With banks enabling the interoperability of Unified Payments Interface’s (UPI) Quick Response (QR) code with their central bank digital currency (CBDC) or e₹ application, users of retail digital rupee will be able to make transactions by scanning any UPI QR at a merchant outlet. Merchants can also accept digital rupee payments through their existing UPI QR codes.

This integration of UPI and CBDC is part of the Reserve Bank of India’s (RBI) ongoing pilot project on pushing the retail digital rupee (e₹-R).

So, what is interoperability?

Interoperability is the technical compatibility that enables a payment system to be used in conjunction with other payment systems, according to the RBI. Interoperability allows system providers and participants in different systems to undertake, clear and settle payment transactions across systems without participating in multiple systems. Interoperability between payment systems contributes to achieving adoption, co-existence, innovation, and efficiency for end users.

And what is UPI QR code-CBDC interoperability?

Interoperability of UPI with the digital rupee means all UPI QR codes are compatible with CBDC apps. Initially, when the pilot for the retail digital rupee was launched, the e₹-R users had to scan a specific QR code to undertake transactions. However, with the interoperability of the two, payments can be made using a single QR code. The digital rupee issued by the RBI, or the CBDC, is a tokenised digital version of the rupee. The e₹ is held in a digital wallet, which is linked to a customer’s existing savings bank account. UPI is directly linked to a customer’s account.

How will it benefit customers and merchants?

• The interoperability of UPI and CBDC will ensure seamless transactions between a customer and merchant without having the need to switch between multiple digital platforms.
• It will allow a digital rupee user to make payments for their daily needs, such as groceries and medicines, by scanning any UPI QR codes at any merchant outlet.
• Even merchants are not required to keep a separate QR code to accept the digital rupee payments. They can accept CBDC payments on their existing QR code.
• We will take advantage of the UPI network to increase transactions in CBDC. There will be one QR code, and you can scan the QR code using the CBDC app. If the merchant has a CBDC account, the payment will be settled in the CBDC wallet. If a merchant does not have a CBDC account, then there will be an option to make payment using UPI, RBI’s Deputy Governor T Rabi Sankar said in July this year.

QR code

A Quick Response (QR) code consists of black squares arranged in a square grid on a white background, which can be read by an imaging device such as a camera. It contains information about the item to which it is attached, according to the National Payments Corporation of India (NPCI). QR code is an alternate contactless channel of payments. It allows merchants or businesses to accept payments from their customers directly into their bank accounts.

And how will interoperability help in increasing CBDC adoption?

• Currently, UPI is a widely used payment method, and the interoperability between it and the CBDC will propel the adoption of the digital rupee.
• At present, more than 70 mobile apps and over 50 million merchants accept UPI payments. In July, RBI Deputy Governor Sankar said there were 1.3 million customers and 0.3 million merchants using the retail digital rupee. The daily per-day e₹-R transactions in July were around 5,000-10,000.
• SBI said the seamless integration of CBDC with UPI will enhance the acceptance and utilization of digital currencies in everyday transactions. This integration will be a game changer for the digital currency ecosystem, it said.

How many banks have enabled UPI and CBDC interoperability?

A few banks, including State Bank of India, Bank of Baroda, Kotak Mahindra Bank, Yes Bank, Axis Bank, HDFC Bank and IDFC First Bank, have introduced UPI interoperability on their digital rupee application.