In recent years, India has emerged as a global leader in terms of innovation in the banking and financial services industry. The massive success of United Payments Interface (UPI) is giving sleepless nights to international payment giants like Visa and MasterCard. To add another feather to its cap, India has become one of the first few countries to announce pilot testing of its Central Bank Backed Digital Currency (CBDC), called as the ‘E-Rupee’.
What is E-Rupee?
While Rupee is the currency of Indian economy, E-Rupee is a digital tokenised version of it. Just like the physical notes and coins of Rupee, E-Rupee is also issued and backed by the Reserve Bank of India. The E-Rupee has digital banknotes and coins in digital format, which are also uniquely identifiable, just like the physical denominations. While you may have a wallet to keep your rupee notes in, you will be keeping your e-rupees in a digital wallet, which will be a mobile application.
Like physical cash, e-rupee can be used as a ‘store of value’: users can store their wealth in digital rupees. It is also intended to be a legal tender for buying and selling goods and services in market, on par with cash.
It can be tricky seeing how the e-rupee is different from the most popular mode of payment in India right now, the UPI. However, both of them are fundamentally different.
- E-rupee is a form of currency, UPI is a payment interface
Simply having a UPI app on your mobile is not enough to buy a product. You should first have money in your account to buy something using the UPI technology. What I mean, is that UPI is simply the technology for sending and receiving money, like NEFT and RTGS. So if you think currency is like the people that travel from one place to another, then UPI is the vehicle that helps them travel efficiently. Whereas, E-Rupee is a money/currency in digital form, which will flow freely from one person to another when you buy and sell goods and make payments with E-rupees. The two of them are completely different from each other, even though they are used for a common purpose.
- UPI has transaction limits, E-rupee will have none
Different banks have different limits with regards to transactions through the UPI interface. But generally, the maximum amount of money that can be transferred using UPI is restricted to Rs 2 lakh per day, per person. If you wish to transfer larger amounts, you will have to either visit the bank branch or use other facilities of online fund transfer like NEFT and RTGS. E-rupee on the other hand, is a currency and not a payment mechanism. Therefore, it is expected that RBI will not put any restrictions on the amount of e-rupees that can be exchanged by a person in a day. However, just like how large cash withdrawals must be reported for tax purposes, RBI has similar regulations for e-rupee. For example, giving details of PAN for transactions of eRs. 50,000/- or more will be mandatory. Since E-rupee is currently in pilot testing phase, there are limits in place for transactions in e-rupees.
- UPI transfers money from one bank account to another, e-rupee does not need bank account to transfer money
UPI technology requires that the sender and the receiver of funds both have their bank accounts linked to the UPI system. Under UPI, money is always deducted from and deposited to a bank account. Whereas in case of a transaction involving E-rupee, this will not be a requirement. User’s mobile phone will serve as a digital wallet which can receive, store, and pay e-rupees to any other user with a digital wallet. Thus, even someone without a bank account will be able receive and pay in e-rupees as far as they have the necessary app installed. These e-rupees can then be deposited to/withdrawn from a bank account whenever user wants to do so. Banks will also serve as distributors of e-rupees in a similar fashion how they distribute normal cash printed by RBI.
- Anonymity of sender and receiver
Due to the compulsion of paying from and depositing in a bank account, identity of the payer and receiver in a UPI transaction can be traceable for a long time after the transaction has been done. This is a matter of concern for user privacy. However, when someone pays cash, it is much harder to trace their identity at a later point. E-rupee will work on similar lines: since there is no requirement of a bank account, people can make transactions without having to disclose their personal details like name and bank account number. Simply having a digital wallet in your phone will be enough to receive and pay e-rupees.
These pointers are sufficient to clarify the difference between UPI and e-rupee. However, some questions remain regarding advantages and challenges of E-rupee.
Is E-rupee based on the block chain technology? Contrary to popular idea, E-rupee is not based on the block chain technology – at least not yet. But it is definitely one step closer to a block chain based digital currency. We might see new updates in coming years which integrate the blockchain technology in e-rupees.
The government is advocating that e-rupee can be very helpful in plugging the leaks in direct benefit transfers. Use of mobiles is more popular than use of bank accounts. Money can be transferred remotely in the hands of people who may not hold bank accounts but have a phone. This can help plug the leakages in direct benefit transfers of government subsidies. Financial and technological literacy to enable ease of use for target population can be a challenge, though.
Every payment service has a cost to be paid. Using debit and credit cards for payments involves paying commissions and other fixed charges. UPI is presently free for the user, but running and maintaining the technical infrastructure of UPI costs a few thousand crores to the government and banks, since charging commissions on UPI transactions is strictly limited by law. This has been practical and acceptable to government and banks so far, since the gains from digital payments to the economy as a whole significantly outweigh the cost of UPI infrastructure. Similarly, E-rupee too, will have its own costs. Are these costs justifiable for the advantages it offers? And, who will pay these costs – receivers, payers, or government? These are questions that will have to be answered as more and more people start using e-rupee.
While using a phone as a digital wallet has its advantages, this might mean that if a user loses his phone, the e-rupees held in his phone will be lost as well. In such a scenario, UPI offers an advantage since the money is always held safely in a bank account, and can be safeguarded by intimating the bank about loss of the phone. There is no confirmation from RBI yet, regarding whether e-rupee can be used offline, without internet connectivity. Hence, it is possible that people may prefer UPI and compromise on privacy, rather than use e-rupees and risk losing the money held in digital wallet.
Increased anonymity of e-rupee might also end up recreating the problem of black money in the form of digital currency. It is to be seen how RBI will control this aspect.
In conclusion:
Although e-rupee and UPI are fundamentally different, they both aim to serve the same goal: making transactions cashless, easier, and low-cost. E-rupee is still in pilot stage; many new features may be yet to come, and it is still too early to say whether any one of them will overwhelm the other. However, there is no doubt that UPI will be a strong challenger to adoption of e-rupee, if the former’s costs for the user remain the same as they are now.
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