Does UPI Pose A Challenge For The Success Of E-Rupee?

The E-Rupee has received backing from the central government as well as RBI
Digital Rupee Concept
Digital Rupee Concept

The Reserve Bank of India (RBI) on Thursday launched the digital rupee on a pilot basis in four cities, including Mumbai, Delhi, Bengaluru, and Bhubaneswar. 

This comes after a pilot for wholesale was launched in November this year. E-Rupee (e-Re) is the common name associated with central bank digital currency (CBDC).

Four banks – SBI, ICICI Bank, IDFC First Bank and YES Bank – will be involved in the first phase of the pilot and four more banks – HDFC Bank, Bank of Baroda, Union Bank and Kotak Mahindra Bank will subsequently be added to the plan, which would cover 13 cities in a phased manner, RBI said.

The retail e-rupee will be an electronic version of cash, and will be primarily meant for retail transactions.

The E-Rupee has received backing from the central government as well as RBI, however, the question is whether it would be a success, considering UPI is already a popular mode for transaction and it’s adoption is increasing day by day in the country.

As the RBI explained, the e-Rupee is a form of digital token that represents legal tender. Unlike cryptocurrencies, the digital Rupee is issued in the same denominations as paper currency and coins.

The RBI explained that digital Rupee or e-Rupee will be distributed through intermediaries like banks to customers and merchants. Users will be able to transact with e-Rupee through a digital wallet offered by the eligible banks and stored on mobile phones or devices.

The user will then be able to transfer money from the bank account to the wallet. Simply put, instead of withdrawing money from an ATM, you are transferring money into a digital wallet. 

The amount transferred would assume the exact denominations of physical cash and will not earn interest when parked in the e-wallet. Therefore, how much non-interest generating money would a user be willing to accommodate would be a determining factor to gauge the acceptance of e-Re.

Digital Rupee vs UPI

Although digital rupee might seem an exciting idea, UPI still has a first mover advantage.

UPI requires a request from your bank to transfer an amount from your account. In case of digital rupee, you can simply transfer digital money from your wallet to another wallet. 

However, people initially might not be too eager to opt for the digital Rupee. According to an IMF paper, the existence of UPI may limit the incentive for users to adopt CBDC.

Data show the case for issuing retail CBDC has been found to be less compelling in some advanced economies such as Australia, Singapore and the UK, compared to emerging markets and developing economies (EMDEs), according to a report in The Hindu.

The IMF paper said the motivations for EMDEs include promoting financial inclusion, enhancing payment system efficiency, competition, security, resiliency, and cross-border payments. In India’s case, UPI already satisfies most of the motivations listed above.

Launched in 2016, UPI crossed one billion transactions in October 2019. In FY23 to date, the UPI has processed 44.32 billion transactions worth Rs 75 trillion.

Nearly 76 per cent of Indians now prefer using UPI during online checkouts while more millennials (84 per cent) are now using UPI when shopping online, a report showed recently.

According to the paper, if instant payments are structured in a country such that they are a feasible alternative to cash at the retail level, this may well limit the incentive for users to adopt retail CBDC.

The IMF paper also argued the similarities between instant payments and CBDCs are too strong to be ignored, saying that if instant payments provide P2P transactions at zero cost and P2B payments only pose very low costs to business payment receivers, the adoption of CBDC may be importantly compromised. There were multiple factors that contributed to the growth of UPI such as the interoperability of QR, zero charge regime, customer acquisition initiatives by PSPs and finally the pandemic.

Retail CBDCs are likely to be driven by QRs as seen in several POCs in other countries primarily China.

Why is RBI moving towards the Digital Rupee?

Initially touted as the government’s answer to cryptocurrency, which the government has denied a legal status in the country so far, 

E-Re is also targeted at those who don’t have a bank account, but can use digital currencies similar to a pre-paid mobile recharge card. 

Will Digital Rupee Be As Successful As UPI?

UPI works on a settlement basis between two banks. That is, on the front-end, money transfer happens instantly, but at the backend, it takes about a day for inter-bank settlements to conclude. There is a settlement risk in UPI, since there is an intermediary involved. But in e-Re, there is no settlement risk, since it is issued by the RBI and could also be much faster.

Further, since UPI is a bank-to-bank payment mode, there is a transaction or audit trail it leaves, which e-Re won’t because it is wallet-to-wallet transfer. RBI is likely to allow anonymity in e-Re transactions, at least in the small-ticket ones. Those who don’t want an audit trail will prefer e-Re.

Three, customers are unlikely to be charged anything for using e-Re since usage of cash does not involve any charges. UPI is free now, but could become chargeable going ahead.

Users could shift to e-Re from UPI, if it proves efficient and trustworthy, and does not have technical glitches.

But those who prefer to keep money in bank deposits and make payments using these interest-earning deposits will continue to prefer UPI. 

Challenges With Retail Digital Rupee

While UPI has become popular and established mode of transaction, it’s not clear if e-Rupee will find many takers initially and by the time it will become equally user-friendly, UPI will have more users and adoption rate.

That said, it’s not clear if people would find ease and safety in digital rupee and wallets. 

Related Stories

No stories found.
Outlook Business & Money