Impact of Supreme Court’s Aadhaar judgement on BFSI sector

Aadhaar Supreme Court Judgement

The lengthy Aadhaar PIL hearing in the Supreme Court culminated on 26th Sept 2018 with a landmark judgement. The quick summary of the judgement is as follows:

1. The constitutional validity of Aadhaar was affirmed.
2. The judges did not feel that Aadhaar Act violated the right to privacy.
3. The judgement struck down Section 57 that allowed the use of Aadhaar by the private sector.  

“This part of the provision which enables body corporate and individuals also to seek authentication, that too on the basis of a contract between the individual and such body corporate or person, would impinge upon the right to privacy of such individuals. This part of the section, thus, is declared unconstitutional. “

Supreme Court Majority Order

Consequently the challenges faced by the BFSI Sector

The Banking and Financial Services (BFSI) Sector has had to face considerable challenges as a result of the Aadhaar judgement. The BFSI sector consists of Banks, NBFC (non-banking financial companies), Small Finance Banks, Payment Banks, MFIs, PPI companies among others.

The KYC (know your customer) requirements of the BFSI sector was largely being met by using Aadhaar KYC. Due to the restriction on the use of Aadhaar by private sector a large number of BFSI entities were directly affected. It was a double whammy, since the requirement for a rigorous KYC was enforced even for PPI wallet accounts but the use of Aadhaar KYC was discontinued – with the exception of Banks (both PSU and private) which serviced DBT (direct benefit transfer) customers.

Increase in KYC Effort, Cost and Time: Each KYC includes 3 verification steps, to verify the Document, Identity and Address. If these are carried out manually with in-person verification it would take considerable effort and time.  This in turn,

• Increased the time taken for acquisition from a few seconds  with Aadhaar KYC to upto 3-7 days by manual methods. Since everything is offline and organisations would have to rely on customer sharing physical docs which then are verified via in personal visit, this slows down the onboarding process.
• Lead to re-instating of infrastructure for in-person KYC needs, including vendors for KYC onboarding which was made redundant and unnecessary during Aadhaar eKYC era.
• Due to the above the result was an Increase in acquisition cost of a customer from Rs 3 to about Rs 300.

BFSI Use Cases for KYC

• Account Opening – Most banks, NBFCs, MFIs and PPIs need to undertake KYC to open a bank or wallet account, as per the RBI.
• Lending – All BFSI lending entities including FinTechs need to KYC the customer before processing and disbursing a loan. Especially in the case of new FinTechs that are focused on unsecured loans with a fast digital straight-through experience, a paper-based verification system completely ruins the customer experience as well as the velocity of growing the loan book.
• Insurance – IRDAI the insurance regulator also mandates the need for KYC of a insurance customer. Several insurance companies are looking at giving the control of allowing the identity verification entirely to end customer. Wherein the customer would have to use the app or visit their website to upload their offline eAadhaar or Aadhaar XML onto the designated sight to be verified using alternatives like Video ID KYC by Aadhaar Bridge.
• Securities Trading – SEBI the securities market regulator mandates KYC of customers who want to trade in securities.

BFSI Use Cases for eNACH

The NACH mandate is an authorisation that consumers provide to institutions debit funds periodically. This product has been used for cost-effective, paperless collections of recurring payments for instance.

• Lending – Several lenders adopted eSign in lieu of wet-signature to sign up for a loan and authorize the lender to make online collections using eNACH. Since eNACH depended on eSign and eSign depended on Aadhaar KYC, the Aadhaar SC judgement impacted the workings of  eNACH and several lending companies had to revert to old paper- pen – cancelled check methodologies and resort to manual non-digital methods of collecting loan repayments.
• Mutual Funds – Making investments in Systematic Investment Plans(SIPs) in a completely digital manner became possible through eNACH. Signing up for eNACH meant, investment amount would automatically get debited from the customers account. This saved a lot of paper cost for the Mutual Fund Houses. In the absence of eNACH, fund houses have to shift back to paper-based NACH forms.

Alternate KYC Solutions

Given the challenges to the BFSI sector and due to the restrictions on the use of Aadhaar, there are some alternate solutions that are emerging that would alleviate these challenges.

1. Offline Aadhaar KYC

UIDAI has come out in support with Offline Aadhaar KYC which allows the customer to share their KYC data with a requesting entity in an offline mode. This happens without accessing data from the UIDAI’s CIDR (Central ID repository). There are three different methods of Offline Aadhaar KYC, they are:

• QR Code: Scan Aadhaar QR Code to get demographic details – Name, Address, DOB, Gender without pinging UIDAI database
• Paperless XML: Download paperless XML including Name, Address, DOB, Gender, Phone, Email and Aadhaar Number (masked) along with UIDAI signatures
• mAadhaar: Download the mAadhaar application on your phone, generate Aadhaar QR Code and share with a company.

Contents of XML and QR Code

The following table lists the data items you get back from the QR Code method and Paperless XML method of offline Aadhaar KYC:

UIDAI Signatures
Paperless – XML: Yes
QR Code: Only in case of new Aadhaar QR template

Aadhaar Number
Paperless – XML: No
QR Code: Only in new Aadhaar QR template (Masked)

Photograph
Paperless – XML: Yes
QR Code: Only in new eAadhaar template

Demographic Details
Paperless – XML: Name, Address, Gender, DOB
QR Code: Name, Address, Gender, DOB

Phone Number
Paperless – XML: Hashed
QR Code: Only in new eAadhaar template (Masked)

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While Offline Aadhaar allows private bodies to continue using Aadhaar, the consumer flow around it is not as seamless as in the eKYC era. While the QR code flow is easier, Paperless XML is more secure as it has the additional validation through UIDAI signatures in all cases.

2. Video ID KYC

Another alternative that works with offline Aadhaar and other government ID documents currently in the market and seems to be a worthy replacement for API based Aadhaar KYC is “Video ID KYC”. This technology uses face matching machine learning algorithms to match a customer’s face with that of the photo in the government document.

Features of Video ID KYC include:

• Identification supported by digitally capturing multiple OVDs – Aadhaar, PAN, Passport, Voter ID, Drivers License.
• Authentication supported by OTP, Face Biometric – Selfie, Face Biometric – Pace, and Verified Agent – where in person verification happens on a front end portal  
• Additionally, validate ID data with Government/Database check APIs
• Additionally, liveness test for selfie capture enabling fraud reduction

In Conclusion

The restrictions in the use of Aadhaar has caused a number of challenges to the BFSI sector. While online Aadhaar KYC cannot be used by private sector companies there are alternatives that are emerging. We have listed several new ways in which KYC can be accomplished. We have highlighted not only the offline Aadhaar solutions but also the use of Video ID and face match to achieve KYC.