AADHAAR: The Right Tool To Help Bank The Unbanked - Rajesh Bansal, Assistant Director General, UIDAI

India is embarking on a project to provide every Indian resident a 12-digit biometric identification number, formerly called the Unique Identity Number (UID) and now called the ‘Aadhaar’ number, tied to three pieces of biometric data (fingerprints, iris scans, and a facial picture) and limited demographic information. Currently, many of India’s poorest citizens do not have ID cards, bank accounts, or even addresses that they can use to obtain social services. Aadhaar is intended to allow individual identification anytime, anywhere in the country through online identity verification from a central database. As per the FATF Guidance Note on Anti-Money Laundering and Terrorist Financing Measures and Financial Inclusion of February 2013, if successfully implemented, it would be the first biometrically verified unique ID implemented on a national scale and would provide the “identity infrastructure” for financial inclusion, as well as for strengthening AML/CFT implementation; delivery of social services; subsidies and other programs; national security; and anti-corruption efforts.” 

Issued by the Unique Identification Authority of India (UIDAI), Aadhaar is a platform that can enable India to move from the first wave of financial inclusion to what can be termed as FI 2.0. Here are ten reasons why I think Aadhaar is the right tool towards helping bank the unbanked.

1) Valid KYC For Everyone 

Various studies have highlighted that one of the key reasons for financial exclusion is availability of KYC documents, especially with the marginalized sections of the population. This problem has been more acute in India as the country has never had a national ID system. Hence, various other documents like driving license, passport, Voter ID card and PAN card have been used as KYC documents. Being a national ID, Aadhaar can thus remove this major bottleneck for accessing the formal financial sector. As of today, UIDAI has issued Aadhaar numbers to more than 39 crore people and the authority is targeting issuance of 60 crore Aadhaar numbers by March 2014. This number would be much higher than the unique bank account holders in the country by March 2014. Given Aadhaar is a valid KYC document as notified by the RBI, as of date 39 crore Indian residents can walk into a banking outlet with their Aadhaar card and open a bank account.

I have personally seen that the hassle of getting a photograph and a photocopy of valid ID document (if available) to open a bank account is a herculean task in rural areas. To add to this, the apathy of banks towards marginalized sections of the population combined with lack of resources available to this section of the population forces people to visit bank branches at least 2-3 times to open a bank account. UIDAI has therefore launched a ‘e-KYC’ service, the first of its kind globally, wherein a person can just walk into a banking outlet, provide his/her Aadhaar number and biometrics with an instruction to UIDAI to share the KYC data with the bank. Post such electronic verification, UIDAI will transfer the encrypted and digitally signed KYC data of the resident including the photograph instantly to the bank through a secure channel. This would enable seamless opening of bank accounts, thus reducing costs for the banking system associated with employee man hours and physical storage of documents.

2) Online Biometric Authentication Reduces Costs 

The first wave of FI under which more than 14 crore accounts were opened was largely a model where the technology service providers (TSPs) appointed by banks went to the field and captured biometrics of individuals as the factor of authentication while opening bank accounts. The service provider was then mandated to issue smart cards at the backend. However, this model did not yield desired results due to three reasons:

In a large number of cases, smart cards were never issued due to operational inefficiencies of TSPs and hence the customer had no avenue to transact. Further, a large number of such accounts were not serviceable at the branches of the banks as the accounts were held in the servers of the TSPs.
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The time lag between opening of accounts and delivery of smart card to the resident varies from one-six months. As a result, customers lose interest and their accounts lie dormant with no transactions, as substantiated by various surveys and studies.

High costs of smart cards issuance are a financial deterrent for banks. 

Aadhaar’s ability to offer online bio-metric authentication services provides a unique opportunity to the banking sector to address all the three problems mentioned above. Using Aadhar’s biometric authentication, accounts can be activated on the same day and banks need not spend money on issuance of smart cards. 

3) Unbundling Of Current FI Model

The smart card-based FI model led to huge dependencies for banks as the roles of TSPs and the BC business were tightly linked. This meant that banks had little flexibility in appointing agents at the front end and if the TSP goes bankrupt the entire FI business of the bank would also come to a halt. The coming of UIDAI has enabled unbundling of these roles as TSPs need to provide a way to integrate banks’ core banking system to the micro- ATM devices through middle- ware. Banks only need to appoint BC agents and handle cash management issues. Some of the banks are already exploring options of appointing reliable individuals/SHGs/retired teachers/soldiers, etc. as BC agents.

