Cash culture a roadblock to instant payments in Latin America

. Nov 18, 2020
instant payments in Latin America CoDi completed one year of operations in September but is still struggling to take hold. Photo: Stefano Spicca/Shutterstock

PIX, the new instant payment system launched by Brazil’s Central Bank, definitively launched on Monday after two weeks of trials. The idea aims at increasing the digitalization of the Brazilian financial landscape, minimizing the parallel economy, and making transactions simpler. However, judging by experiences in Mexico — Latin America’s second-largest economy — implementing such a system is not a straightforward task.

Mexico’s instant payment system Cobro Digital (CoDi) completed one year of operations in September but is still struggling to take hold. Despite the general trend toward digitalization brought about by the Covid-19 pandemic, CoDi has benefitted little.

</p> <p>One of the supplementary goals of national <a href="">payments systems</a> such as PIX and CoDi is to <a href="">reduce the use and circulation of banknotes</a>, but the habit of cash-in-hand transactions is proving harder to shift in Mexico. On the contrary, the use of cash rose about 22.82 percent between September 2019 and September 2020. Furthermore, one of the initial phases of CoDi focused on in-person transactions, crushed by the pandemic and its social isolation measures.</p> <p>Regardless, Miguel Díaz, general director of Payment Systems and Market Infrastructures at the Bank of Mexico, said that &#8220;ending the use of cash&#8221; was never CoDi&#8217;s primary objective. &#8220;The main goal of CoDi is simply allowing every Mexican to be able to pay or receive payments through electronic means. This does not imply that the central bank has any objective in terms of eliminating cash for good. That’s a decision that every person has to make,&#8221; says Mr. Díaz.</p> <p>Indeed, analyzing the origins of CoDi, Mr. Diaz&#8217;s statement makes sense. The system was born out of an electronic funds transfer system created in 2004, called SPEI. As with any real-time gross settlement (RGTS) system, it allowed for financial institutions to send large amounts to each other in a quicker manner. Some years later, Mexico&#8217;s central bank decided to use the same framework for individuals. “We had so much spare capacity in the system,&#8221; says Mr. Diaz. &#8220;So we thought, why not allow final customers to have this amazing service?”&nbsp;</p> <p>CoDi essentially exists as an adaptation of this existing service, simplifying the process for customers to pay for goods and services via electronic means.</p> <h2>Mexico&#8217;s instant payments system, in numbers</h2> <p>The first phases of CoDi were focused on small independent businesses, principally the so-called “mom-and-pop stores,” where most Mexicans consume and pay for services daily. In that sense, the <a href="">Covid-19 pandemic</a> did not help the system get off the ground. “All the communication schemes were built for these businesses, which were supposed to be really engaged with the new system in March, helping things to flow by word of mouth,” says Mr. Díaz.</p> <p>Currently, CoDi has 6,022,617 million valid accounts, but the quantity that has been used since September 2019 is much smaller: just 284,647 accounts were used for at least one payment transaction in the first year of operations.</p> <p>By the end of the year, the system is likely to achieve 1 million total transactions and MXN 1 million (roughly USD 49,000) in volume — far from the system&#8217;s potential.</p> <p>Mexico has between 77 and 82 million smartphones, and a population of around 130 million people — but less than 40 million of them have a bank account. “CoDi will not solve the financial inclusion problem alone, but with it we can generate a functionality that may make more people willing to use electronic payments,” says Mr. Díaz, stressing that this could be the first step for many Mexicans to enter the financial system.&nbsp;</p> <p>Today, studies show that Mexicans still prefer to pay for services such as transportation and utility bills in cash. Mr. Diaz points out that CoDi is being used largely for rent payments, which are not everyday transactions. The average transfer is around MXN 990.</p> <h2>Why Brazil’s PIX could be ahead of CoDi</h2> <p>Despite also being an instant payment system that works in a very similar fashion to CoDi, PIX appears to have been more successful in engaging both direct and indirect participants, even during its trial stage. Over 750 financial institutions are already certified to operate within PIX since its soft launch. More than 60 million PIX keys have been registered since the beginning of October.</p> <p>Of course, the total number of keys does not guarantee that Brazilians will actually use PIX, as we have seen with CoDi. However, the fact that fintechs are among the institutions with the largest number of registered keys could help PIX take off faster than CoDi, as customers of these younger financial institutions are more inclined to use such tools.</p> <iframe src="" width="100%" height="232" frameborder="0" allowtransparency="true" allow="encrypted-media"></iframe> <hr class="wp-block-separator"/> <p><a href=""><em>This article was originally published on LABS – Latin America Business Stories, a news platform covering business, technology, and society in the region for an English-speaking audience.</em></a></p> <figure class="wp-block-image size-large"><a href=""><img loading="lazy" width="1024" height="124" src="" alt="" class="wp-image-41934" srcset=" 1024w, 300w, 768w, 610w, 1320w" sizes="(max-width: 1024px) 100vw, 1024px" /></a></figure> <p>

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Fabiane Ziolla Menezes

Fabiane is a journalist and editor-in-chief of LABS

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