Aadhaar in The Financial World 06032014

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Bringing a revolution to the

financial world

Internship Report by:


Mohit Kansal
MBA 2014 | Sloan School of Management
Massachusetts Institute of Technology
[email protected]

Table of Contents
What is Aadhaar? ................................................................................................................... 3
Aadhaars role in the financial sector ........................................................................................ 3
Step-by-step process to financial prosperity ......................................................................... 3
Give unique identity to residents ....................................................................................... 4
Include residents in the financial sector by easing bank account opening process .......... 4
Kick start the eco-system by funding bank accounts through Government schemes ....... 5
Enable banks (and other institutions) to provide cheap and secure token-less
authentication methods to customers ............................................................................... 8
Enable banks (and other institutions) to provide cross-sector services to customers via
Business Correspondents (BCs) ........................................................................................ 10
Benefits of Aadhaar in the financial sector .......................................................................... 11
Easy access to bank accounts ........................................................................................... 11
Mobile Person to Person (P2P) payments ........................................................................ 12
Fraud prevention .............................................................................................................. 13
Extend credit to new demographics................................................................................. 14
Summary .................................................................................................................................. 14

What is Aadhaar?
Aadhaar number is a unique 12-digit identification number issued to residents of India and
is linked to the residents biometric data (photograph, fingerprints and iris scans) and limited
demographic information.
Aadhaar is a first of its kind formal unique identity and address proof for residents of India.
This formal identity and address proof is a gateway for marginalized sections of the society to
access various services that were never available to them before. Providing access to financial
services is one of the most important implications of the Aadhaar eco-system.

Aadhaars role in the financial sector


The Aadhaar eco-system has the ability to completely revolutionize the financial sector of
India. Aadhaar platform provides a way for the Government of India to directly reach each
resident of the country by using the residents Aadhaar number only. It also opens avenues
for residents to access various services that were never accessible to them before. The
Aadhaar eco-system can provide financial prosperity to each stakeholder in the system
including residents, government and service providers.

Step-by-step process to financial prosperity

1. Give unique identity to residents


2. Include residents in the financial sector by
easing the process of opening bank accounts
3. Kickstart the ecosystem by funding bank
accounts through Government schemes
4. Enable banks (and other institutions) to
provide cheap and secure token-less
authentication methods to customers
5. Enable banks (and other institutions) to
provide cross-sector services to customers
via Business Correspondents (BCs)
Step-by-step process to financial prosperity
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The Aadhaar platform ensures that each of the above steps is straightforward, convenient
and makes economic sense for all stakeholders in the system. A description of each of these
steps is given below:
Give unique identity to residents
Aadhaar provides a unique non duplicable 12 digit identification number to all residents of
India. At the time of registration, biometrics (fingerprints and iris scan) of residents are
captured along with other details to ensure no duplication and to use this biometric data for
secure authentication in the future. The process of enrolment is funded by the government
and residents can enrol for free. The Government pays its authorised agencies (Registrars) a
certain fee per enrolment thus making this process economically viable for the Registrars
who in turn hire enrolment agencies to do the field level enrolment. Enrolment centres are
widespread all over India making it convenient for residents to enrol at a centre near them.
Overall, the process has been designed to give relevant incentives to various stakeholders
involved to ensure smooth, efficient and convenient enrolment.
Include residents in the financial sector by easing the process of opening bank
accounts
The next step is to include residents in the financial sector by making it easy for them to open
bank accounts using Aadhaar number. Before issuance of Aadhaar, it was a hassle for the
marginalized section of the society to open a bank account.
As per the Prevention of Money Laundering Act, 2002 1 and its amendments before
September 2010, the only acceptable valid identity and address documents for institutions
were Passport, Drivers License, Voter ID card and PAN Card. None of these documents are
available to all residents of India. Hence, without Aadhaar, it is impossible for a large number
of residents to open bank accounts and become a part of the financial sector.
Even if a resident has one of the above identities, he/she would have to make multiple trips
to a branch to open an account. Traditionally, new customers bring physical documents for
identity and address proofs that need to verified, copied, transported, scanned, and stored
on expensive electronic database servers. This process takes a long time, is prone to errors
due to manual intervention, causes loss of daily wages for applicants from marginalized
sections of the society, and is also expensive for the service provider. The entire hassle of this
process is a deterrent for marginalized sections of the society to open accounts. The expenses
associated with opening low value accounts make it an economically unviable activity for
service providers.
Using Aadhaar for KYC
The Government of India issued a notification2 on December 16, 2010 adding Aadhaar as an
officially acceptable identity and address proof document. Thus, Aadhaar is now a formal
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2

