Retail CBDC’s penetration in the digital payments market may be slow, not steady, experts say

Representative image.

The retail Central Bank Digital Currency (CBDC) which the Reserve Bank of India (RBI) plans to introduce after the completion of the pilot launch may be off to a shaky start given the dominance of the United Payments Interface (UPI) in the digital payments space, experts say.

Confusion between UPI and CBDC is also like to keep consumers on their toes. In the pilot phase, four banks will be distributing the digital currency to consumers for spending it through a digital wallet offered by the banks and stored on their mobile phones.

RBI governor Shaktikanta Das said on December 7 that the retail CBDC would erase the involvement of multiple banks in the payment process. Das said transactions using the retail CBDC would provide anonymity to users. Experts downplayed this aspect.

“When we talk about how people would take retail CBDC payments, there is a concern of trust and uncertainty on how the transactions will happen as people are used to using UPI for making digital payments. This is expected of any new, unfamiliar payment method,” said Junofy Anto Rozarina, a behavioral economist and scientist.

Gaurav Samdaria, Chief Business Officer at Perfios Software Solutions, said a user may be able to see the benefits of using the retail CBDC, but noted that the digital currency will be launched in parallel with UPI, and a factor like anonymity may not be able to attract a large user base.

UPI dominance

Data with the National Payments Corporation of India (NPCI) shows that transactions through UPI in November 2022 exceeded 7.31 billion, their value totalling more than Rs 11.90 lakh crore. Since May 2022, monthly transaction value through UPI has crossed the Rs. 10 lakh crore mark.

The International Monetary Fund (IMF), in a report titled India Embraces Digital Money, said the aim behind the introduction of UPI had been to make it an umbrella institution for digitalization of retail payments.

“UPI was a response to the nation’s patchwork of rules and paperwork for payments. The goal was to make transfers easier and safer by allowing multiple bank accounts on the same mobile platform for individual and business use alike,” the IMF report stated.

NPCI Chief Executive Officer Dilip Asbe, in the IMF report, said the number of individual digital payment users is set to triple in five years to 750 million, and the number of merchant users could double to 100 million.

“With a burgeoning cashless society, the old ways are increasingly forgotten by the country’s hundreds of millions of young people. A system like UPI has democratized the payment system to the smallest value and the most reasonable cost,” Asbe said.

Rozarina explained that UPI had been a major gamechanger in the payments industry because it was accessible and also had largely eliminated users’ concerns about using their debit and credit cards for routine transactions.

Consumer shift

The RBI had earlier said the key motivations for launching the retail CBDC included a reduction in operational costs involved in physical cash management. Das explained that with retail CBDC’s pilot launch and future implementation, there may arise challenges that will be worked on.

A research paper by the Bank for International Settlements (BIS) said the rationale for introducing CBDC in a certain jurisdiction could be to provide a safe, central bank instrument, especially should the use of cash decline significantly.

“In Sweden for example, these developments have led to an absolute decline in the amount of cash in circulation. The Riksbank is investigating whether an e-krona would provide the general public with continued access to central bank money and increase the resilience of the payment system,” said the report.

Experts in India suggest that it is too soon to predict whether CBDC would result in less cash flow and a change of consumer behavior towards CBDC-enabled mobile applications, away from UPI, which consumers largely use to make digital payments.

"Around 24 percent of the total currency in circulation in India is in the form of cash or savings, hence attracting people to use CBDC would be very difficult," a digital payments expert said.

“Consumers would not use retail CBDC-enabled platforms unless the authorities involved provide flexibility in payment methods,” Samdaria said.

The BIS report explained that the growing use of electronic means of payment has generally not yet resulted in a substantial reduction in the demand for cash. It added that the rationale for considering a central bank replacement for, or supplement to, cash may appear less compelling.