By Sanjeev Kumar
Aadhaar-enabled Payment System (AEPS) has revolutionised the financial landscape in rural India, acting as a transformative tool that bridges the gap between traditional banking services and the previously unbanked population. Launched in 2016, AEPS has quickly gained popularity and currently accounts for nearly 40 per cent of the daily Aadhaar authentications, which amount to seven to eight crore. According to another report, AEPS has enabled financial inclusion for those at the bottom of the income pyramid, with 219.3 million last-mile banking transactions facilitated in March via the network of micro ATMs.
AEPS aims to offer essential banking services to underbanked rural citizens, eliminating the need for people to travel long distances to access banking facilities. By leveraging biometric authentication through Aadhaar, people in remote locations can conveniently perform various transactions, including deposits, withdrawals, and balance inquiries, which can be conducted using Point of Sale (PoS) machines equipped with biometric authentication technology.
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Reports suggest 14.19 lakh micro ATMs have been deployed across the country till December 2022 in remote locations which were previously not covered by the traditional banking system. These micro ATMs function as banking touchpoints, allowing individuals to carry out financial transactions without needing a physical bank branch. It has been particularly beneficial in areas where the accessibility of banking services was challenging.
Collaborations with NBFCs, PSUs, and banking partners have further expanded the reach of AePS, making it accessible at the swipe of a button. Through these partnerships, AePS has effectively reached even the country’s most remote corners, providing financial services to individuals previously excluded from the formal banking system.
The use of Aadhaar authentication in AePS has also enhanced the effectiveness of various government schemes. By leveraging Aadhaar as a means of identification, AEPS has helped prevent duplication and identify ghost beneficiaries in schemes such as the Public Distribution System (PDS) and the Mahatma Gandhi National Rural Employment Guarantee Scheme (MNREGA). It ensures government benefits reach the intended recipients, eliminating leakages and improving the efficiency of welfare programs.
The success of AEPS is based on the ability to provide last-mile connectivity through a network of intermediaries (nanoprenuers). These intermediaries act as a bridge between customers and banks and play a vital role in building trust and familiarity among rural communities. They facilitate transactions, offer assistance, and educate individuals about the benefits of digital payment systems. The presence of banking correspondents has significantly reduced apprehensions and increased the adoption of AEPS in rural areas.
AEPS has emerged as a transformative tool in rural India by offering simplified and convenient banking services. It is complementary to the Unified Payments Interface (UPI) and addresses the unique challenges rural communities face. With AEPS, individuals no longer need to rely on physical debit cards or remember multiple passwords or PINs. Instead, they can access essential financial services using their Aadhaar-based biometric authentication. It has empowered millions in rural India, bringing them into the formal financial ecosystem and fostering financial inclusion.
Reducing the reliance on cash
By digitising payment processes, AEPS reduces the reliance on cash. Digital transactions through AEPS are faster, more secure, and leave a clear audit trail, ensuring transparency and accountability. It also reduces the administrative burden on banks, making financial processes more streamlined and efficient.
Individuals can become AEPS agents, operating micro-ATMs and assisting their fellow villagers with banking transactions. It creates income-generating opportunities at the local level and increases financial accessibility for the community. Individuals engaging with the digital financial ecosystem through AEPS gain exposure to formal banking systems, digital transactions, and financial services. It fosters financial literacy, promoting a better understanding of saving, budgeting, and managing personal finances. By providing access to banking services and encouraging digital transactions, AEPS empowers individuals to become more financially aware and make informed financial decisions.
The need for collaboration
AEPS requires the efforts of all stakeholders, including financial institutions, government bodies, technology providers, and community leaders, to drive widespread adoption. By promoting AEPS, stakeholders can accelerate the transition from cash-based transactions to digital payments, fostering a digital economy in rural India and promoting digital empowerment. It is essential for unlocking the transformative potential of AEPS. Furthermore, AEPS offers cost-effectiveness, making stakeholders collaborate and optimise resources and infrastructure to maximise the impact of financial inclusion initiatives.
The frock in the road
Though AEPS has been a success story, it has hit some roadblocks. The recent surge in AEPS system failures, particularly in withdrawals and transaction amounts on corporate BC networks, has sparked widespread complaints on social media. Many believe these issues indicate banks preparing to establish their platforms and gain direct control over access points, which are currently in high demand. However, this could be counterproductive, posing a threat to the success of the digital payments revolution.
The ramifications of increased AEPS failure rates extend beyond mere inconvenience. Rural customers, accustomed to the convenience of transacting at nearby kirana stores, will be adversely affected. They rely on these outlets to obtain cash for farming and other transactions. Simultaneously, the local kirana owners will lose a significant source of income.
To overcome these challenges and ensure the system’s continued success, all stakeholders— including fintechs, BCs, banks, and the government— must collaborate and devise innovative solutions. Establishing a system that benefits everyone, reduces fraud, and retains banks’ participation in the AEPS system is imperative.
Financial inclusion plays a pivotal role in poverty reduction and sustainable development. By granting individuals in rural areas access to essential financial services, they can save, invest, and access credit, thereby improving their livelihoods. Consequently, the expansion of AEPS represents a significant stride towards accomplishing the goal of financial inclusion in India.
Sanjeev Kumar is Co-founder, Executive Director and CEO at Spice Money. Views expressed are the author’s own.