The Aadhar-enabled payment system (AePS) is facing multiple challenges such as authentication, lack of infrastructure and security risks, resulting in stalling of its progress, say experts.
As a result, while transactions on the Unified Payments Interface platform have seen a steady rise, there have been seven instances in the past one year where AePS transactions witnessed a Y-o-Y decline. That is, the number of transactions have come down from 120 million in June 2022 to 95 million in June 2023. Similarly, the value of transactions are also down from Rs 32,403 crore to Rs 26,498 crore during the same time period.
Notwithstanding the key role it played for migrants during the Covid, AePS has been plagued by a high transaction failure rate. A recent study showed that around 34% of AePS transactions fail on an average. The study noted that biometric mismatch, bank system failures, internet connectivity, and lack of sufficient balance are key reasons for these failures.
“There are a lot of structural challenges that have to be addressed for AePS to become successful. Authentication is a significant challenge,” says Ranadurjay Talukdar, partner and payments sector leader, EY India. “There is also a technical challenge around time-outs where systems are not able to connect and network is down.”
Launched in 2010, the AePS enables Aadhar cardholders to make cash transactions at micro ATMs or point of sale machines using a unique identification number. The service links the Aadhar number to a customer’s bank account and specifically targets the under-banked segment.
The National Payments Corporation of India (NPCI) has set the maximum amount for a single AePS transaction at Rs 10,000. While the Reserve Bank of India does not impose any restriction, some banks have imposed a daily limit of Rs 50,000 on the total number of transactions.
Through the AePS, citizens can avail of services like cash deposit, cash withdrawal and fund transfer through a business correspondent or bank agent. Currently, 35 banks are offering the service, the NPCI website showed.
AePS is significant because in enables individuals to participate in the formal economy and promotes financial inclusion, particularly in rural areas where traditional banking infrastructure may be limited, say experts. It is particularly preferred by the government to provide subsidies in the form of the Pradhan Mantri Jan Dhan Yojana.
Apart from transaction failures, AePS faces implementation-related challenges as well. “The successful implementation of the Aadhaar-based payment system requires robust technological infrastructure. However, in many remote areas, these infrastructure elements may be lacking or unreliable, hindering the effective adoption and usage of the system,” says Sanjeev Kumar, co-founder and chief executive officer, Spice Money.
Kumar added that the exclusive reliance on Aadhaar as the primary identification for financial transactions may also lead to transaction failures as people may be unable to carry out transactions if technical glitches occur.
The Aadhaar-based system heavily relies on biometric authentication, which can be problematic for certain segments of the population, particularly those who are illiterate, elderly, or physically challenged.
Additionally, unjust deductions of tax at source from business correspondent agents and the GST on AePS fees burden the income of agents and economically-challenged rural populations, say experts.
“AePS took off well during the pandemic. But after that, people are using ATMs, PoS terminals and UPI a lot. Maybe that is one of the key reasons for AePS decline wherein use cases are being replaced with other payment products,” says Mihir Gandhi, partner – payments transformation, PwC India.
While spokespersons from the NPCI were unavailable for comment, experts note that innovative solutions must be designed to address challenges related to AePS authentication. A robust legal and regulatory framework to safeguard against misuse, data breaches, and protect individual rights is also the key.
“We should see a significant scale-up once authentication-related challenges are solved. I think offline authentication services can address some of these challenges. For example, UPI Lite can be used in conjunction with AePS,” Talukdar said.