The Reserve Bank of India launched a pilot digital rupee (e₹-R) in four cities from December 1st. However, data suggests that India, where the United Payments Interface (UPI) has already been successful, may not be so keen on adopting the digital rupee.
The IMF work report ‘Instant Payments: Cross-border Regulatory Innovation and Payment Substitution’ stated that the existence of instant payments such as UPI may limit users’ incentives to adopt retail central bank digital currencies (CBDCs). It is already a viable alternative to cash at the retail level.
Data shows that the case for retail CBDC issuance is less attractive in some developed countries such as Australia, Singapore and the UK compared to emerging and developing countries (EMDE).
The IMF report said EMDE’s motivations include promoting financial inclusion, payment system efficiency, competition, security, resilience and strengthening cross-border payments. For India, UPI already meets most of the motivations listed above.
Launched in 2016, UPI passed the 1 billion transaction mark in October 2019. So far FY23, UPI has processed 44.32 billion transactions valued at Rs 75 trillion.
Nearly 76% of Indians now prefer to use UPI when paying online, while more millennials (84%) are using UPI when shopping online, according to a recent report.
“The similarities between instant payments and retail CBDCs will be very strong, especially when operated and settled by central banks. Both will provide ready-to-use good and final funds backed by the central bank,” the newspaper said.
Thus, the paper argued that if instant payments (read UPI) are structured in countries to be a viable alternative to cash at the retail level, it may limit users’ motivation to adopt retail CBDCs.
Successful UPIs have had the first-mover advantage of trusting instant payment methods for day-to-day transactions where retail users tend to form the majority of their usage.
The IMF paper argues that the similarities between instant payments and CBDCs are too strong to be ignored, suggesting that CBDC adoption is significantly impaired if instant payments provide cost-free peer-to-peer transactions and P2B payments only impose very low costs on business payment recipients.
Win-Win and Complementary Success
Experts have argued that these two payment methods will coexist and meet the needs of different users. This allows the Reserve Bank of India to keep a close eye on inappropriate transactions.
Adelia Castelino, CEO of In-Solutions Global Ltd, said, “Retail CBDCs are potentially important for RBI to provide access to financial services to unbanked people, reduce fraud and money laundering, and provide a secure alternative to digital payments. We will do our part,” he said.
Industry players also play an important role in the successful adoption of digital rupees, similar to what has led to the success of UPI.
Several factors contributed to UPI’s growth, such as QR’s interoperability, zero-fee scheme, PSP’s customer acquisition initiatives, and finally the pandemic.
“An essential element of the design is seamless interoperability with other payment systems. To make the digital rupee an alternative, governments need to enable PSPs and banks to engage and collaborate to build new solutions and use cases around the digital rupee,” said Jaikrishnan G, Partner and Financial Services Consulting, Grant Thornton Bharat. said.
“If you look at their life cycle stages, the digital rupee as a currency and payment system is in the adoption stage and UPI is in the growth stage,” Jaikrishnan added.
Retail CBDCs are likely to be powered by QR, as seen in several POCs in other countries, mainly in China.
“Perhaps they will use a UPI rail that includes both merchant location and QR on the website, as well as a link to the user’s bank account,” said Sunil Rongala, senior vice president of strategy, innovation and analytics at Worldline India.