, spearheaded by the Central Bank of Brazil (BCB), adopts a 'payments-first' approach. The BCB owns Pix and actively promotes collaboration with domestic private market participants, focusing on instant payments and related products. Launched in 2020 after two years of conception and development, Pix has become the fastest-growing instant payment system globally, reaching 15.4 billion quarterly transactions in the second quarter of 2024. This growth has been primarily driven by a high level of financial ecosystem cooperation and the mandatory participation of financial institutions with over 500,000 transaction accounts, creating a strong network effect.
In contrast, India developed UPI as part of its Digital Public Infrastructure (DPI) program and implemented it as part of a broader technology stack. The Indian government adopted a strategy of building foundational infrastructure, including digital identity, data exchange, and payments, and encouraging private sector innovation on top of it. UPI was developed by the National Payments Corporation of India (NPCI), a consortium of private banks independent of the Reserve Bank of India. UPI has become the most popular digital payment method in India, processing over 75% of all retail digital payments.
UPI's initial growth was slow. It reached 10 million monthly transactions in 2017 and took approximately three years to surpass one billion transactions. However, demonetization in 2016, a decrease in cash usage due to the COVID-19 pandemic, and the entry of international payment service providers into the market accelerated UPI's growth.
Both Pix and UPI have significantly enhanced financial inclusion, supported the growth of the fintech industry, and established themselves as the payment standards in their respective countries. However, the impact has not been entirely positive. The increased use of both systems has also led to a rise in fraud and shifts in the balance of power among market participants.
Winners and Losers: Market Impact in Brazil and India
Both systems have innovated their respective markets, benefiting some participants while weakening the market dominance of others. In Brazil, Pix has transformed the financial sector in a way that favors new domestic players and weakens the position of traditional financial institutions and credit card companies. Brazilian neobanks and fintech startups have leveraged Pix's low-fee model to attract new customers and achieve significant growth. Pix's fee structure, which is free for consumers and imposes mandatory fees on businesses, has enhanced the competitiveness of these new entrants. Instant payments and fee waivers have increased consumer trust and made digital payments more accessible, promoting financial inclusion for the underserved. Small businesses and the self-employed have also benefited from low-cost instant payments, reducing their reliance on cash and improving financial access. This has ultimately led to an expanded potential customer base for these banks.
Conversely, traditional banks and credit card networks have been significantly impacted by Pix. Before Pix, Brazilian banks charged substantial fees for interbank transfers, but Pix's free instant payment model has eroded this revenue stream. As a result of Pix's launch, traditional banks' payment-related revenues decreased by 8% between 2020 and 2021. Credit card companies have faced an even more severe threat. In 2022, the BCB governor even predicted that Pix would make credit cards obsolete. However, actual transaction data shows a more complex situation. As the number of consumers newly entering the financial system through Pix has increased, banks are issuing more credit cards to them. The compound annual growth rate (CAGR) of credit card spending was 12.7% from 2018 to 2020, before Pix's launch, but nearly tripled to 31.7% from 2020 to 2022 after its introduction.
In India, the rapid expansion of UPI has also shifted the balance of power in the market, benefiting payment technology providers. Notably, large third-party app providers (TPAPs) such as Google Pay and PhonePe have dominated the UPI transaction market, accounting for over 80% of total transactions. These companies have leveraged UPI's free model to acquire a substantial user base. Consumers and merchants have also benefited from seamless real-time payments without additional fees. However, traditional banks are struggling due to UPI's zero-fee structure, which has not translated into direct revenue increases despite the surge in transaction volume and related costs. Some banks have even advocated for the introduction of transaction fees to cover operating costs. In response, the Reserve Bank of India (RBI) introduced a bank subsidy for small-value transactions in 2022, which can be shared with TPAPs. In 2024, this subsidy accounted for 10% of PhonePe's annual revenue. Credit card companies have also faced increased competition, but similar to Brazil, credit card usage has actually increased since UPI's expansion. The CAGR of credit card spending, which showed a 7.3% decrease from 2018 to 2020, surged to 24.2% from 2020 to 2022 after UPI's expansion.
