The eternal debate in financial services technology boils down to build vs. buy, and whether to rip and replace core banking operations. Banks have invested a lot of time and money in those core systems — they have a lot of data there too — and so they are loath to give up legacy tech.
There’s a major problem though, especially as U.S. financial institutions (FIs) gear up for instant payments across FedNow® Service and The Clearing House’s RTP® rails: Their back-end systems simply were not designed to handle the rigors of faster fund flows, real-time balance updates and demands of operating ledgers 24/7/365. It has become an imperative to create a more modern infrastructure to help these FIs make the digital leap into instant payments, and to connect to one another across new payment rails.
Carlos Netto, CEO of Brazilian FinTech Matera, is betting that his firm’s three decades of experience in Brazil — supporting the evolution of that country’s banking system evolution from a narrow band of FIs offering limited services to a fully fledged ecosystem of advanced, interconnected payments — can help U.S. firms make the leap into instant payments.
“Pix connects everything,” Netto said. “So I call Pix the ‘internet of accounts,’ just like the internet connects all of the computers in the country.”
The instant payment rail in that country moves money across core systems and between accounts, no matter what accounts they may be, between all manner of FIs. A May update has noted that Pix is used by three quarters of the country.
“It’s the network of money,” Netto said — so popular that songs have been written about the payment system. Matera, for its part, by providing software that enables FIs and other firms to complete Pix payments and assign alias, has grown fourfold since Pix was launched, and logged 30% revenue growth last year to $77 million. The company supports about 500 million transactions each month, Netto told Webster.
Private equity firm Warburg Pincus is also making that same U.S. focused bet, having invested $100 million in Matera, in return for a minority stake in the company. That capital is being used to further Matera’s presence in the U.S., where it’s been operating for the past two years.
The money’s being earmarked for Digital Twin, billed as “a next-generation, high-performance ledger built to work on top of bank’s existing core platforms,” as it enables real-time transaction authorizations and balance updates, and the company’s QR Code payments solution that enables billers and merchants to present QR codes to be paid by mobile phone.
There’s a fundamental difference between Brazil and the U.S. in terms of mandates for instant payments: Brazil’s Central Bank mandated participated by banks; the U.S. has no such edict.
But the ways in which FIs in Brazil have blossomed, broadened and expanded financial access through the decades since Matera’s founding in 1987 — chiefly through tech-enabled connectivity — will offer at least some possibilities in the states, Netto said.
Back in the 1980s — as Netto and his co-founders launched Matera, focusing on software, and stirred by the knowledge that banks were investing heavily in their tech stacks amid the demands of grappling with hyperinflation — there were about 160 banks in Brazil. Through the 1990s and into the millennium, Netto said, Matera helped international banks make headway in Brazil, where localization and updating tech stacks took years, but Matera was able to winnow down those modernization cycles to a matter of months.
The middle of the last decade saw the rise of payment institutions, which had been constricted to offering just a few types of payment modalities, such as prepaid cards or debit cards. Operating as “narrow banks,” he said, they were and are not allowed to use customers’ funds to back new innovations. At the same time, the central bank invited “non-financial institutions” to establish a presence in the country — and this led to the emergence of Nubank, the largest FinTech digital bank in the region.
Now, he said, no matter the firm and no matter the use case or the user (particularly among the unbanked population), “Pix connects all of these accounts — they’re the same, no matter if it’s a bank account or a non-bank account. I can pay my taxes, fees for my car license, Visa transactions … everything. And a new bank coming into the system does not have to connect to all those networks to operate. They just need to connect to Pix.”
By creating the Digital Twin layer that rests on top of core banking activities, but does not replace or displace those systems, he said, the connections and always-on uptime are assured. The ledger technology is now on its third generation, and that iteration is the one that has “unlimited capability,” said Netto, who added, “If you want to put 5 billion accounts to support the entire globe through a single ledger, we are OK with that.”
Warburg’s investment, Netto said, supports the fact that Matera’s software is relevant for the movement of instant payments in the U.S. and across the globe. The user experience, he said, is assured as money can be sent and received at any time. The Digital Twin offering, he said, is one of a kind, and offers a “blue ocean” of opportunity for Matera as it focuses on the mid-sized FIs (and credit unions, CU aggregators and systems integrators) that are more forward thinking in terms of technology.
“We’ll have one ledger to cover many countries,” said Netto, who added that banks will be able to lower their operational costs and compete more effectively against digital upstarts — with all of it done at scale, even if instant payments do not take off as rapidly as some might hope.
“They can be like Nubank in the United States,” he said, having modernized their core operations without overhauling them as they keep their old core banking at least for now, reduce costs, and offload mainframe activities.
In addition to the Digital Twin, the company is expanding its presence in the U.S. to help shape a standard QR code for the country, with joint efforts from banks and merchants.
“The idea is to generate a QR code that is not going to be tied to any rail,” he said. Amazon, he said, doesn’t ask which carrier the customer wants when they place their order and enter their address. Similarly, with standardization, the consumer scanning the code sets a transaction in motion, and the payment routing is handled on a transaction-by-transaction basis, bank to bank, and with no one in the middle.
“One bank scans the code, and it will push the payment from the payer to the receiver direction, using FedNow, RTP, or Visa Direct or MasterCard Move. It’s up to them how to choose to send the money,” Netto said, using the same Digital Twin ledger overlay.
With Brazil as a guide, and as the U.S. beckons as a market getting ready for instant payments, Netto said, “We’re in the center of this tornado.”
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