One of our new year’s resolutions was to get to write out a thought leadership article every couple of weeks, based on what we see happening in the tech world and its impact on both Global & Indian economy.
We intend to publish this as a post both on LinkedIn (to get both visibility and comments) as also our website (as a repository). This is quite a commitment as this is going to put us in front of public scrutiny where we may need to justify a stance in the future against a 20-20 “hindsight”. However, we do believe that is the challenge and we are up to it.
The first topic we have chosen is a question that was posed to us in one of our investee review meetings where we were asked to comment on the e-Rupi and its ability (or lack of) to create a dent in the Indian Fintech space. Though that response turned to a bit of discourse, we thought we’d use this as an example to put in some stake into the ground and do some future gazing.
For the uninitiated, RBI just rolled out a pilot program for its version of the digital Rupee (e-Rupi / CBDC for retail). Although RBI has 2 versions – one for retail and one for wholesale, we, in this article are focused on the retail version.
The key advantages of the retail CBDC are
– Zero transaction costs: While the e-Rupi is getting compared to UPI in the context of small value spends, we believe that it is NOT an appropriate comparison. Today, UPI is subsidized by the government (think of the 1-2% transaction costs that were being paid on credit / debit cards) and this is the key reason we are seeing this retail usage. However, this is not sustainable in the long run as commercial banks need to be compensated for this. Also, the float on these small value transactions (money in savings bank account of the retail user that is lying idle) may not be significant enough to recover costs.
– Being ONLINE is not necessary: Across the country (not just rural / remote areas, but also basements in Tier 1 cities etc.), the current model of needing to have an internet / phone connection (initiation + TFA – ie. two factor authentication with SMS PIN) is a pain. With CBDC, the transaction can be completed without any connection and even a feature phone. There can be other models of TFA (eg. Thumbprint / preset approval etc).
The biggest challenge that RBI will have will be in positioning this appropriately and in managing change. We think that the debate on “traceability” / “comparison with UPI” are both non-starters. Instead, the focus should shift back to “convenience” and “zero scam / failure”. Which is what is expected from an e-currency as a replacement of “hard cash”.
Longer term, there will be other applications like loyalty programs, couponing, shared wallets, SIP/SWP products (systematic investment / withdrawal), share-pay settlement etc. that will provide for sustained growth.