Prevention of Money Laundering Act, 2002


Notification from Ministry of Finance, December 16, 2010

identity and address proof for all residents of India and is a valid KYC document to open an
account with institutions in the financial sector.
Today, a person can walk into a branch of a bank or another financial institution with his/her
Aadhaar card, and open an account (bank account, prepaid wallet, insurance account,
pension account or securities market account) immediately. There is no hassle of creating
photocopies of various identification and address proof documents or of making multiple trips
to a branch. This makes the KYC process quick and easy for the customer and saves the
service provider from manually verifying multiple documents thus reducing the cost of
customer acquisition.
Using Aadhaar for e-KYC
Aadhaar also provides a service called e-KYC that is an electronic form of KYC. This service
makes KYC process paperless, instantaneous, secure, economical and non-repudiable. The
Ministry of Finance, Government of India, has already recognised e-KYC as a valid form of KYC
service for all financial services under the Prevention of Money Laundering (PML) Rules3.
e-KYC service will extend the power and convenience of Aadhaar to paperless transactions.
Using this service, residents can authorise the UIDAI to release their KYC data to a service
provider. This authorisation can either be done in person (through biometric authentication),
or it can be done online (through One-Time-Password or OTP authentication). Upon
successful authentication and consent of the resident, the UIDAI will provide the residents
name, address, date of birth, gender, photograph, mobile number (if available), and email
address (if available) to the service provider electronically.
The residents data can be verified by the relevant branch or Business Correspondent (BC)
electronically in a matter of seconds and relevant information can also be auto-uploaded to
the service providers database with appropriate consent from the resident.
This is a first of its kind service of making the KYC process paperless, instantaneous and secure
that significantly reduces the cost of customer acquisition and makes low value or no frills
accounts economically viable for service providers.
Kick start the ecosystem by funding bank accounts through Government schemes
Currently the Government of India spends $70bn annually on welfare expenditures. It is
estimated that approximately 30% of these payments are lost due to leakages, inefficiencies
and corruption4. Aadhaar provides a way to plug such leakages by making welfare payments
secure, transparent and by enabling direct transfer to beneficiary bank accounts by cutting
middlemen. This is possible because Aadhaar number is not only a residents identity address
but it can also become a residents financial address.

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4

Notification from the Reserve Bank of India, September 2, 2013


CLSA Report, Welfare Plumbing, April 2013

Aadhaar as a Financial Address


Once a resident links his/her Aadhaar number to a bank account, the Aadhaar number
becomes a financial address of that resident. In order to identify a person in the financial
system for any purpose (e.g. transfer of Government benefits, person to person payments,
credit-card companies trying to track transactions), one needs to know that persons Aadhaar
number only.

Aadhaar as a financial address has the following benefits various stakeholders in its ecosystem:
1. Government: Seeding Aadhaar numbers in a Government benefit scheme's database
helps remove ghost, duplicate, and fake identities, making it possible for
Government's development funds to be transferred efficiently. The Government can
make payments securely by just using Aadhaar numbers as identifiers and focus on its
primary objective of service delivery only.
2. Private Corporations (e.g. Banks): Private companies such as telecom operators,
credit card companies and others will be able to uniquely identify their customers
through Aadhaar numbers. This will prevent opening of fake accounts and will also
allow easy tracing of transactions to individual customers thus preventing money
laundering and terrorist activities. Cross-linking transactions across service providers
will allow companies to offer services to their customers based on a deeper
understanding of customer behaviour.
3. Customers: A customers Aadhaar-enabled bank account can be used for receiving
multiple welfare payments as opposed to one-scheme, one-bank approach followed
by a number of State Governments. Aadhaar authentication can ensure that the funds

