UPI-PayNow Link Sets The Stage For Future Adoption Of Central Bank Digital Currencies

Eventually, UPI is a bank-driven system that still uses the traditional banking architecture and systems. Unlike in India where UPI is subsidised by the government and other participants, in the case of global payments, there are still underlying costs that need to be paid for such real-time or fast payments that are embedded in the payment architecture. So while the pace of payments may improve with such real-time links, there will be associated costs when cross-border payments have to be executed.  

Cross-border payments have always been expensive since there is an element of risk in money transfers happening between entities that have different systems and different legs of compliance as per their jurisdictions. There is the additional element of time taken for verification to prevent fraudulent transactions, so security costs tend to be embedded in the fees. 

This has led to many existing cross-border payment specialists such as banks, wire transfer services and even new age digital payment platforms, charging a fairly high cost for ensuring safe transfers across country borders. Despite global regulatory push, the existing players have shown little effort to bring down cross-border payments costs to enable cheaper transactions, and reduce the incentive for those who try to bypass the formal systems for payments to avoid paying these costs and taxes.  

This is where RBI’s CBDC or e-rupee can play its part, especially if the corresponding country also has its own version of a fiat digital currency.  

Imagine a money transfer that is effectively taking place between someone in India and a person in Singapore (which has conducted pilots for its own retail CBDC). In a normal circumstance, this would have happened via banking systems and now is even possible via UPI, albeit with a cost involved.  

Imagine if both countries have a CBDC framework that effectively reduces or even negates the security checks and compliance costs for a customer since the underlying ledger system is controlled by the respective central banks of both countries.  

This is not something in the realm of theory, as RBI has literally stated this interoperability of as an objective post the launch of the digital rupee.  

“Among the various benefits of CBDC, perhaps the most important is its potential to make cross-border payments faster and cheaper,” RBI Deputy Governor T Rabi Sankar said in a speech on Dec 27, 2022. “Here again, a necessary precondition is that other countries develop their own CBDCs and there is a global understanding on the need to make CBDCs interoperable (basically by linking the various CBDC systems) and develop standards for effective interfacing.”  

And we don’t need to look too far to see an example of the RBI doing exactly this to expand a payments system that was largely limited to a few players, and ironically the example is the ideation and launch of UPI.  

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