The Promise of the Digital Rupee and its Impact on Fintechs

Digitization has had far-reaching effects in redefining and shaping global economies. With the world around us becoming more hyper-connected, central banks globally are toying with the idea of launching their very own version of digital currency. India has recently joined the Central Bank Digital Currency (CBDC) bandwagon. In what must have been one of the biggest announcements in the Union Budget speech this year, the Minister of Finance, Nirmala Sitharam proposed the introduction of digital rupee by the Reserve Bank of India (RBI) using blockchain technology.

In a bid to give a boost to the growing digital economy, the Finance Minister proposed the launch of the digital rupee or the e-rupee (e₹) which is India’s version of the Central Bank Digital Currency.

Digital rupee: The current state of affairs

Several countries have rolled out CBDCs of their own. Ten countries including the Bahamas, and Nigeria have implemented the CBDC in their economies and nearly 17 of them are in the pilot stage, gearing up for a launch soon.

On 1^st November 2022, the RBI rolled out the first pilot of the digital rupee for the wholesale segment. Undoubtedly, this was a landmark moment in the history of money. A total of 9 top banks in the country including the State Bank of India, HDFC, ICICI Bank, and HSBC have been roped in to participate in this pilot endeavour. These banks will use the digital rupee to settle inter-bank transactions. On the first day of the launch the nine chosen banks engaged in 48 transactions amounting to Rs. 275 crores.

The retail version of the digital rupee is slated for launch next month in selected locations—a move that many businesses are looking forward to with hopes that it will usher in greater efficiency, democratize financial access, and reduce the cost of cash in the country.

Central banks all over the world have expressed concerns over the rise of cryptocurrencies which run in a decentralized format. The digital rupee, on the other hand, will be regulated by the RBI making it a legal and acceptable form of currency.

The launch of the digital currency is a massive step towards India’s digital transformation. The e-rupee is expected to boost the Fintech sector and enhance the safety of digital payments. Backed by blockchain technology, the digital rupee will make business transactions easier and fortify India’s booming digital payments infrastructure.

Will the digital rupee be a boon for India’s Fintech sector?

The move towards the digital rupee comes at a time when the Fintech sector has witnessed massive disruption. With the onset of the pandemic, there has been a rise in demand for faster and personalised payment experiences that Fintechs have come to offer.

As a result of which, Indian Fintech firms have been successful in raising funds aggressively in the last two years—and their overall valuations have been skyrocketing.

With the usage of cash declining globally, the launch of the digital rupee is going to be monumental for the  Fintech segment as a whole. Along with enabling faster settlements, the digital rupee will open up more opportunities for rising Fintech startups by reducing the dependency on physical cash. It removes the hassles of handling, printing, and managing cash—bringing about greater convenience as well as increasing the resilience and security of the entire payments infrastructure.

The impact of the digital rupee on the Fintechs:

In addition to removing the burdens of cash handling, the digital rupee is expected to bring forth greater efficiencies to the financial services world. Some of the key ways in which the digital rupee will transform the Fintech space are:

• The digital rupee is backed by the RBI curbing the risk of volatility.
• There is also no risk of theft, fraud, or damage to the digital currency, unlike the physical notes which are subject to wear and tear while in circulation.
• It will streamline cross-border payments. By considerably reducing the time and costs involved in making payments across the globe, the use of the digital rupee will ensure that cross-border payments are faster.
• It secures online payments. Since the digital rupee is backed by blockchain technology it is more resilient against cyber breaches and threats.
• Experts are also of the opinion that the digital rupee will improve transparency in the financial services ecosystem

The new frontier in payments

The launch of the digital rupee has been a revolutionary moment as it has forever changed the nature of transactions. Post the pandemic, with a greater reliance on digital payments—the rollout of the e-rupee is expected to find early acceptance and commercialization. The Fintechs have a lot to look forward to as the digital tokens facilitate quicker disbursements and ensure that digital payments and online transfer of funds are more secure. With the digital rupee believed to have a significant impact on customer value propositions, players in the financial services space need to be well-prepared for this new asset class. 

The article has been written by Nirav Choksi, CEO, Co-founder at CredAble