Here is Why the Aadhaar Verdict Left Fintech Companies in Ripples
On 26 September, the Supreme Court in a detailed judgement said that Aadhaar scheme is constitutionally valid, however, struck down Section 57 of the Aadhaar Act, which prevents private companies including banks and telecom companies from accessing the data
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What does your Aadhaar mean to you: A 12 digit number or a social access card for your identity? But, for more than 70 per cent of the Indian population, it means access to financial inclusion plan. Entrepreneur examines how the recent SC verdict changes things.
About a few months ago, opening a bank account was one of the easiest tasks. Unlike the traditional methods, where you were required to present your photo along with an address identification physically, Aadhaar based biometric system had really eased out the KYC game for consumers in India. But then came the much-sought-after Aadhaar ruling.
On 26 September, the Supreme Court in a detailed judgement said that Aadhaar scheme is constitutionally valid, however, struck down Section 57 of the Aadhaar Act, which prevents private companies including banks and telecom companies from accessing the data. And since then, the fintech industry that thrived on the e-KYC process is in turmoil.
Manish Khera, founder and CEO of Happy, feels the verdict has left a lot of room for interpretation by the different bodies including the Aadhaar-issuing body Unique Identification Authority of India (UIDAI), and thereby the regulated entities as well. It has also caused an erosion of confidence in UIDAI's solutions, even those that apparently do not violate the judgement. "Aadhaar had significantly reduced the cost of KYC and that of digital contracts while also decreasing the overall turnaround time. These advantages have also eroded with the judgement.
This has increased the overall cost of credit for digital lending companies," shares Khera. Dinesh Rohira, founder and CEO of 5nance.com, concurs, saying he feels the verdict to scarp e-KYC authentication via Aadhaar, the growth of companies would be moderate while upsurging the operational cost of fintech companies on account of the need for human resources would further dent profit margin.
"The cost of e-KYC verification per person costs around Rs 15 against Rs 100 for physical KYC, and therefore, adopting back to physical verification is excepted to increase overall cost," he says, adding that, "Apart from taking additional days for physical verification, there will be further needed for proper infrastructure setup coupled with superior value chain for the smooth business process."
About the scrapping of Section 57 of the Aadhaar Act that allowed data-sharing with private companies, Akash Karmakar from Veritas Legal says fintech companies are in limbo on whether or not, they can conduct e-KYC using Aadhaar.
"The Supreme Court struck down Section 57 is being read as private companies cannot now use Aadhaar at all," he says. The apex court simply empowered the customers to choose the method of e-KYC and toned down the usage of Aadhaar while making it one of the options to verify yourself.
The Way Forward
All is done and dusted now. Either the fintech industry can continue to cry on SC's verdict or look at alternative methods to fuel its growth and prove that their business model is sustainable. Parag Mathur, general counsel and head of compliance, BankBazaar.com feels the penny drop feature clubbed with Aadhaar (i.e. optional at the discretion of the customer) can together suffice the KYC requirements, which is the way forward.
The above two factors (OTP-based e-KYC + Penny Drop) authentication can make the verification processes less expensive for the financial institution and less complicated for the potential customer. "This solution, to a large extent, also plugs identity theft that can be affected by stealing another person's cell phone or sim card while conducting the e-KYC via OTP authentication. This is because the person stealing the cell phone will not be privy to banking transaction id and password (two-factor authentication) to complete Penny Drop or the other surrogate checks/questions, employment, tax verifications that follows to validate the identity," Mathur says.
Furthermore, Mathur also promotes the digital-locker facility clubbed with the above option. He points out, "In the Digilocker, the process of document retrieval, the customer is the facilitator and no additional tech platform or API is required for the requestor (Banks/FI's) in the retrieval process.