The introduction of digital payments by the smallest cities in the country laid the foundation for the Reserve Bank of India (RBI) digital currency, which is based on blockchain technology.
The Banking Authority is working on the gradual introduction of its digital currency: the central bank digital currency (CBDC) or the rupee in electronic form. A pilot test could start in December.
The initiative, like digital offline payments, aims to update the government’s vision of a financial system with less cash.
The growing popularity of Unified Payments Interface (UPI), the flagship payment platform of the National Payments Corporation of India, in smaller cities has paved the way for easier adoption of CBDC, according to Sachin Gaikwad, founder of Buildd, a Pune-based banking services platform .
The growing popularity of Unified Payments Interface (UPI), the flagship payment platform of the National Payments Corporation of India, in smaller cities has paved the way for easier adoption of CBDC, according to Sachin Gaikwad, founder of Buildd, a Pune-based banking services platform .
“First of all, the central bank wants to protect the holders (of the digital currency) from the temptation to quickly multiply virtual currencies. The challenge, however, is to cope with the risk of losing a significant deposit base quickly and not having a system to offset credit “Cycles,” said Gaikwad.
While details of the CBDC’s structure, security, and interoperability are still unknown, analysts believe its adoption outside of India’s eight major cities will be easier if elements of the offline digital payments framework are integrated with it.
Rising small-town India
Around 450 million Indians live in the country’s Tier 2 and Tier 3 cities alone, which is more than 30% of India’s 1.39 billion population.
Digital payments have grown rapidly, especially in tier 2 and tier 3 cities, according to fintech firm Razorpay on November 30, 2020 and 6, 2021 by 80% compared to the previous 250-day period.
“Small town India is accepting digital payments much faster than major cities and tier- I cities,” reported Financial Express, citing data from the payment app PhonePe, which reportedly records nearly 80% of all transactions of cities Tier2, 3, 4 and more.
Last year, RBI launched a pilot plan to advance digital offline payments between September 2020 and June 2021. The project involved transactions of up to 200 rupees ($ 2.66) in areas with no internet and no additional factor authentication. It reportedly involved 241,000 transactions worth Rs1.16 crore.
In a country of 320 million feature phones, it is important that companies accelerate the development of offline payment solutions through these devices along with cards.
A PwC report suggests that customers awareness and education will be key to growth.
Digital payments in India beyond metro cities
The Covid19 pandemic has pushed millions of Indians to contactless digital payments.
In August 2021, providers of UPI, the main driver of QR code payments in India, recorded 3.5 billion e-payments worth 6.4 million rupees, more than twice as many as a year ago, reports show .
Interestingly, payments from offline merchants, for example in grocery stores, grew faster than those from online merchants. In July, PhonePe had a market share of 46% in this segment, followed by Google Pay and Paytm with 34.45% and 11.94% respectively.
In addition to convenience, the drastic change has been driven by retailers who take advantage of the low acquisition, maintenance and infrastructure cost of using QR codes.
Until two years ago, most transactions involved debit cards at point-of-sale (PoS) machines.
“The cost of PoS machines is in the range of Rs5,000 to Rs15,000. The QR code has raised that barrier,” said Sandeep Sonpatki, partner at Deloitte India. UPI has waived the Merchant Discount Rate (MDR), while card payments generally include an MDR of 1% to 2.5% that small business owners are reluctant to pay.
The merchant discount rate is paid for the processing services on debit and credit card transactions.
How will the CBDC work for retail customers?
As with digital payments via QR codes, analysts anticipate that the rollout of RBI’s digital currency for everyday use will take at least five to seven years and will build on government efforts to raise awareness.
However, the mechanism shouldn’t be too difficult to customize.
In the current framework, the means of payment is cash, which is debited in real time from the sender’s bank account and credited to the recipient’s bank account. The payment channels remain the same for CBDC electronic form of the rupee.
There will be an overlap of existing digital payment modes and underlying can be CBDC instead of currency, said Gandhi. “Of course there will be some nuances in distributed ledger technology that regulators and industry need to evolve, but that can be managed as a single change.”