4) Multiple Products And Services 

In the offline model of FI, smart cards needed to be re-configured every time a new product had to be added. In the FI 2.0 world, with Aadhaar authentication being offered as a public good, any new product can be added very easily. The BC agents can easily offer micro-insurance, remittance, micro-SIPs, micro-pensions, utility payments, etc. with ease without any need to re-configure anything at the customer end.

5) Standardised Micro-ATMs 

UIDAI has worked with IBA and banks to define standards for handheld devices (micro-ATMs) used by BCs. This standardisation ensures that banking transactions are done in a standard, secure way rather than in a non-standard way using a multitude of non-standard devices. 

6) Interoperable Platform 

Before the Aadhaar platform was built, the BC model was not only offline but also purely intra-bank. Any interoperable BC model using biometrics requires a central repository of biometrics data. As the UIDAI system is a central repository of biometrics, banks can easily deploy interoperable BCs. This would not only empower the resident as he/she would have a choice of BC agent but it would also increase the viability of BC business as account holders of any bank would be able to transact at any BC agent.
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7) Reliable Credit Histories And Micro-Credit Risk Models 

In the current system, banks are averse to lending to the marginalized sections of the population due to a number of reasons, including worries about willful default. As Aadhaar is a unique 12-digit number, the credit histories built using Aadhaar will be reliable for banks to assess the credit history of individuals. This would also enable banks to monitor the customer’s financial behaviour over time and build smart micro-credit risk models using Aadhaar number as the unique identifier. Further, when the loanee is aware that non-repayment of loan can lead to bad credit scores, he/she would be coerced to repay on time as has been seen in Malawi where the repayment rates for loans went up after biometrics were captured by banks. Further, as more and more land registrations/land records are linked to Aadhaar, it would be easier for the banking system to extend credit to the marginalized sections of the society.

8) Comprehensive Customer View 

Currently banks use various methods, including matching of name, date of birth, PAN card, etc. to detect multiple accounts of a customer. Gradual linking of Aadhaar to accounts will enable banks to have a comprehensive 360-degree view of customers. This would make it easier for banks to cross- sell suitable products to customers. 

9) Aadhaar As A Financial Address 

Similar to an e-mail address which is unique across the globe, the Aadhaar number is unique across the country. This property of Aadhaar enables it to be used effectively as a financial address. This means that any entity, whether government or individual, can send money to an Aadhaar number.

The Government of India has initiated the direct benefits transfer (DBT) scheme using Aadhaar as the payment address. DBT has been launched in 121 districts initially and it is expected to be extended across the country. On similar lines, the government has also launched the LPG subsidy scheme where the subsidy amount is transferred to a bank account using the Aadhaar number. This scheme benefits the government as it helps in cleaning up databases and provides complete transparency and digital audit trail. The DBT scheme also helps the banks as the hitherto inactive/dormant accounts have gradually started receiving government payments. Also, as there would be only one account linked to one Aadhaar number, consolidation of bank accounts across schemes would take place gradually. All of this would improve the viability of the FI business of banks.

10) Low Token Management Costs 

In the banking world, the generally used factors of authentication are Magstripe+PIN, smartcard+biometrics, User ID+password and Magstripe+signature. The use of these factors of authentication is a challenge in case of illiterate segments of the population, which constitutes a large section of government scheme beneficiaries. Also, the token management costs for banks in sending/re-sending PINs and passwords do not make business sense. Aadhaar’s biometric authentication provides every individual the ability to use his/her finger as a factor of authentication, thus reducing token management costs to nothing for banks.

In summary, Aadhaar provides a unique opportunity to India to enable banking for all its residents through a secure, reliable and cost-efficient identity and authentication system. Aadhaar enables creation of a business model for the banking industry where reliable credit histories for a billion users are available to banks, where users can authenticate their identity anytime, anywhere and where such tokenless authentication is possible at an extremely low cost to banks. Aadhaar is not the future, it has already arrived!