India’s CBDC may reduce need for multiple players like card networks, payment gateways

India’s central bank digital currency (CBDC) could end up reducing the importance of intermediaries such as card networks, payments gateways and even people involved in reconciling payments, opine experts in the banking and financial technology.

"While the Reserve Bank of India (RBI) is yet release a technical framework or whitepaper, the CBDC could facilitate transactions directly through banks with systems like unified payments interface (UPI) in place,” said Prasanna Lohar, vice president-digital, innovation, and architecture at DCB Bank.

Pointing out that the digital model of payment we use today through UPI involves several intermediaries such as software providers and maintenance contractors, Lohar explained that many of these stakeholders will be cut off from the ecosystem that will allow banks to save costs. It could also make it simpler for transacting users, possibly reducing server downtimes etc.

One reason why intermediaries may be cut out is that banks and payments networks today have their own ledger systems to record transactions. If the CBDC is eventually implemented using blockchain, multiple systems will be replaced by a single ledger to be shared across ecosystem participants, thereby eliminating the need for multiple stakeholders.

That, however, does not mean that intermediaries will not play a role in other financial systems like measuring a person’s creditworthiness. This is where the bank and intermediary players such as payment gateways and card networks will still have a role, experts said. Stakeholders like MasterCard, Visa, etc., will still need to keep track of a host of other functions, such as risk management, they pointed out.

TR Ramachandran, group country manager, India and South Asia for Visa, said the company is “eager to work” with the RBI to “help identify the most compelling CBDC use cases”. “Visa is helping ecosystems in various countries lay the foundation for an open digital currency ecosystem by developing standards for security, interoperability, scalability, privacy, offline capability, as well as for enabling NFTs (non-fungible tokens). We are keen to bring this expertise to the fore in our engagement with the RBI as well as market participants in times to come,” he added.

According to Sankarson Banerjee, chief information officer of RBL Bank, the digital coin by itself does not offer any benefits except that it is “natively digital”, but solutions can be built atop it. The major advantage, according to him, is that a centralized body like the National Payments Corporation of India (NPCI) may not be needed. “Without centralized control, the ecosystem participants can get together and innovate more openly,” he said.

According to Harshil Mathur, co-founder of payments gateway unicorn RazorPay, the UPI system of payment has several hassles when it comes to reconciliations with banks. “Our goal is to help merchants accept money. Today this acceptance has to be built through different banks, network providers, card issuers and UPI issuers. But in the future, we can build acceptance through the CBDC ecosystem,” he said.

He added that if merchants want to accept the digital rupee, Razorpay will develop new application programming interfaces (APIs) that allow them to do so. APIs are software interfaces that allow different programs to interact with each other. Since the CBDC is essentially a computer program, an API can help connect it to different use cases through APIs, instead of having to jump through the traditional hoops.

Lohar noted that there are 1.2 billion mobile phone connections in India right now, but only 582 million bank accounts — a disconnect that something like a CBDC could help bridge. According to data from the NPCI, 4.56 billion UPI transactions happened in India in December 2021.