Big Tech vs. Local Tech: Contrasting Approaches
One of the key differences between Pix and UPI lies in their approach to global technology companies ('Big Tech') and multinational corporations. The BCB has actively blocked the entry of Big Tech companies into the digital payments market, emphasizing the need for domestic control over digital payments. This is part of a broader policy to strengthen the domestic ecosystem rather than multinational players. For example, in 2020, the BCB suspended WhatsApp's launch of its instant payment service in Brazil and launched Pix later that year. The BCB cited regulatory concerns and potential risks to financial stability as the reasons. This strategy has helped foster the domestic fintech ecosystem and bring primarily domestic companies, such as neobanks, to the forefront of the market.
Conversely, India has allowed Big Tech and multinational companies to participate in the UPI ecosystem, often using them as a means to connect with end-users and acquire customers to drive system expansion. Google Pay and PhonePe, backed by Alphabet and Walmart, rapidly gained market share. They were able to adopt a strategy of offering payment services at a loss to attract customers and then profit from other lucrative products in the long term. While this approach accelerated adoption rates, it also raised concerns about data privacy and market concentration. The Indian government has since explored regulatory measures, such as capping the market share of individual TPAPs at 30%, but implementation continues to be delayed. Government officials have also argued that given UPI's universal nature, service providers are interchangeable, thus negating anti-competitive arguments. These differing strategies and outcomes reflect a broader debate among emerging economies about whether to embrace or limit the role of Big Tech in their financial infrastructure.
Implementation Phase
Drawing on the experiences of Brazil and India, a three-phase framework can be proposed for countries considering the introduction of instant payment systems.
The first phase, pre-condition assessment, involves evaluating the need for a national payment system based on three factors: the existence of alternatives (e.g., strong credit card penetration), the expected change (primarily determined by the level of financial inclusion, development costs, and economic scale), and national capabilities. Consequently, countries with low banking penetration and high cash dependence are likely to benefit more from such systems.
The second phase is preparation for execution and expansion. Understanding the existing market conditions and the expected changes from system introduction is crucial. Additionally, selecting an appropriate governance model—whether a central bank-led model like Pix, a consortium-led model like UPI, or a supplier model—plays a significant role in long-term impact. Finally, the fee structure should be proactively set during this phase, as it affects both adoption rates and market entry.
The final phase is establishing a long-term process through building cooperation mechanisms and managing externalities. Policymakers need to implement regulatory adjustments based on market responses to address issues such as monopolization and consumer fraud. They should also explore communication mechanisms with domestic market participants through forums and bilateral consultations to secure knowledge, legitimacy, and efficiency.
As many regions worldwide consider future payment systems, this framework can serve as a benchmark for initial evaluation. There is no perfect 'one-size-fits-all' solution. However, a country's ability to execute and enforce participation, its economic scale, and its existing market structure significantly influence decisions about the 'what' and 'how' of launching an instant payment system.
Pix and UPI offer several additional insights into how national payment systems can reshape economies. Brazil focused on domestic financial institutions and regulatory control, while India leveraged global technology companies for rapid adoption. Consequently, Brazil fostered the expansion of its domestic fintech ecosystem, while India created an environment with significant multinational participation. In both cases, the incentives of private market participants aligned with supporting credit card penetration after Pix and UPI brought consumers into the financial system for the first time. While the impact of this stage is debatable, it is a crucial point to consider when launching and evaluating the outcomes of such systems.
Finally, a key lesson from these models lies in the decisions policymakers make to initiate innovative processes. Both models demonstrate the potential of such systems to enhance financial inclusion, revolutionize traditional banking, and reshape economies to drive development. While these lessons from UPI and Pix are directly applicable to public sector institutions seeking to build national systems, it is important to consider that the market structure changes may not be an ideal solution for all economies, especially developed economies with more private sector participants. Ultimately, policymakers within each jurisdiction bear the final responsibility for launching instant payment systems.
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