What lessons can FedNow draw from real-time payment experiences in Brazil and India

The Federal Reserve may hope its new FedNow instant payment system can replicate the success of real-time payment programs in Brazil and India, but reaching similar adoption levels in the United States may take longer.

Brazil's Pix and India's Unified Payments Interface (UPI) quickly dominated transactions in their respective countries, partly because they were designed not just as payment systems but to provide broad financial services to the unbanked.

According to the Central Bank of Brazil, as of the end of April, about 71% of Brazilians (approximately 154 million) had used Pix at least once, even though the system was only launched in 2020. This is higher than the 56% (approximately 120.7 million users) recorded at the end of May 2022.

In India, transactions processed through UPI in April reached nearly $236 billion, up about 70% from $169 billion in the same period last year, according to the National Payments Corporation of India, which operates the system. The payment system has been in operation since 2016.

The widespread adoption in these countries may offer lessons for the Federal Reserve. The Fed launched FedNow in July 2023 and has been trying to attract nearly 10,000 U.S. financial institutions to adopt the new payment rail. But progress has been slow, with only about 700 institutions signing up as of this month.

Comparing real-time payment experiences in Brazil and India

The high adoption rates in Brazil and India were not entirely organic. India linked social welfare disbursements to UPI, while Brazil required large banks to support Pix.

Additionally, business-to-consumer payments played a role in driving adoption, as such payments have become increasingly common in Brazil and India through Pix and UPI, respectively.

FedNow is not mandatory and has no business-to-consumer connectivity. Existing U.S. digital payment options, such as Early Warning Service's Zelle and PayPal's Venmo, already connect individual users. Combined with the well-developed U.S. credit card industry, this leaves the U.S. financial sector with little incentive to shift to real-time payments.

"There is no widespread digital payment wave in the U.S. like there is in India," said Manish Kohli, global head of payments solutions at HSBC, a UK-based bank. "Real-time payments in the U.S. are not used for commercial transactions, only for person-to-person transfers," he said in a video call in April. "Credit cards remain the dominant mechanism—so the three elements that truly made UPI successful in India are completely absent in the U.S. right now."

Another key factor is that the real-time payment systems in India and Brazil were designed from scratch, unencumbered by legacy systems that require extra effort to upgrade, according to Rafael Costa Abreu, director of market planning and strategy at LexisNexis Risk Solutions.

Lessons learned

This does not mean the U.S. is not paying close attention. The Federal Reserve "maintains very close contact with global peers," Daniel Baum, product lead for FedNow payments, said at a Payments Dive event in April.

"An important lesson we've learned is... if you can truly focus on ease of use and security of use, you can start removing barriers for end users and financial institutions, thereby truly enabling the system," Baum said.

Ease of use was crucial for the Central Bank of Brazil in attracting the unbanked into the financial system. Users can register with national ID numbers, email, and more, and can also use QR codes and near-field communication technology.

Ease of use also means interoperability, where multiple agents can participate without friction, said André Ferraz, CEO of digital identity company Incognia. How to address fraud is also evolving, with Pix tackling security issues as they arise.

Cybersecurity is a priority for the Central Bank of Brazil.

"Pix has extensive security accountability and fraud prevention tools," Ferraz said. "Investing in fraud prevention upfront is worthwhile, rather than dealing with rampant fraud during the early adoption phase."

How to attract institutions

In Brazil and India, the shift to real-time payments was top-down and much more limited in scope than in the U.S.

Brazil requires all financial institutions with 500,000 or more accounts to offer Pix, while India disburses social welfare benefits exclusively through UPI.

However, the U.S. has thousands of banks, while Brazil and India have only hundreds. For example, in Brazil, five banks control about 87% of assets, said Rocio Wu, a principal at fintech investment firm F-Prime Capital.

Moreover, the systems in Brazil and India were envisioned as more than just simple payments. UPI is part of a broader national digitalization goal aimed at driving commerce and financial inclusion, Kohli said.

"I view UPI as a component of a broader ecosystem, and that broader ecosystem begins with digital identity," Kohli said. The idea is to continuously build on the system.

"For real-time payments to succeed, they must go beyond a single function, not just moving money from point A to point B," Kohli said. "You need ancillary features." For example, QR codes have been crucial to merchant success.

QR codes have made it easy for everyone from coconut vendors on Copacabana Beach to chat sellers in Delhi to receive consumer payments, a key factor in driving system adoption because the technology eliminates costly credit card transactions and enables instant transfers.

Merchants may also be crucial to FedNow's success. A key obstacle in the U.S. is Americans' love of credit card rewards—a phenomenon more prevalent in the U.S. than elsewhere. Americans are accustomed to using credit cards heavily and collecting rewards.

"If everyone already has credit cards, there is less incentive for an immediate shift," said Stephen Topliss, vice president of global fraud and identity market planning. "Growth rates in places like India or Brazil are faster because they truly apply to the entire population."

International extension of real-time payments

The question FedNow officials are repeatedly asked is: When will it apply to cross-border payments, or how will it connect with other international real-time systems? Although the Fed says cross-border coverage is a long-term goal, it is not an immediate priority.

"We must first focus on building the local network before we can bring value globally," Baum said. "That doesn't mean the Fed is not paying attention to cross-border needs. It's a very complex equation."

A core use case for cross-border instant payments is remittances, money that migrants send back to family and friends in their home countries after working abroad. According to the International Organization for Migration, global remittances totaled $860 billion in 2023 and are expected to grow about 3% this year.

UPI is already available in countries such as Singapore and France, and the Central Bank of Brazil is developing Pix International. In fact, global payment processor Fiserv is already working on a way for Brazilians to use Pix when traveling to the U.S.