In one of the shopping trips to a mall, I was standing in billing queue and it was taking unusually longer. I couldn’t help but notice that transaction times for those who were paying with cash was way lesser than those paying via UPI. I kept thinking to myself that if we have good internet connection (which we had), why should a money transfer from one device to another take longer? After all, this digitization bandwagon has been sold to us on the pretext of being fast!
As it turns out, it wasn’t just a transaction between two mobile phones- a whole set of parties are involved!
- When you scan the QR code provided by merchant, you let your bank know that you attempt to initiate a transaction.
- In the second step, your bank will transact with the merchant’s bank.
- In the third step, the merchant’s bank will let the merchant know that a transaction has been made.
Involving four different parties (you, the merchant, your bank and the merchant’s bank) is how this UPI transaction was made possible. This is mostly called a balance-led transfer where only a ledger entry (not the real money) moves around from one bank to the other in three steps. Compare this with a digital-wallet-based transfer, which is just one step- from one wallet to another.
With the current state of digital wallets, it has to correspond to real physical money. The banks have to make sure that there is always enough cash available for you to be able to withdraw. Printing, maintenance and other operational aspects of making this cash available has a huge cost implication that can be saved if we can use digital form of physical money. This is the thought behind the launch of Central Bank Digital Currency aka CBDC.
Think of CBDC wallets as your physical wallet in digital form. Very much like the different currency notes you hold in your physical wallet, CBDC wallets will also let you hold your currency notes in digital form. You may ask why is that needed when we already have so many electronic modes of payment available. The reason is that even after so much digitalization in the payment space, there is still a huge dependency on cash. This is because for most people, cash provides a sense of security that no other electronic mode of payment we use today provides.
Having said that, everything is not as rosy as it sounds. Transacting through CBDC will give the governments more power over your money. As an example, if you hold cash today, you can spend it at any time and in any way you want. However, when you would potentially pay through CBDC, the governments will know exactly what you bought and when. Supposedly you bought $100 of petrol and wanna buy more, the CBDC you hold in your wallet can be programmed to be invalid for all fuel stations stopping you from buying more petrol. They can also be set to have an expiration date. So- if you are not able to spend your CBDC by a particular date, all of your money will expire! How about that?
While I had all these thoughts trailing around in my head, it was my turn in the billing queue to pay. At that very moment, I thought no matter which mode of electronic payment I choose, there will be an opportunity for businesses and governments to record trails of my transactions. My life could be an open book but I refuse to have someone take benefit/money out of it. Nevertheless, there is nothing that I can do other than falling into this bottomless pit.