are available for use to intended beneficiaries by reducing money leakage through
middlemen.
4. Policy Makers: A policy maker has the objectives of ensuring that entities involved in
transactions are easily identified, the transactions are seamless, transparent and
easily traceable. Aadhaar as a financial address achieves all of the above objectives.
Linking transactions to beneficiarys Aadhaar numbers ensures proper identification
and record maintenance. Since Aadhaar number is a unique, it has the ability to
seamlessly link various entities involved in money transactions using one identity only.
Use case of funding bank accounts
By using Aadhaar as a financial address, an institution can fund multiple bank accounts easily
by creating a list of beneficiary Aadhaar numbers and payment amounts and sending this
information to the institutions bank. These institutions include government, businesses and
corporations of any kind. This process is especially useful for banks as it reduces redundant
data in transfer instructions, allows easy traceability of transactions, reduces fraud and
decreases overall operational costs.
Consider the use case of government funding bank accounts of beneficiaries as a part of
government welfare programs. The use of Aadhaar streamlines the entire process by
seamless transfer of government benefits to beneficiary bank accounts.

The steps involved are as follows:


1. Government department generates a list of beneficiary identification numbers as per
the relevant government scheme, respective Aadhaar numbers and the amount of
benefit to be transferred.
2. Government department sends this list in the form of a payment instruction to its
bank.
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3. The bank sends this instruction to Aadhaar Payment Bridge (APB).


4. APB matches each Aadhaar number on the list to a bank code, sends relevant credit
instruction to the respective beneficiary bank and a debit instruction to the
Government departments bank.
5. APB sends a status update with successes and failure to Government departments
bank
6. Government departments bank sends these updates to the department and takes
corrective action (if any).
7. Government department receives confirmation from its bank.
This process provides the following benefits to the Government or to any institution (e.g.
bank) using Aadhaar as a financial address to transfer funds to beneficiaries5:
1. Single window platform with adequate security, access controls, and a standard
platform for Government payments resulting in the saving of substantial effort, time,
and cost involved in a decentralized environment.
2. A standard file based, centralized and bulk upload based method will help to improve
spread and reach of Government payments. All intermediary layers are removed from
the system making it simple, fast and cost effective.
3. Reduce the time of credit of entitlement from Government to accredited bank to the
beneficiarys account to one day.
4. The concerned Government Department will get status report for the payments
initiated by them at the end of day, including returns, if any. The returned transactions
will get captured through appropriate error codes.
5. The concerned Government Department can obtain comprehensive MIS reports and
percentage of declines with reasons thereof from their accredited banks.
This process also provides multiple benefits to the beneficiaries5:
1. Beneficiaries receive the funds on time and in full without any intermediation.
2. Beneficiaries receive intimation from their bank when funds are credited to their
account.
3. Beneficiaries can access their funds through any regular banking channel, or utilize the
funds electronically immediately upon receipt.
Enable banks (and other institutions) to provide cheap and secure token-less
authentication methods to customers
Traditionally authentication has been composed of two parts: What you have and What
you know. What you have refers to a token that you carry (e.g. debit card) and What you
know refers to some information that you remember (e.g. PIN code). To perform
transactions, you present or use what you have and you input some information or what

Report of the Task Force on an Aadhaar-Enabled Unified Payment Infrastructure

you know to verify your identity. Aadhaar brings an additional secure aspect to
authentication Who you are through a persons biometrics (fingerprints and iris scans).
Aadhaar enables its holders to prove their identity digitally and online, without the need of a
debit card or a similar token. Customers often lose tokens (such as Debit cards, PINs, etc.) and
it is inefficient and expensive for institutions to re-issue such tokens. The Who you are
aspect of authentication (biometrics) is always with a customer and solves the problem of
using expensive tokens.
Aadhaar makes the authentication process seamless, quick, secure and token-less. There is
no need for a service provider to send a debit card or PIN code to its customers; a process
that is error prone and expensive. A customer can just walk into any BC branch with his/her
Aadhaar number and prove his/her ID using the Aadhaar number and biometrics. On
successful authentication, this person can perform transactions such as balance enquiry, cash
deposit/withdrawal and money transfers in a hassle free manner. This type of token-less
authentication method is especially useful for marginalized sections of the society since they
are prone to losing tokens such as debit cards and also to forgetting PIN codes.
UIDAI ensures that the authentication is secure and easy. It provides multiple methods of
authentication that may be used for delivery of any service. A service provider can choose
either single-factor or multi-factor authentication method. The Aadhaar number alone is not
a factor for authentication. Aadhaar number along with demographic attributes such as
name/address, OTP, or single/multiple biometrics (fingerprint, iris etc.) may be used to
provide single factor authentication or these attributes may be used in combination to
provide multi-factor authentication.

