The Aadhaar platform conceived by the UIDAI was brought into place to integrate all segments of the society under one identity system. Being a massive repository of citizen information such as biometric, residential and banking data, the project can be leveraged across numerous sectors to transform the way the country functions. Its biggest disruption is brought about was in the payments industry and many payments solutions sprung up in its wake. While systems such as the BHIM (Bharat Interface for Money) and UPI (Unified Payments Interface) are Smartphone based processes for peer-to-peer transactions, the Aadhaar enabled payment systems are for the rest of the population in the rural areas who aren’t tech savvy. It particularly helps the underprivileged section of the society who isn’t comfortable with using mobile payment methods or bank cards.
The AEPS (Aadhaar Enabled Payment System) is a payment solution supported by the Aadhaar authentication system that was built with the goal of extending financial and banking services to the more unbanked parts of the country. In Jan 2017 the AEPS saw 2.65 million transactions of a value of 316 crores. The system which enables users to carry out transactions via a micro ATM saw 13.7 million payments in March of 2018, and since its launch, there has been a total of 104.2 million APES transactions for a total value of INR 26,286 crores ($3.7 Billion) as of march. Another payment solution supported by the Aadhaar scheme is Aadhaar Pay which is designed as a digital transaction system for merchants. It allows customers to pay for goods or services using their Aadhaar number and fingerprint. The credentials linked to their bank accounts would be used to verify and complete the Aadhar card payments.
Along with these the UPI systems were supposed to have integration of Aadhaar upon the launch of the UPI 2.0. It would have had the ‘Pay to Aadhaar’ functionality which was scrapped after the Supreme Court ruling.
Supreme Court’s ruling on Aadhaar cards
In its five-bench judgment, the Supreme Court of India struck down several propositions considered irrelevant to the Aadhaar card linkage. These propositions had no originally intended benefits or subsidies, especially in the private sector. It includes section 57 of the Aadhaar act which permitted private parties to use the biometric authentication data for identifying users. The highlights of the ruling pertaining to the Fintech industries are as follows:
Impact of the Aadhaar Judgment on the Payments Industry
The Supreme Court decision on Aadhaar card excluded certain provisions in the Aadhaar act such as section 57. It will have an adverse effect on payment banks and Fintech players that includes e-wallets, online brokerage house and loan givers, peer-to-peer lending platforms and others. On the surface it has thrown into to disarray many of the business models that relied on Aadhaar based biometric authentication of users. Since it is prohibited to use Aadhaar to establish the identity of new customers, companies that use Aadhaar based e-KYC (know your customer) will have to change the way they onboard and verify customers.
This would force a major change in the operational costs associated with onboarding new customers. For instance, the e-KYC verification of a customer takes about 30 minutes and costs INR 15 per person, while the physical KYC takes 5-6 days and about INR 100 per person. Also the Fintech industry in India, particularly, digital lending platforms who use Aadhaar to assess the creditworthiness of borrowers will be adversely affected by the Supreme Court restricting Aadhaar data storage to only six months, from five years earlier. “This will lead to peculiar challenges faced by the customers in order to access credit. There will be delays in instant loan approvals. With the physical model, credit facilitation may take more than three days, against the 10-15 minutes for the online model. Also, the cost of accessing credit may go up due to the physical model. This burden will mostly be passed on to the borrowers,” says Manav Jeet, MD and CEO of Rubique Technologies Pvt. Ltd, an online financial products marketplace.
Despite the ruling that private companies cannot insist for Aadhaar to continue their services, Fintech firms are hopeful they can conduct e-KYC authentication with the consent of the customer. Naveen Kukreja, cofounder of Paisabazaar a lending marketplace adds, “What this judgment does is offer the customer the choice. Now, financial services companies will have to start offering other identification documents as options for authentication, but e-KYC as one of the options will continue.”
Vivek Belgavi, fintech partner at PwC consultancy firm expressed a similar insight and said that according to his “preliminary reading of the judgement, I do not see anything prohibiting regulated entities from leveraging the UIDAI (or Aadhaar) database and onboarding customers through e-KYC. For other means of KYC, there would be a jump in operational costs and that could be passed on to customers in the future.”
Some other important decisions under Aadhaar judgment
Although Fintech and payments industry in India are staring at some uncertain times ahead, the ramifications of the verdict is yet to be fully understood.
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