Instant payments: The Brazilian landscape
Alan Mareines, a junior partner at the IPMF Global consultancy that specialises in standards, provides an overview of Brazil’s SPB payment system and the challenges of bringing it into the 21st century.
The domestic System of Funds Transfer (SITRAF) is the retail backbone of the Sistema de Pagamentos Brasileiro (Brazilian Payments System). Operated by the Interbank Clearing House, CIP, SITRAF is a near real-time infrastructure where customers experience a less than one minute transaction speed.
SITRAF was introduced back in 2002 and now has 97 participants. However, it does not work on a constant 24×7 basis, with business day only functionality the norm. This limitation, combined with a lack of political consensus regarding investment in payments infrastructure programmes in Brazil has meant that while the country may once have been a world leader, when the system was created, it now runs the risk of falling behind.
I intend in this article to provide an overview of SPB’s history, its composition and how it operates within the Brazilian National Financial System Network. Financial institutions’ (FIs) desire, or otherwise, to invest in their own service solutions – with or without a scheme technology overhaul – for the SPB system will also be considered.
The Brazilian Central Bank (Banco Central Do Brasil) approved a plan in late June 1996 for the biggest restructuring project that the domestic national financial system had than ever experienced. The Bank laid the foundations for the creation of what was later to become the new SPB in 2002.
In an effort that brought together the whole Brazilian financial market at the turn of the millennium, the Central Bank coordinated a payments project that had two main goals:
- the development of comprehensive, systemic risk management
- & the creation of a new nationwide real-time gross settlement (RTGS) service.
Brazil has historically been plagued by high inflation, which can depreciate the currency and pricing in a single day. This was another key driver for the project and the subsequent SPB system.
By April 2002, SPB brought all Brazilian FIs into one single centralised system. Since then, some tweaks and adaptations have occurred, but essentially the same successful system is still in place today.
How the SPB works
The SPB operates as a centralised system where FI accounts are held at the Brazilian Central Bank in its Reserves Transfer System (STR). Ultimately, all interbank settlements (credit transfers, utilities, slips, bonds and even FX foreign exchange) are settled via STR.
The Financial Market Infrastructures (FMIs) also play their role within the National Financial System Network. The Payments Clearing House (CIP) is responsible for the processing of most payments made by the general public. With two different systems (SITRAF and SILOC), CIP targets the payments market, settling credit transfers (USD $300,000 cap) through RTGS, payment slips and utilities via deferred net settlement, with settlements operating in T+1.
Figure 1: How Brazil’s National Financial System Network works.
Source: Banco Central Do Brasil.
The funds transfer (SITRAF) element in the above diagram is considered a hybrid system because although it operates in near real-time, with a customer experience of less than one-minute, its operating hours are not on a constant 24/7/365 basis. Operating hours are 07:30 – 17:30 on business days only. The latest available figures show that 4,689 billion Brazilian Reals (equivalent to USD $1,434bn) was processed last year in 2017 from 534,585 million transactions.
Figure 2: The Brazilian schemes: The Reserve Transfer System (STR) and Payments Clearing House (CIP)-operated SITRAF and SILOC elements support Brazil’s Sistema de Pagamentos Brasileiro (SPB) payment system.
Source: IPMF Global.
Innovation, regulatory and technology challenges
With 202 participants, the SPB has seen few big innovations since its introduction in 2002. Participants adhere to a national standard for messaging, schemes and practices, but most keep ‘disruptive technology’ away from the National Financial System Network.
Adherence to the SPB scheme is compulsory for all FIs in Brazil. Its introduction brought significant benefits but, as it has aged, it can also be viewed now as a somewhat of a barrier to the next steps in market innovation.
The 2002 introduction of SPB was a success, but it has left scars on the technology departments within FIs that had to ensure the connectivity and integration challenges it presented, often in a complicated manner due to legacy systems. After such a large-scale effort, few want to open up the hood and make further changes to the payments system, although discussions about potential upgrades to SITRAF are happening.
Regulators play an important role in national domestic and regional Latin American (LatAm) implementations of better and more efficient clearing and settlement systems, but cooperation is important too if any further advances are to be made, so debate and dialogue is essential. Brazil is no different from other LatAm countries in this regard.
Equally, like most other countries in Latin America, Brazil relies heavily on the regulator to drive market-wide innovation in technology and business processes. Striving for efficiency and effectiveness, while maintaining and promoting comprehensive monetary policy and national standardisation efforts, has been a dilemma that the Brazilian Central Bank has faced together with its partner regulators. The challenge is exacerbated when assessing how to accommodate disruptive new technologies on older infrastructure. It is an issue many global market infrastructures are facing.
At the present moment, most Brazilian FIs meet market-wide innovation needs with some resistance. However, the expenditure of the financial industry on technology within their own organisations cannot be overestimated. For example, the market saw a USD $5.6 billion expenditure last year in 2017 on innovation and technology but this is not going on shared platforms.
Discussions about potential upgrades to SITRAF are on-going, but there is no doubt FIs are investing anyway in new technology within their own organisations as these debates rage. Customer appetite for new services is pushing Brazilian banks and others to a new level and it may spark upgrade discussions about the underlying infrastructure at some stage too. There are clear paths that FIs are tracing in order to satisfy customers’ needs and everyone is waiting to see where the discussion leads.
Figure 3: The 2017 Pesquisa Febraban de Tecnologia Bancária (Brazilian Federation of Banks) 2017 report, shows where Brazil’s banks are spending their innovation budgets with 47% choosing analytics and 62% client customisation on the internet and 54% focusing on user accessibility. The mobile channel is also popular.
Source: The 2017 Pesquisa Febraban de Tecnologia Bancária (Brazilian Federation of Banks) report, produced in association with Deloitte Touche Tohmatsu.