Enable banks (and other institutions) to provide cross-sector services to


customers via Business Correspondents (BCs)
As per a report of the National Commission for Enterprises6 in the Unorganized Sector, 86%
of the total workers in India (456 million) work in the unorganized sector or the informal
economy. A large part of legal informal economy can be moved to the formal economy if the
involved residents are able to open and operate accounts in the financial sector. As described
earlier, Aadhaar platform provides an easy way of opening accounts for any resident with an
Aadhaar number. This will enable residents in the informal economy to start saving money
with banks and perform various transactions via Business Correspondents (BCs).
BCs provide an additional channel to provide banking and other services to the marginalized
section of the society that does not have easy access to traditional brick and mortar branches
of service providers. BCs typically appoint sub-agents for carrying out transactions.
Transaction costs at agents are lower than the cost of branches and ATMs and most agents
are profitable at significantly lower transaction volumes. As an additional channel, evidence
shows that agents can have a positive impact on the bottom line of banks by providing
additional value and convenience to existing customers. As a growth channel, banks can
expect favourable unit economics to enter new geographies and reach unbanked customers
as agents can facilitate rapid deployment of a high-volume, low-margin payments-led banking
business7.

The Challenge of Employment in India An Informal Economy Perspective (National Commission for
Enterprises in the Unorganized Sector)
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Report of the Task Force on an Aadhaar-Enabled Unified Payment Infrastructure

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BCs will have revenue streams from providing multiple services. They will be able to provide
services across multiple sectors such as banking, insurance, telecom, pensions etc. with
appropriate authentication.
1. Banking: BCs via microATMs can support the following transactions for the banking
sector: deposit, withdrawal, funds transfer and balance enquiry. Such transactions will
be possible even if the customer uses a microATM of a bank different from his/her
own bank that holds the account.
2. Insurance: BCs can provide services for the insurance sector such as opening a new
insurance policy, paying insurance premiums, making changes to existing policy
among many others.
3. Telecom: BCs can provide services for the telecom sector such as selling a new SIM
card, making a bill payment, mobile recharge among many others.
4. Pension: BCs can provide services for the pension industry such as getting a new
pension (micro or otherwise) account, getting pension payments, making changes to
existing schemes etc.
The cost of providing above services is low due to Aadhaars cheap, secure and token-less
authentication system. New customers will be able to perform transactions that they could
not perform before the advent of Aadhaar. BCs will become a one-stop solution for most
services needed by marginalized sections of the society. Once accounts are opened, the
number of transactions done at BC centres will grow exponentially. Such a one-stop shop will
also allow cross selling of services to customers. BCs will charge fees on a per-transaction
basis for providing such services. This is different from the traditional float and savings
interest model followed by banks for high value accounts and this will make the business
model of BCs financially profitable.

Benefits of Aadhaar in the financial sector


Easy access to bank accounts
Aadhaar provides a formal identity and address proof to all residents of India and is a valid
KYC document to open an account in the financial sector. Today, a person can walk into a
branch of a bank with his/her Aadhaar card, and open a bank account immediately. Aadhaar
as a KYC document makes the whole account opening process quick and easy for the customer.
It also enables the service provider to surpass manual verification of documents thus
significantly reducing the cost of customer acquisition.
Aadhaar also provides a service called e-KYC that is an electronic form of KYC. This service
makes KYC process paperless, instantaneous, secure, economical and non-repudiable. e-KYC
service will extend the power and convenience of Aadhaar to paperless transactions. This is a
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first of its kind service that significantly reduces the cost of customer acquisition and makes
low value or no frills accounts economically viable for service providers.
Mobile Person to Person (P2P) payments
In November 2010, National Payments Corporation of India (NPCI) launched a service called
Immediate Payment Service (IMPS). This service facilitates customers of banks to use mobile
instruments as a channel for interbank fund transfers in a secure manner. At the time this was
a revolutionary service that enabled bank customers to use mobile instruments as a channel
for accessing their banks accounts and remit funds instantly 24x7.
Before any remittance transactions are done, the remitter would have to register for mobile
banking with his/her bank and get MMID & MPIN from the respective bank. The beneficiary
would have to link a mobile number with his/her bank account and get MMID from the
respective bank. Once this is done, to initiate a transaction the remitter would only need the
mobile number and MMID of the beneficiary apart from his/her own information (MPIN).
The benefits of mobile based IMPS are as follows:
1.
2.
3.
4.
5.

