Imagine driving steadily on a hilly road and suddenly having to brake hard as a landslide blocks the path ahead, leaving the journey incomplete and the destination elusive. This gives a sense of the state India’s financial technology or fintech industry found itself in after the Supreme Court’s Aadhaar judgement.
The apex court’s September 26 ruling barred private companies from accessing the biometric database. It hit the banking and broader financial services sector hard since Aadhaar had provided them with remote access to rural markets and urban poor segments at a nominal cost. Since then, technology companies have been seeking viable alternatives. A new method has been suggested by the Unique Identification Authority of India (UIDAI), which administers Aadhaar and manages the offline citizen registry. As per the process, any entity that wishes to access Aadhaar numbers online will have to download either the new QR codes or XML format from the UIDAI website. This would keep citizens’ biometric data safe and protect the privacy of the 12-digit unique identification numbers.
However, the fintech industry has not been enthused by this option. “The Aadhaar XML journey has many steps including obtaining an OTP (one-time password), selecting a range of permissions and downloading the XML file before actually using it as an ID. Such a journey is extremely complicated,” said Ashok Hariharan, chief executive, IDfy, a Mumbai-based tech startup that provides authentication services. “Presented with a choice, most users would prefer to use other ID cards rather than Aadhaar at this point.”
Another issue, according to the industry, is internet bandwidth in remote locations which might make any online process across multiple hops cumbersome. Moreover, in many cases, mobile numbers do not match those in the Aadhaar database.
“The XML file and the new QR code need to be downloaded, which will be a challenge for the last mile, especially since it will need OTP-based authentication for the user which will fail in case of the customer using a different mobile service,” said Ashish Ahuja, head of products at Fino Payments Bank.
CUSTOMER ON BOARDING
The biggest challenge for such entities is to onboard customers remotely. Aadhaar allowed consumers to avoid lengthy paperwork and get services through their smartphones or computers even from faraway places. “The biggest problem for us was customers dropping off in the middle of the registration process – Aadhaar had largely solved that for us,” said a senior executive of a Bengaluru-based fintech firm, which offers investment solutions, speaking on condition of anonymity. “Consumers could fill up forms in a few seconds, digitally sign the documents through Aadhaar and authenticate themselves through biometrics – all this at a fraction of the real cost.”
Among the companies that benefited from this were digital lending firms such as Capital Float, Lendingkart, Early Salary and even investment startups like Zerodha that were trying to reach out to consumers digitally.
“If a person has to physically collect documents, it pushes up cost. Also, chances of errors in filling up these documents are many,” said Zerodha CEO Nithin Kamath. “Imagine, if one signature is missed, then the agent has to travel again to get that done.” Even banks were onboarding customers digitally, be it Kotak’s 811 scheme or State Bank of India’s proposition to the new generation customers through YONO. “We are trying to take processes digital as much as possible, even making our branches paperless,” said Deepak Sharma, chief digital officer at Kotak Mahindra Bank. “Now, with the limitation of Aadhaar seeding only for DBT (direct bnefit transfer) customers, we have to go back to the drawing board to build seamless customer experience.”
Besides fintech firms and traditional banks, another segment that is feeling the pinch is payment banks. These entities were mandated to take digital payments to the masses. Fino Payments Bank, for instance, relied heavily on Aadhaar to serve its customers, who are mostly migrant workers or rural poor. Such entities may now have to incur five times the customer onboarding cost, especially with physical collection of documents.
“The seamlessness of Aadhaar helped us ramp up our account opening process. Further, for our segment of customers Aadhaar was ubiquitous. They hardly have other documents to furnish,” said Ahuja of Fino Payments Bank.
PROBLEM OF RECURRING PAYMENTS
While consumer payments went the digital way, driven mainly by mobile wallets and Unified Payments Interface (UPI), recurring payments still required manual intervention. These could include paying equated monthly instalments (EMI) and systematic investment plans (SIP) for mutual funds. This issue was resolved by the National Payments Corporation of India (NPCI) through the electronic mandate system based on the NACH (National Automated Clearing House) platform. Consumers could again avoid lengthy paperwork and issue an e-mandate to allow automatic debit or credit from their accounts by using the biometric database. NPCI said that it would halt all eNACH mandates last month because of the court order and requested all banks to move to internet banking and debit card based mandates.
