As real-time payments expand globally, financial institutions confront the challenge of modernizing their legacy systems to meet the digital expectations of their customers. The positive aspect is that there’s no need to overhaul core systems. Instead, modern software can relieve core banking systems from real-time demands.

During a recent PaymentsJournal podcast, Carlos Netto, Co-Founder and CEO of Matera, and Elisa Tavilla, Director of Debit Payments at Javelin Strategy & Research, delve into the success of Brazil’s Pix and what U.S FIs can glean from other countries that have successfully ramped up their instant payment efforts.

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The Unexpected Impact of Pix

Pix, Brazil’s instant payments system, has enjoyed remarkable success since its November 2020 launch. That’s attributed to several factors. For one, certain financial institutions were mandated by the central bank to participate, and the regulator played a role in developing the system’s technical aspects. This ensured uniform standards, encouraging widespread adoption.  Pix’s free availability to all users also differentiated it from traditional banks, which typically restricted fund transfers to business hours.

“Pix is used by people to send money to friends, pay in stores, or by reading a QR code,” Netto said. “It’s not only a rail but also a way to move money from one bank account to another bank account.

“Pix and related technology enable every use case. We have QR codes so consumers can pay businesses instantly. We have the directory so we can send money to our friends. And there’s a standard UI so every bank providing Pix has to offer it in the same way so it’s easy for everyone to use. It enabled Pix to grow fast. Faster than we were expecting. It moved from zero to five billion monthly transactions in three years.”

The surge in transactions due to Pix has had a significant impact on core banking systems. With transactions moving directly between demand deposit accounts (DDA) without intermediaries, traditional core banking systems were not equipped to handle such high volumes.

This has led to Matera’s latest challenge, developing a core banking system that can handle a high volume of transactions brought about by Pix’s success.

How Matera Supports Its Clients

As a core banking provider, Matera set out to not reinvent the wheel but to add to it. Requiring banks to make a significant overhaul in their legacy systems, upgrading to facilitate 24/7 payments, and enabling Pix acceptance across digital channels was a tall order. Matera decided to enhance the existing core with its Digital Twin solution.

“We call this a light ledger,” Netto said. “It’s a thin, high performance ledger software that runs on top of our own core banking. This light ledger doesn’t perform all the activities a core banking system performs. As far as regulatory reports that need to be sent, we don’t need to do this in real time.

“The challenge was to keep the user happy. The user must be able to see their balance, see their statement, and use the money, pay, and receive. That’s it. Why do more than necessary?”

What FIs in the U.S. Can Glean from Brazil

The success of Pix proves that integration remains a viable solution with legacy systems, avoiding the need for overhauls and minimizing disruption. Brazil’s success offers valuable insights into the requirements for advancing the adoption of real-time payments.

“A big step for the United States would be creating a standard QR code or a standard way to make payments in-store because they don’t have this standard yet,” Netto said. “It can create new use cases for FedNow and instant payments.

Using a QR code to pay in-store means that the merchant can benefit from paying a much lower merchant discount rate. Furthermore, the customer can benefit by enjoying a special discount for using the QR code.

“Unlike Brazil, the Federal Reserve does not mandate FedNow adoption,” Tavilla said. “Nor is there any mandate in the U.S. to adopt real-time payment systems.

“We also have a very complex and diverse banking and payments ecosystem with roughly 10,000 financial institutions. So getting agreement or a consistent standard around QR codes as well as other technology—whether it’s APIs or an alias system—is certainly more complicated and would take time to achieve.”

Tavilla further notes that banks are heavily invested in their core providers and legacy systems. Any upgrade at this point would require considerable resources and could disrupt operations.

The Future of Instant Payments in The U.S.

If U.S. FIs want to participate in real-time payments, they must prioritize collaboration with other key players such as merchants and fintech companies.

“This QR code should be agnostic. In Brazil, you just have one QR code because there is only one rail. In the U.S., you have three rails. It’s very important that merchants drive this to force the creation of this standard so every bank account holder can go to the store and pay by bank regardless of the rail they use.”

Consumers will not know the value of real-time payments if the current use cases don’t resolve their pain points. Addressing their frustrations and offering real advantages will encourage customers to develop trust in and ultimately adopt these real-time payments use cases.

“While in Brazil, P2P was a primary use case that has been extremely successful on Pix,” Tavilla said. “In the U.S., we haven’t seen quite the adoption with real-time payments, whether it’s FedNow or RTP with P2P payments. Part of that might be because before RTP or FedNow was integrated into P2P apps like Venmo or Zelle, to consumers and the users, it seemed like their money was already moving instantly when they sent it to their friends or family.

“But behind the scenes, the money wasn’t necessarily moved instantly, although today, depending on the user’s financial institution, the money is moved over RTP. Defunding those wallets has been a primary use case on RTP and FedNow in the U.S. Earned wage access is another use case, as well as defunding for gaming accounts. Focusing on the use cases that provide the most value to customers would be important.”

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