We’ve come to pass where a lot is needed to further digital financial inclusion
The Lok Sabha has recently approved the Aadhaar and Other Laws (Amendment) Bill, 2018—for the amendment of the Aadhaar (Targeted Delivery of Financial and Other Subsidies, Benefits and Services) Act, 2016; the Indian Telegraph Act, 1885; and the Prevention of Money Laundering Act, 2002—to align it with the Supreme Court’s verdict on Aadhaar and its use.
These amendments have wide-reaching implications. The big takeaway is the amendment to Section 4 of the Aadhaar Act, which now permits voluntary sharing of Aadhaar by individuals for the purpose of verifying his details by way of authentication or offline verification. This will have a powerful and positive impact on the objective of financial inclusion for hundreds of millions of Indians.
Last year, before the Supreme Court examined Section 57 of the Aadhaar Act based on proportionality, Aadhaar was playing an important role in digital financial inclusion. Over 1 billion Indians today have a smartphone or an Aadhaar number, or both. The combined power of the two helped financial inclusion by lowering the costs of delivery of finance. For millions, this was a boon. They’d otherwise struggle to authenticate themselves to open savings and borrowal accounts—often, the gateways to formal finance. Aadhaar OTP-based eKYC drastically reduced the costs of customer on-boarding and these savings were passed on to customers. Instead of having face-to-face meetings with customers, collecting photocopies, and physical signatures, banks could authenticate customers to open accounts remotely, without one being present, paperless and instantly, and all that in a compliant manner.
As smartphone penetration rises, India must leverage its powerful tech infrastructure to reduce the need for brick-and-mortar banking in every locality. This would truly democratise finance. Now, following the Supreme Court’s verdict, the government’s step to amend the Aadhaar Act in a manner that will allow Aadhaar to be used voluntarily by the people will certainly boost digital financial inclusion. This is a welcome step. So, what does this amendment entail for the customer—the common man?
The customer can choose to authenticate himself through Aadhaar voluntarily. Authentication through Aadhaar is now optional, and banks requesting for your Aadhaar must also inform you of alternative forms of identification through other officially valid documents. Mandatory Aadhaar authentication for any service is now only possible through law enacted by Parliament. Lastly, your Aadhaar data collected by any entity shall not be used or disclosed for any other purpose, other than the purposes informed to you in writing.
We have come to pass where more is needed to further the objective of digital financial inclusion. Currently, the amendments allow only banks to perform online Aadhaar eKYC authentication.
Therefore, non-banking entities such as insurance companies, mutual funds, registered investment advisers, NBFCs and regulated fintechs are left out of their ambit. We, in fintech, have seen the power of Aadhaar. Paperless, instant eKYC via Aadhaar OTP helps us complete in minutes what might take several days and dozens of photocopied pieces of paper in the offline world. The customer is authenticated instantly and gets his savings account or loan instantly. Ultimately, this is what the consumer wants. Today, financial institutions are benchmarking their performances not just against peers, but also against the Ubers and Amazons—businesses that allow internet-connected youth to instantly access, compare and purchase anything they need instantly, without cumbersome paperwork and having to wait in a queue to meet salespersons.
Fintech is a hotbed for financial innovations. It has a role to play in bringing more Indians into the fold of regulated finance. Being a fast-growing sector, it’s essential that fintech also gets law-backed access for Aadhaar authentication. Therefore, regulated fintech must request the government to consider their case as one of the Reporting Entities under the Prevention of Money Laundering Act that meet the requirements of security and privacy as defined in the new amendments. This, coupled with the Data Protection Bill, can enable a revolution wherein financial products are delivered to an additional 200 million Indians.