Will consumers ditch cash and UPI to embrace e-rupee?

Why switch to e-rupee when UPI already offers similar functionalities without cost? This juxtaposition presents a formidable challenge in justifying the leap to e-rupee.

The making of the e-rupee as a ubiquitous retail currency in India hinges on the ongoing pilot programmes, but it faces significant hurdles. While fundamentally, the unified payments interface (UPI) is a money transfer instrument and the central bank digital currency (CBDC) is money, convincing the masses to abandon traditional cash and established systems like the UPI presents a formidable challenge.

For many, the initial allure of the e-rupee pilot test is undeniable. In urban hubs like Mumbai and Bengaluru, one might find merchants accepting e-rupee, but in cities like Chennai, Jaipur and Pune, its acceptance remains scant. But then, it is in the pilot stage. The widespread adoption of the e-rupee might hinge on the interoperability of the QR (quick response) codes, much like the transformational impact the UPI has had on our economy and our lives.

The inherent nature of the e-rupee is intriguing. Functioning as the digital counterpart of physical currency, each e-rupee retains the qualities of its tangible cash counterpart. Yet, divergence emerges between wholesale and retail CBDCs. While wholesale CBDCs cater to inter-bank and business transactions, retail CBDCs aim to mirror the simplicity of cash transactions, a la UPI. However, embracing the e-rupee on a massive scale faces resistance from two significant quarters.

Hurdles To Adoption

The first concern is the novel experience it offers, which might captivate initial users but struggle to secure enduring dominance akin to physical cash and the well-established UPI. Comparing the e-rupee to its tangible counterpart reveals a stark truth: Why switch to e-rupee when UPI already offers similar functionalities without cost? This juxtaposition presents a formidable challenge in justifying the leap to e-rupee.

The second resistance arises from a fundamental divergence between e-rupee and UPI: the former doesn't provide the anonymity that cash transactions can afford. Since banks will oversee e-rupee transactions, the privacy sought by many in cash payments remains elusive. The RBI is working to provide anonymity at the transaction level, but the custodian or banks would have wallet-level information, especially CBDC balances. This won’t solve for the full anonymity people want. Furthermore, those who depend on cash payments for their untraceability — intentionally or those otherwise (such as informal and low-income segments) — are unlikely to make the switch unless there is a winning proposition.

However, the most significant hurdle for the e-rupee emerges in the form of UPI. The widespread penetration of the UPI across our society has transformed how we transact, presenting a level of familiarity and efficiency that the e-rupee is striving to replicate. While the e-rupee could theoretically substitute for the UPI through interoperability, one glaring difference emerges. Unless banks introduce fees for UPI transactions or e-rupee adopts anonymity, the scale will likely tip in favour of UPI.

The challenge of denominations within CBDCs poses a significant deterrent for retail consumers. Unlike physical currency, where various denominations are readily available, loading digital wallets with specific amounts can be limiting. This lack of flexibility can lead to impracticalities when making transactions that don't align precisely with the loaded amounts. In contrast, the UPI offers a seamless solution, enabling transactions down to the smallest unit of the currency. The UPI's ability to handle precise amounts eliminates the need for preloaded denominations and provides a more adaptable and user-friendly experience. This difference in approach underscores why CBDCs must address the issue of denominations to ensure a smooth transition for retail consumers and compete effectively with existing digital payment systems like UPI.

User Experience

In the discourse surrounding the potential of the e-rupee to outshine the UPI in a cashless economy, an aspect that merits attention is the user experience and inclusivity.  Firstly, the e-rupee's potential to offer features and functionalities beyond UPI could be the key to its success. Innovations such as faster cross-border transactions, smart contracts, or integration with loyalty programmes could set e-rupee apart and provide the value proposition needed to attract users beyond what the UPI currently offers. The RBI’s idea to offer interoperability of CBDC with UPI is useful, but will it improve the retail adoption of e-rupee ? Time will tell.

Secondly, the digital divide in India is a reality that cannot be ignored. A significant portion of the population, especially in rural areas, might lack the necessary technological infrastructure to adopt digital currencies seamlessly, especially for the daily transactions. Bridging this gap through initiatives that promote digital literacy, affordable devices, and reliable internet access would be critical to ensuring the success of the e-rupee across all strata of society.

While the challenges are undeniably substantial, by focusing on enhancing the user experience and prioritising inclusivity, the e-rupee could find its own unique place in India's quest for a cashless economy. As the RBI continues to fine-tune its e-rupee product based on user responses and technical capabilities, the path forward must address the deep-seated preference for cash, the ubiquity of UPI, and the need to strike a balance between innovation and familiarity.

Srinath Sridharan is author, policy researcher and corporate advisor. Twitter: @ssmumbai. Views are personal, and do not represent the stand of this publication.