Cheap transfer service for banks


Instant fund transfers available 24x7
No sharing of bank account details
Immediate SMS confirmations to both remitter and beneficiary
Safe and secure

Aadhaar will be an integral part of IMPS by becoming the sole address of the beneficiary.
Instead of sending a message with the beneficiary MMID and phone number, the remitter
will need the beneficiarys Aadhaar number only. The process flow is given below:

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The steps involved are as follows:


1. A person initiates payment on his/her mobile phone by sending an SMS. The SMS
contains the Aadhaar number of the beneficiary, amount to be transferred and a
unique PIN (MPIN) known to the remitter only.
2. The SMS goes to the remitters bank, which looks up the bank account numbers linked
to the remitters phone number and verifies the PIN associated with it.
3. If the PIN number is incorrect, an error message is sent back to the remitter and the
beneficiary does not get any notification.
4. If the PIN number is correct, remitters bank routes the payment through Aadhaar
Payment Bridge (APB) to beneficiarys bank.
5. APB sends a status update with successes and failure to remitters bank.
6. The remitters bank sends an SMS back to the remitter.
7. If the entire transaction is successful, the beneficiary bank sends a confirmation
message to the recipient in a pre-agreed method of communication.
Fraud prevention
Typically frauds in the financial sector occur due to various reasons - people owning multiple
ghost accounts, lack of proper identification documents attached to such accounts,
untraceable transactions, and stealing of credit/debit card data. Once accounts are linked to
unique Aadhaar numbers and electronically verified, there will be no ghost accounts as each
account will be linked to a real person (via an Aadhaar number). Each transaction will be
associated with a unique Aadhaar number and transaction flows through multiple entities will
be easily identified at each level using the Aadhaar number. Thus Aadhaar number will
become a universal identification number for tracking transactions independent of the
number of entities involved in a transaction.
Aadhaar can also prevent fraud from theft of credit and debit card details. Once an Aadhaar
number is linked to each debit/credit card, each payment can be verified electronically using
Aadhaars authentication system using biometrics or OTP. RBI has issued a mandate that all
debit/credit card acquiring infrastructure should include functionality to handle Aadhaar
based authentication. Thus Aadhaar has become a second factor of authentication for such
card transactions. If the card user is present at the payment location, he/she can authorize
the transaction by verifying his/her biometrics using a device attached to the payment system.
If the card user is not present at the payment location (e.g. online payments), he/she will
receive a PIN (OTP) on his/her Aadhaar registered mobile number that will have to be entered
online to complete the payment. These measures will add an extra layer of security to the
existing system and prevent unauthorized use of credit/debit cards.
Aadhaar will make the entire financial sector more secure and significantly reduce spending
on fraud prevention measures by service providers in the financial sector.

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Extend credit to new demographics


Aadhaar provides an exceptional ability to banks to extend credit to a new demographic of
people. For a large section (financially marginalized section) of the Indian society, reliable
credit history is non-existent. This is because this section of the society was not a part of the
formal financial system due to lack of proper identification documents. Aadhaar solves this
problem by providing every resident with an identity that allows easy access to the financial
sector.
For this newly formalized section of the society, all transactions in the financial sector will be
linked to Aadhaar and can be easily documented. There will also be reliable data on receipt
of Government benefits for each beneficiary. Beneficiaries will withdraw money, make
payments, and execute transactions through Business Correspondents (BCs) and such
transactions will be documented. This will enable creation of risk profiles for such customers.
Service providers will not only be able to offer their services to new customers but they will
also be able to offer better services to existing customers based on their risk profiles. In some
cases service providers will not provide certain services to high risk customers who have bad
credit and thus reduce overall default risk for themselves.

Summary
Aadhaar is creating a revolution in the financial world. By end of 2014, over 600 million Indian
residents will have an Aadhaar number. This means that one out of every two Indians will
have access to the formal financial sector. Not only will this be a blessing for marginalized
sections of the society, but it will also open doors for service providers to increase rate of
penetration efficiently, offer new services and thus create new attractive revenue streams for
their businesses.

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