“eNach, which was a primary mode to debit a customer’s account for LazyPay loans, has been stopped. This has led to complete chaos on operations side,” said Jitendra Gupta, managing director at PayU India, which runs the buy now, pay later product named LazyPay.
Gupta said the requirement of a signature from the customer, which needs to be manually verified by banks, has affected the turnaround time as well as cost efficiency. “The whole process takes 10-15 days while the earlier process got completed in two seconds. Further, cost of collecting NACH has increased multifold, having a serious impact on user experience,” he said.
A senior banker said if the customer is being originated online, then the assumption is that he or she is comfortable with net banking or debit card as a payment instrument. Once banks go live with alternative modes of eNACH, the problem would be solved. “But, yes, there will be paperwork now, and that is what makes the processes extremely cumbersome,” he said.
UNCERTAINTY IN BUSINESS
Such issues have had an adverse impact on the business environment and the confidence of entrepreneurs to launch innovative businesses. Companies were built on Aadhaar, which helped bring the financially excluded into the fold through Jan Dhan accounts, connected through mobile phones and identified through the unique identification numbers. The apex court judgement abruptly changed all that.
“A lot of money has been invested by companies in installing dongles at retail outlets to read customer biometrics. Now, all that will be rendered useless,” said Anand Kumar Bajaj, managing director at PayNearby, which claims to facilitate more than 28% of all Aadhaar-enabled payments for banks.
Payment companies were mandated by the Reserve Bank of India to complete full KYC (know-your-customer) process for their customers. When the wallet companies raised their voice regarding the prohibitive cost of doing KYC, they were told to invest in eKYC modes which were cheaper.
“Now we do not have eKYC and the deadline to convert semi KYC wallets into full KYC ones is just a couple of months away. We have no idea when the alternate methods will be made effective,” said a senior executive of a payments company, requesting not to be identified.
February 28 is the deadline for conversion of wallets into full KYC ones to prevent them from becoming defunct.
Many early-stage startups also sprouted in the business of authenticating customers. Entities such as DigiO, IDfy and Khosla Labs were acting as intermediaries for financial services providers Zerodha, PayU India and others. “When the Aadhaar route stopped, our revenues fell more than 30%. This made us to look for alternative mechanisms to keep our business models running,” said Ashok Hariharan of IDfy. “We had even got a sub-AUA (authentication user agency) licence, which is now useless. That was a loss for us as well.” However, Hariharan said that business had to go on and as a tech company IDfy innovated to other modes of authenticating customers through videos and machine learning capabilities.
“We are looking at credible alternative mechanisms and offline Aadhaar is looking like the next best solution. As an alternative to eNACH, we are working with NPCI to develop other methods such as mandate creation via netbanking or debit card-based mandate,” said Sharma of Kotak Mahindra Bank.
Kamath from Zerodha also said that the company had switched to video KYC and DigiLocker, and was planning to shift to XML-based KYC and video for onboarding customers. The company might see a higher drop-off rate but it has to live with that, he said.
Another major problem for companies is training their front-end employees. In the past few years, with processes having gone digital, agents and employees had learnt to switch to tablets and smartphones for using eKYC. Now they have to get back to either paper or other modes such as XML and video.
“Training employees in modes of eKYC took time. Now we have to retrain them in other modes – literacy in the last-mile is always a challenge,” said Ahuja of Fino Payments Bank, which relies on bank agents to reach out to far-flung rural areas.
Another trend in the making for many startups is a shift from online only to omnichannel offerings. “Merchant acquisition is back in business,” said Vivek Belgavi, fintech leader at PwC India.
Though banks, which are mostly experimenting with tech products, can still go back and change the path, it might be more challenging for early-stage entities which may not get investor support in many cases.
The industry is also seeing the entry of large tech players such as Google, WhatsApp and Chinese entities which have a lot of capital to deploy. This makes life even more difficult for home-grown tech startups. Besides competition from global players, with the changing regulatory landscape these companies are now forced to fight battles on both fronts. As a founder of a digital lending startup said, one can either sit back and rue what is lost or pick up the pebbles and clear the road and move ahead. Since the former is not an option, companies are actively scouting for alternative business models.
“JAM (Jan Dhan-Aadhaar-Mobile) was just the first intervention. There is need for many more such interventions in the fintech space,” said Belgavi of PwC. “All the forces need to come in, be it policy, innovation or technology, for financial inclusion problems to be solved.”