Author: Karan Vijay
Legal Associate at Talwar Thakore & Associates, Mumbai
I. What is e-RUPI and how would it work?
On 2nd August 2021, e-RUPI was launched as a new digital payment instrument developed by the National Payments Corporation of India [“NPCI”]. It is a form of voucher that can be sent to the mobile phone of beneficiaries as a QR code or SMS string which can be redeemed directly by the beneficiary herself in exchange for services with the service provider.
The idea behind e-RUPI is to connect the sponsors of a service with the beneficiaries and the providers of the service. For example, banks could issue e-RUPI to people who will use it as a valid payment option at hospitals and primary health care centres for getting vaccinated. The banks can refund the hospitals to the tune of collected e-RUPI vouchers, followed with or subject to a government reimbursement to the bank.
Out of the current list of banks, some are issuers; who can issue e-RUPI and some are acquirers, who can redeem e-RUPI for the service provider, while some will act as both. This means that e-RUPI mechanism like Unified Payments Interface [“UPI”] and unlike digital wallets (which will change in the near future) will be interoperable across different private platforms of banks and other financial intermediaries. As of now, the main focus seems to be on health-related welfare service payments such as drugs and diagnostics, and also for fertiliser subsidies. This might be expanded to cover other welfare services in the future.
II. Why do we need e-RUPI?
Issuing a currency alternative such as the Central Bank Digital Currency [“CBDC”] is the prerogative of the Reserve Bank of India [“RBI”] and not of the Government or Banks. e-RUPI is not a CBDC or a digital currency or even a currency. It is, in fact, a Direct Benefits Transfer [“DBT”] platform implemented to ensure the delivery of benefits of different welfare schemes and services. It is essentially a digital voucher which can be exchanged for pre-determined services.
The DBT programme was launched in 2013, wherein all cash benefits were to be directly transferred into the beneficiaries' linked bank account. It was considered to be a major reform towards the effective implementation of welfare schemes and services as it reduced potential leakages. However, such a claim that DBT acted as an effective and efficient plug was, to a great extent, unsubstantiated.
e-RUPI strengthens the DBT as it is person-specific and also purpose-specific. As will be explained subsequently, e-RUPI can plug the leakages in the existing system where the subsidies and other benefits are transferred but are not utilised by the beneficiaries themselves or even utilised for other purposes.
III. Plugging the hole – A lesson from the West
In the vaccination illustration above, if the voucher given to people by the banks was transferable from person to person and also redeemable against other benefits apart from vaccination, it would have defeated the purpose of the government issuing the voucher itself.
A similar issue was noted in the Supplemental Nutrition Assistance Program [“SNAP”] of the United States, also called the Food Stamp program. This food assistance programme, having an yearly budget of more than INR 5 Lakh crores, almost double the 2021 Union Healthcare budget of India, has benefited millions of poor Americans for decades. However, it has always been a hotbed of issues in American politics due to instances of fraud and misuse. Initially, the benefits were disbursed via physical paper stamps which were susceptible to counterfeiting and misappropriation and were difficult to track, and were fungible, and universally redeemable (Rude 2017). For example, a person would sell their USD 20 food stamp to any SNAP authorised retail shop in exchange for food worth USD 10 and cash worth USD 8. The total USD 20 would be deposited in the retailer’s account by the government. Both the retailer and the person would make extra cash by engaging in such trafficking of SNAP Benefits, at the expense of the American taxpayer.
However, in the late 1980-90s, the Electronic Benefits Transfer [“EBT”] card was introduced and became the norm in 2004. These function like any other electronic payment cards requiring a PIN for authorising a transaction and being linked with a government ID. A person swipes a card at a shop and SNAP transfers the due amount in the retailer’s bank account.
This was considered a major overhaul in the system as it was believed that eliminating cash transactions would reduce instances of fraud. However, if we just replace a USD 20 food-stamp with a swipe of an EBT card, fraud can still happen and it does.
e-RUPI took these issues into account and made the benefits non-fungible, also providing an option of tracking its redemption. If ICICI Bank issues an e-RUPI to me for getting vaccinated, neither can I use it for buying food nor can someone else use it for getting vaccinated. The bank can also know if and when I have redeemed the benefit. Thus, it has the potential to plug some of the glaring leakages in the existing system of DBT effectively.
IV. For the underbanked and the unbanked
Before the rise of any of India’s digital payment methods, the Kenyan M-Pesa launched by Safaricom, a Vodafone subsidiary, revolutionised digital payments back in 2006. It initially started as a mobile wallet where the money deposited in a pre-paid phone for recharging mobile services could be transferred to family, friends and even retailers. The main advantage of this service was that the users were able to access its services with simply a mobile network and digital payments services were available even in the rural areas of Kenya and other East African nations.
A person in Kenya, like in India before the advent of digital wallets, had to go to a bank or an authorised m-Pesa agent for deposit or withdrawal of cash. The company had ensured that they have an established network of such agents spread across the country. Usually, they were the small shop owners who would recharge the mobile services and also accepted deposit and withdrawal requests on behalf of M-Pesa.
This ease of access that was integrated in the business model of M-Pesa had resulted in over 70% of Kenya’s population having access to digital payment solutions and banking services, including many of those who lacked access to other modern amenities.
