India’s G20 presidency has gone along with UPI advocacy. August saw over 10 billion online transfers of money done via the Unified Payments Interface (UPI), a figure big enough to make dignitaries from even large economies sit up. Run by an entity called National Payments Corporation of India that’s owned by a mix of lenders, the UPI platform itself sits atop the state-run Aadhaar system of biometric IDs—which helps by cross verifying the identities of bank and telecom users—as the star of our ‘India Stack’ success. Once the privacy risks of a data sprawl are taken care of, the very ease of a handset acting as an aim-and-pay device by moving money among banks at the swipe of a thumb makes the UPI idea worthy of the spotlight it’s now in. This week, the Reserve Bank of India (RBI) okayed UPI as a platform for banks to extend credit lines, too, thus expanding its scope. Far more exciting, though, was Monday’s news of State Bank of India linking UPI with e-rupee wallets issued for people to hold RBI’s central bank digital currency (CBDC). In what SBI called a “significant leap,” holders of e-rupees will now be able to scan QR codes of the UPI network to make snappy retail transactions. Given the liquidity this link-up will assure e-rupees, UPI could well be recast over time as the springboard for a far more dramatic shift.
As of now, UPI rules e-payments. Speaking on 4 September, RBI Governor Shaktikanta Das called it “the backbone of digital payments in India,” one that has “helped catalyse a wave of innovations in the fintech sector.” If Das pitched a role for a CBDC (with RBI’s e-rupee under trial), it was as a novel medium offering a speedy, cheap and secure alternative to today’s unwieldy transfers of money across borders. This is an easily identified market need, globally, one that’s been crying out to be served. “It would also support economic growth, international trade and financial inclusion,” he added. Indeed; and the sooner G20 countries adopt global protocols for CBDC conversion, the better. In our case, playing up a trans-border role for RBI’s digital tokens could also serve a strategic purpose, perhaps, if it acts as a bulwark against crypto adoption and secret capital flight, which are risks RBI cannot ignore. The CBDC’s real capacity for disruption, however, lies in what sets it apart from bank-to-bank UPI swipes. Legally, all e-rupees held represent a direct claim on our currency issuer. As these IOUs bear RBI’s very own promise, no less, they are super-safe. In contrast, UPI rests on the safety of the commercial banks involved in the payment loop. Over time, from a systemic point of view, that’s not a trivial risk difference.
If RBI were to pay interest on the e-rupees we hold, and this money proves just as easy to use, we would have an incentive beyond safety to convert our bank balances into it. At scale, such a shift would deprive lenders of funds in the form of deposits. But then, the reason an economy needs its lenders is not their access to people’s savings (any longer), but their ability to price risk and allot credit profitably. To the extent the internet has turned geography history, RBI can access our money too. And if RBI opts to back its CBDC with interest, it could centralize deposit-taking and start lending banks this money to on-lend. With banks focusing on loans (what they specialize in), we could conceive of a better banking model on the whole. In sum, e-rupees could use UPI for a leap towards much more than an aim-and-pay facility. Let’s keep our options open.