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The Future of Digital Payments: Will CBDC Replace UPI?

CBDC Replace UPI

The Unified Payments Interface (UPI) platform has experienced significant growth, with the number of transactions rising by 49% year-on-year (y-o-y) to 13.9 billion in June, according to the latest data from the National Payments Corporation of India (NPCI). Despite a slight dip from May’s 14 billion transactions, attributed to the shorter number of days in June, the platform continues to show robust performance.

In terms of transaction value, June saw a 36% y-o-y increase, reaching Rs 20.1 trillion. This is slightly lower than May’s Rs 20.4 trillion, which had seen a 37% y-o-y rise. NPCI data also revealed that the average daily transaction count in June was 463 million, with an average daily transaction amount of Rs 66,903 crore.

In the evolving landscape of digital finance, Central Bank Digital Currency (CBDC) and Unified Payments Interface (UPI) are at the forefront of transforming how we handle transactions. Both systems have revolutionized digital payments, but could CBDC soon eclipse UPI as the preferred choice? Here’s a closer look at these systems, their functionalities, and the potential shift towards CBDC. Siddharth Mala, Correspondent, ObserveNow interacted with Sandeep Indurkar, CEO, Resilient Payments Private Limited (A BharatPe Group Company) to gain more insights.

Understanding CBDC and UPI

CBDC functions like digital cash and is backed by the government, combining the stability of traditional currency with the convenience of digital transactions. It can be used for online purchases and business transactions, effectively making your country’s money available in a digital format.

UPI connects various banks to facilitate direct money transfers without needing cash. It is user-friendly, and secure, and allows instant transfers from one account to another.

While commenting on the Impact of India’s CBDC on the competitive scenario of digital payments Sandeep stated “CBDC and UPI will complement each other, enhancing the overall digital payment ecosystem. For CBDC to succeed, interoperability with UPI is essential, while ensuring anonymity similar to cash transactions is crucial. Just as we don’t require KYC for holding cash, additional details like PAN should only be asked when transactions exceed certain limits.”

The Potential of CBDC

CBDC, representing digital money issued by the central bank, and UPI, facilitating instant bank transfers, both offer significant benefits. However, the digital payment landscape is evolving. Unlike UPI, which is largely confined to India, CBDC has the potential for global adoption, simplifying cross-border transactions. The central bank’s backing can provide CBDC with greater stability and trust compared to UPI, along with stronger security measures addressing privacy and fraud concerns more effectively.

QR and offline payments are equally pivotal aspects of the Unified Payments Interface (UPI) ecosystem, significantly enhancing the digital payment landscape in India. QR code-based payments allow users to make transactions swiftly by scanning a QR code with their UPI-enabled app, automatically populating payment details for easy confirmation. This method is not only secure, as it avoids sharing sensitive information like bank details, but also cost-effective, eliminating the need for expensive POS terminals. This ease of use and widespread acceptance has made QR code payments popular across various economic sectors, from small street vendors to large retail stores.

Emphasizing Technical and regulatory challenges for offline CBDC transactions, Indurkar said “Offline timeout scenarios must be meticulously managed to prevent double spending, unlike situations where at least one party (either payer or payee) is connected online, where double spending can be easily tracked. Transaction thresholds should be implemented by analyzing the risk of cash hoarding and setting maximum limits for offline and online holdings.”

Offline payments via UPI address the digital divide, enabling financial transactions even in areas with unreliable internet connectivity. Users can leverage USSD codes, token-based systems, or SMS commands to conduct transactions without internet access. This inclusivity ensures that digital payments are accessible to all, promoting financial inclusion and convenience. By streamlining payment processes and supporting small businesses, both QR and offline payment methods contribute to the broader goal of a cashless economy and economic growth, ensuring that digital financial services are within reach of every Indian citizen.

In the near future, CBDC might become the digital counterpart to traditional currency, while UPI continues to facilitate instant bank transfers. With its wider reach and government backing, CBDC has the potential to streamline and dominate the global digital payments landscape. As we embrace a digital era where money is as mobile as we are, transactions will become smoother and faster than ever. The future of finance is arriving at your digital doorstep, and CBDC might just be the key to unlocking it.

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