However, M-Pesa was not successful in India and has folded its business operations here. The major issues it faced from 2013 were finding the last mile agents who would cover the rural parts of the country and the minimal technological penetration amongst low-income individuals in both rural and urban areas. Finally, it also did not benefit from demonetisation because its structure involved cash deposits and eventually could not survive the competition with other digital payments services such as PayTM.
This business model serves as the perfect precursor for e-RUPI. It shows that an SMS string or QR code-based DBT/payment solution can be adopted in India as effectively as M-Pesa was in Kenya. When it comes to adopting self-service technologies, M-Pesa was unsuccessful as Vodafone could not invest in awareness programmes to the extent that it was required.
However, e-RUPI comes at a time where the technological penetration, especially in IT and fintech has transcended social classes and geographical limitations. Many factors can be attributed to this aggressive adoption of communication technology like the availability of one of the cheapest mobile data rates in the world, Digital India Campaign, and even Demonetisation and then, obviously due to the onset of COVID-19 pandemic. Today, finding a mobile and a data connection in the remotest corners of the country would not be an uncommon sight. Moreover, the technological literacy required for effectively utilising e-RUPI is far lower than using UPI or any other payments solution. In any event, the government has the onus as well as the means to run awareness campaigns.
Further, using e-RUPI is not capital intensive as it does not require creation of any additional last-mile intermediaries for the transfer of benefits. The same healthcare centres or ration shops can use the SMS strings for transferring medicines and food supplies.
Even the Chinese Digital Yuan [“e-CNY”], a CBDC, which is a legal digital tender in China, can be set up independently of any private platform like Alipay or WeChat Pay making it interoperable across different platforms. e-CNY has also enabled offline transactions to cover a much larger user base including those in the rural parts of the country. These desirable features of a CBDC, such as interoperability, independence from private platforms, and offline transactions have been adopted by e-RUPI already. Thus, it can be said that the structure of e-RUPI has been formulated with careful considerations and learnings from across the globe.
V. Structure and Future Implications for the Private Sector
e-RUPI has been launched in the backdrop of the success of UPI and as evident from its logo on the NPCI website, is a subset of UPI itself. However, e-RUPI is different from UPI, where the latter is a Semi-Closed System Prepaid Payment Instrument [“PPI”] which can be used for the purchase of goods and services from third parties. On the other hand, e-RUPI mechanism will not allow any cash withdrawals or usage for payment or settlement for any third-party services, similar to brand-specific gift cards like that of Amazon Pay, Google Play, or Reliance Digital/Trends. Therefore, it is in the form of a Closed System PPI, which will be issued by the government for facilitating the purchase of goods and services from itself or from its agent(s) or processor(s) such as hospitals and ration shops. The issuance, redemption and acquisition in a Closed System PPI form a closed circle and the same is the case with e-RUPI. This system is not classified as a payment system and does not require prior approval or authorisation from the RBI.
e-RUPI can even be utilised by the corporate sector for their employee welfare and CSR programmes, which will make it an important element of consideration in fintech, corporate and even employment spheres in the future. However, the major implication for entities might lie in the potential utilisation of e-RUPI’s closed system PPI interface for retail-oriented purposes. To elucidate the exact difference between the two, consider that if e-RUPI is a bitcoin, then the closed system PPI will be the Blockchain.
While brand-specific gift cards exist in India, their usage is negligible due to the general lack of awareness and inconvenience of managing them. But the public may be open to such an interface due to the convenience it promises to offer, the seal of approval of the government which is extremely important for the populace nowadays, and the current situation of open-mindedness around IT and fintech.
Widespread adoption by corporate entities and acceptance by the general public is possible in the retail and hospitality sectors. It is evident from the number of corporate giants that had signed up for payments bank licenses that there is a rising interest in the digital payments sector. However, fierce competition and regulatory oversight has resulted in almost half of the licensees closing shop.
e-RUPI and the subsequent adoption of the Closed System PPI can change this situation as there is no threat of competition in a closed circle and no requirement of prior RBI approvals. Apart from levying their own transaction charges that currently go to digital payment companies, they will be able to completely monopolise every aspect of the transaction from the moment an e-RUPI will be issued to their potential customers without any regulatory oversight. Even the NPCI website mentions that the Corporate sector can benefit from the e-RUPI mechanism since it offers “end to end digital transaction and doesn’t require any physical issuance, hence leading to cost reduction.” Non-fungibility also guarantees that the two options available would only be either redemption or waiver. This interface can also enable Indian entities to emulate the strategy and success of Starbucks. Any transaction from a Starbucks’ cards/apps gives users ‘stars’ which can be redeemed for offers and discounts at Starbucks’ various locations. Their regulars do not mind maintaining a balance in their cards/apps as a result of which Starbucks holds close to USD 1.5 billion in deposits, against which concerns have being raised internationally from a banking point of view.
Such a strategy can potentially enable even non-financial companies to have access to funds which can be utilised or leveraged further without worrying about maintaining an adequate Capital to Risk-weighted Assets Ratio, i.e., they can make riskier bets in giving out loans and debt as compared to other Banks and NBFCs.
Although it is at a nascent stage, e-RUPI has been enacted with a clear vision and can strengthen the existing DBT structure, impactfully enhancing public welfare. The prospects for e-RUPI and also of the closed system PPI in India are immense, if promulgated and adopted appropriately, albeit with their own set of complex corporate, regulatory and fintech issues.