In 2009, the Aadhaar initiative was introduced under “UIDAI” (Unique Identification Authority of India). Aadhaar is a 12-digit unique identification number which contains various demographic features like name, Father/Mother’s name, Date of Birth, gender, address, and biometric features like photograph, fingerprints and iris (eye) details. The launch of the Aadhaar card was a significant step in India in 2016, when the Indian Government announced that it would now be mandatory for all its citizens to their banking accounts and PAN (Permanent Account Number). Due to this, the need to collect multiple identity proofs was eliminated and documentation process became clear and simple. The banking industry in India reacted positively to this step and took immediate steps towards its implementation.
In September 2018 the Supreme Court of India declared Section 57 of the Aadhaar Act, along with the RBI norms, circular by the DOT and a 2017 amendment to Rule 9 of prevention of Money Laundering Act, as unconstitutional; however, Aadhaar shall remain mandatory for filing of one’s Income Tax returns. This means that several business models that mandated Aadhaar-based KYC procedures like banking, telecom, payment wallets, mutual funds, credit cards etc. can no longer insist on customer’s Aadhaar card information for verification and KYC purposes.
The Supreme Court decision on Aadhar card is likely to have a tremendous influence on banking industry in India. All banks will now have to revert to the earlier practice of physical verification. Banks can no longer insist on customers linking their Aadhaar card to their bank accounts for verification as previously required; however, bank accounts including Kotak 811 which have been opened using Aadhaar verification prior to the judgement of the Supreme Court will not be affected and continue to operate as normal as Aadhaar continues to be one of the six valid documents used for KYC.
Here are top ways the Aadhaar ruling will have an impact on financial institutions
Increase in cost of acquisition
A few years ago, individuals had to physically go and apply for bank accounts. In recent times, banks have used the option of opening online banking accounts using Aadhaar and OTP (one-time password). This increased the growth of getting new customers on board as it was quick, efficient and paperless. With the Supreme Court ruling, banks will not have an increased cost of acquiring new customers. It will increase the cost of conducting business for banks as the cost of on boarding customers, peer to peer lending platforms will also be affected.
A recent report on Quartz indicated that the cost of acquisition may go up by an average of 10%. This means that when a new bank account is opened there will be a significant delay in completing the process of verification, thereby increasing the cost. Customers can also expect delays in loan approvals and instant bank account opening will no longer be “instant”. Banks expect delays in credit facilitation which could take 72 hours as opposed to 10-15 minutes using the online route. It may be noted that as Aadhaar linking is optional, such changes shall primarily effect customers who opt to obtain verification through other means and not Aadhaar.
Customer service will take a hit
Banks will now adopt alternate ways to ensure customer satisfaction when it comes to efficient deployment of loans and other banking processes. Since a physical verification may now become a norm, banks will have to invest in retraining their staff to deal with customer centric issues as the footfalls to branches may increase.
Online Payments will be affected
Payments industry in India and Fintech companies used to rely on online banking platforms to get new customers on board. This was based on a low cost business model which made getting new clients easier on platforms like Paytm, Aadhaar Pay, BHIM etc. This was specially created to promote digital payments in India and reduce using credit or debit cards. With the new ruling, this system of using Aadhaar will become voluntary thereby affecting the cost of conducting businesses online.
Conclusion
The Supreme Court judgement has received a positive response across the country, being on the heels of the recent judgement by the Supreme Court on the fundamental right of privacy. The ratio behind the judgment was to remove the restrictions on the citizens to share their data including biometric data with corporations and other private entities, due to the infringement of their constitutional right to privacy and to avoid the risk of misuse and abuse by these institutions. Banking customers can now be rest assured that their privacy is not infringed due to the unrequired over reach of the big brother Government.
It is pertinent to note that most Indian banks have already started implementation of the changes required to adopt the ruling of the Supreme Court.
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