What’s the news?

• The fusion of UPI and CBDC is an essential component of the Reserve Bank of India’s (RBI) ongoing pilot project aimed at propelling the retail digital rupee.

Central idea

• Banks are boosting digital rupee (e₹-R) adoption by integrating UPI QR codes with CBDC or e₹ apps. Users can now scan any UPI QR code for transactions, while merchants can accept digital rupee payments using their existing UPI QR codes.

Definition- Interoperability

• Interoperability, as defined by the RBI, is the technical compatibility that enables a payment system to operate harmoniously with other payment systems.
• This fosters the seamless execution, clearance, and settlement of payment transactions across diverse systems.
• The synergy between payment systems contributes to fostering adoption, coexistence, innovation, and efficiency for end-users.

Understanding QR Codes

• A Quick Response (QR) code is a pattern of black squares arranged in a grid on a white background, interpretable by imaging devices like cameras. It carries information about the attached item.
• This versatile tool provides an alternative contactless payment channel, allowing merchants to directly receive payments into their bank accounts.

What is a Central Bank Digital Currency (CBDC)?

• CBDC is a legal tender issued by the central bank in digital form. Like rupee notes or coins, which are in physical form.
• Simply put, it’s just like rupee (₹) notes but in digital form (e₹). You can also exchange e₹ for physical currency notes.
• However, unlike fiat currency that’s usually stored in banks and hence their liability, CBDC is a liability on the RBI’s balance sheet. That’s why you don’t necessarily need to have a bank account to own a digital rupee.

What is the Unified Payments Interface (UPI)?

• UPI is India’s mobile-based fast payment system, which enables customers to make round-the-clock payments instantly using a virtual payment address (VPA) created by the customer.
• It eliminates the risk of the remitter sharing bank account details with the remitter.
• UPI supports both Person-to-Person (P2P) and Person-to-Merchant (P2M) payments, and it also enables a user to send or receive money.

The interoperability between UPI and CBDC

• The interoperability between UPI and CBDC introduces the concept of UPI QR code-CBDC interoperability. This entails the compatibility of all UPI QR codes with CBDC applications.
• In the pilot phase of the retail digital rupee, e₹-R users had to scan a specific QR code for transactions. However, with UPI-CBDC interoperability, transactions can now be initiated using a single QR code.
• The digital rupee, a tokenized digital variant of the rupee, is issued by the RBI as CBDC. The e₹ is stored within a digital wallet linked to a customer’s existing savings bank account, while the UPI directly connects to the customer’s account.

Significance of Interoperability

• Enhanced User Experience: Interoperability simplifies the payment process, allowing users to seamlessly make transactions using any UPI QR code. This eliminates the inconvenience of switching between multiple payment apps or systems, enhancing user satisfaction.
• Accelerated Adoption of the Digital Rupee: Leveraging the popularity of UPI, interoperability promotes the adoption of the retail digital rupee. This aligns with the government’s objectives to drive digital currency usage and reduce reliance on physical cash.
• Merchant-Friendly: Merchants benefit from this interoperability as it eliminates the need for them to manage a separate QR code for digital rupee payments. This lowers the entry barrier for merchants to accept digital currency, making it more accessible to a wider range of businesses.
• Expanding Financial Inclusion: Interoperability has the potential to extend financial inclusion efforts, particularly in underserved regions. Users and merchants with limited exposure to digital payments can now participate more easily in the digital economy.
• Efficiency and Cost Savings: For both users and merchants, interoperability reduces the operational costs associated with maintaining multiple payment platforms. It simplifies accounting and transaction management for businesses.

How will it drive CBDC adoption?

• Presently, UPI is a widely used payment method. The interoperability between UPI and CBDC is poised to accelerate the adoption of the digital rupee.
• With over 70 mobile apps and 50 million merchants accepting UPI payments, the existing UPI ecosystem sets the stage for the retail digital rupee’s growth.
• The RBI reported 1.3 million customers and 0.3 million merchants using e₹-R in July, with daily transactions ranging from 5,000 to 10,000.
• Prominent banks, including State Bank of India, Bank of Baroda, Kotak Mahindra Bank, Yes Bank, Axis Bank, HDFC Bank, and IDFC First Bank, have introduced UPI interoperability on their digital rupee applications.

Benefits for Users

• Seamless Transactions: Users can effortlessly execute digital rupee transactions by scanning any UPI QR code, eliminating the need for multiple apps or QR codes for different transactions.
• Wider Acceptance: Users are no longer restricted to specific QR codes; they can utilize their digital wallets linked to UPI for transactions at various merchants, increasing flexibility.
• Financial Inclusion: Interoperability ensures that users, including those in remote areas, can easily access and use the digital rupee without specialized infrastructure or additional QR codes, promoting financial inclusion.
• Reduced Transaction Costs: Users can avoid extra fees associated with using multiple payment platforms. Interoperability makes digital rupee transactions more cost-effective.
• Streamlined Wallet Management: Users can consolidate their digital transactions within a single digital wallet, simplifying financial management.

Benefits for Merchants

• Ease of Adoption: Merchants can accept digital rupee payments without the complexity of creating and maintaining a separate QR code for CBDC, simplifying onboarding for businesses, including small retailers.
• Expanded Customer Base: With interoperability, merchants can cater to a broader range of customers using digital rupees, regardless of whether customers possess a specific QR code.
• Reduced Infrastructure Costs: Merchants save on expenses related to setting up and maintaining additional payment infrastructure, such as separate QR codes or payment terminals.
• Efficient Settlement: The integration allows for efficient settlement of digital rupee payments, whether or not the merchant has a CBDC account. This ensures prompt and secure payment receipts for merchants.
• Increased Sales: Simplified payment options often lead to smoother and quicker checkouts, potentially boosting customer satisfaction and increasing sales for merchants.

Conclusion

• The convergence of UPI and CBDC through interoperability marks a transformative phase in the realm of digital payments. With the fusion of two powerful platforms, the retail digital rupee is poised to gain widespread adoption, revolutionizing the landscape of digital transactions in India.

Also read:

India’s Central bank digital currency (CBDC) in detail

Get an IAS/IPS ranker as your 1: 1 personal mentor for UPSC 2024

Attend Now