Analysing the prospects of combining payment channels with digital rupees in India

The combination of India's payment gateway with the Digital Rupee, the central bank's digital currency CBDC, has transformative potential, but multiple challenges such as technology, policy and market acceptance need to be overcome. The outlook is analysed below in terms of key dimensions:

1. Policy and regulatory framework

• positive factor

  • RBI's Proactive Advancement: The Reserve Bank of India (RBI) has launched a retail-based digital rupee pilot (e₹-R) and is exploring wholesale application scenarios (e.g., interbank settlement). Policy support lays the foundation for payment channel consolidation.
  • Harmonisation of compliance standards: The digital rupee, as a fiat currency, naturally complies with existing payment regulations (e.g., the Payment Systems Act) and reduces compliance friction.

• risk point

  • Data privacy controversy: RBI may require transparency of transaction data, conflicting with anonymity needs of private payment platforms (e.g. Paytm, PhonePe). Need to balance regulatory transparency with user privacy.

2. Feasibility of technology integration

• chances

  • seamless interoperability: Embedding the digital rupee wallet into the existing UPI (Unified Payment Interface) ecosystem through APIs allows users to switch between UPI/digital rupee payments within the same app.
  • Offline trading capabilities: Digital Rupee's offline functionality can bridge UPI's network-dependent shortcomings and expand rural coverage.

• challenge

  • System upgrade costs: Payment platforms need to modify their back-ends to support CBDC settlement, and small and medium-sized vendors may face financial pressure.

3. Market impact and competitive landscape

• Subversion of traditional models
  A digital rupee with direct central bank liabilities may reduce reliance on bank intermediation and impact the existing NEFT/RTGS system; however, it is more likely to complement rather than replace UPI in the short term.

• Role of the private sector::
  Third-party payment platforms can differentiate themselves through value-added services:
  Offers a combination of digital currency + credit products;
  Use data analytics to optimise merchant loyalty programmes;

4. Economic and social benefits

5.Key success conditions

1. RBI needs to clarify private sector participation in the profit sharing mechanism;
   2. Address the anti-double-spend technical vulnerability of double offline payments;
   3 Avoid low adoption issues similar to eNaira in Nigeria by 2026 (currently only ~6%)

Conclusion.Limited scenario convergence expected in the medium term (within 5 years)(e.g. government subsidy distribution), but full commercialisation depends on constructing a win-win benefit distribution model for all parties involved

6. Cross-border payments and the potential for international cooperation

The combination of the Indian digital rupee with payment gateways could reshape the cross-border transaction ecosystem, especially in the remittances and trade settlement space:

• Lower remittance costs::

  • India is the world's largest recipient of remittances (by 2023)$125 billion), traditional intermediaries (e.g. SWIFT) charge up to 5%-7%.
  • Digital Rupee + BlockchainPoint-to-point transfers can be realised, compressing costs to below 11 TP3T. Pilot could work with major remittance corridors such as UAE and Singapore.

• Attempts to de-dollarise foreign trade settlements::

  • RBI has explored local currency trade settlements with Central Bank Digital Currency (CBDC) partner countries (e.g. Russia, Saudi Arabia). Private payment platforms are available to provide compliance gateway services.

• Risk Warning::
  Harmonisation of national AML/CFT standards is needed to avoid international disputes over regulatory arbitrage.

7. Pathways to deeper financial inclusion

(1) Rural Scene Breakthrough

(2) Women's Economic Empowerment

• status quo: Only 35% Indian women have bank accounts;
• chances: Intra-household digital rupee allocation enhances women's financial autonomy, combines with Aadhaar biometrics to address KYC hurdles.

8.Merchant-side adoption driver analysis

The speed of merchant acceptance will determine the success or failure of integration, with key factors including:

1. Handling fee gaming::

   • UPI currently charges merchants 0.5%-1%, which would accelerate the switchover if the digital rupee settlement rates are lower (and the RBI may subsidise the initial rollout);

2. smart contract automation::

   • eg:Pre-set the contract condition of "automatic payment after the goods are signed for" in supply chain finance;

3. Tax incentives::
   The government may offer relief to GST-taxed businesses that use digital rupees.

9.Early warning of potential conflict points

(Red Alert Zone)

⚠️ Commercial banks resisting risk
Deposit diversion may lead to banks lobbying to delay rollout - need to devise compensatory mechanisms (e.g. allow banks to issue financial products in several currencies).

⚠️ Cash cultural inertia
India's cash/GDP ratio is still high at 12% (vs China's 8%), and small traders are more reliant on notes in the short term - need to roll out "hybrid payment terminals" (both scanning/counting/ NFC).

⚠️ Chain reaction of technical failures
UPI had a single day of downtime affecting 200 million transactions in 2023, and the central bank must ensure that the CBDC system is more redundant than private systems.

10.Proposed road map for phased implementation

11.Implications for Chinese companies

For players like Alipay/WeChat Pay observing the Indian market.

🔹 window period strategy: Take a position through technology export (e.g., blockchain modules for Indian vendors) before RBI opens up the CBDC ecosystem to foreign companies (expected after 2025);
🔹 avoid a minefield :: Avoiding direct storage of user-currency assets in order to prevent being recognised as a "shadow bank".

Final conclusions.India's payment channel + digital rupee convergence will be a benchmark testing ground for global CBDC adoptionHowever, it is necessary to use the "sugar cane model" - first to nibble down the hard-core technology integration and benefit-sharing challenges - in order to squeeze out the market's sweet rewards.