Post SC ruling, Fintechs replacing Aadhaar with innovative e-KYC processes

While some have developed video-based authentication that uses govt identification such as PAN card, driving licence and passport, others are using selfie-based IDs through cell phones or laptops

Digital lenders are slowly coming up with innovative solutions for onboarding of new customers sans e-KYC (know your customer) through Aadhaar-based authentication. While some fintech players are in the process of using video-based authentication that uses government identifications such as PAN card, driving licence and passport among others, some others have been using selfie-based identification through mobile phones or laptops. Through these new modes of authenticating customers, many of them have escaped the costly route of physical verification.

"We have developed a video-based authentication app through which we can take the liveliness test of a customer. Through this solution, not only will customer identification process be accomplished without any need for Aadhaar data, we will also do away with the requirement of field staff," said Abhinandan Sangam, co-founder & chief technology officer at P2P (peer-to-peer) lending platform, Finzy.

According to the company, towards the end-stage of the loan approval process, the camera in the applicant's phone or laptop will prompt the customer to read some written material on the screen. If the customer is able to read the line, the app will match this video with the applicant's photograph and come to conclusion about the identity of the person. "We have developed this app in-house, which will be operational in coming days," Sangam of Finzy said.

A few of its peers operating in the digital lending space have also come up with other video-based solutions that use PAN card for verifying the genuineness of a prospective customer. "An applicant is prompted to move his head right or left, hold his PAN card and read his PAN card number while the app in the phone or laptop films the process. This is also another way of authenticating a customer," an industry expert said.  

These solutions not only authenticate the customer's credentials, but also put a check on instances of fraud as no person can impersonate another individual.

In September last year, the Supreme Court in a landmark verdict restricted private entities from using Aadhaar data. This was feared to have wide spread ramification among fintechs as the business model of companies operating in this space was based on Aadhaar-based authentication. Post this verdict, while many of them started relying on traditional ways of doing customer verification, and of late many are coming up with technology-enabled solutions in their bids to save time and cost.

"Many start-ups are bleeding as they are not allowed to do e-KYC. While companies like us, which give big ticket loans, have to anyway do the physical KYC, wallets and digital lenders which provide small ticket loans have seen a lot of disruption in their business model," said Vikas Kumar, cofounder and CTO at Pune-based digital lender, LoanTap. "We have to understand that digital lending is all about faster disbursal. So, e-KYC is closely integrated with the very business model," he added.

Not only fintech lenders, even some of the e-KYC solution providers like Bengaluru-based incubator and innovation centre, Khosla Labs has to repurpose its offerings after the SC verdict. The company has now come up with a video identification-based KYC solution. "Our models are extensively trained on data including PAN cards, voter ID cards, passports and other datasets. So, this is an alternative to the Aadhaar-based authentication process," said Saru Tumuluri, CEO at Khosla Labs. "Currently, this solution is being used by many consumer companies and is likely to be adopted by fintech firms after receiving the Reserve Bank of India’s approval under its sandbox regulations," she added.  

The RBI in April this year has released draft norms on 'regulatory sandbox' in which it proposes to allow fintech firms to test new technology-led solutions under controlled environment, before its approval. Under this proposed norm, innovation in wealth management, digital identification, smart contracts, financial inclusion products and cyber security products could be tested before its full-scale implementation.  

Meanwhile, there are reports suggesting that e-KYC through Aadhaar may be allowed for fintech firms who hold NBFC licenses. The process has already been initiated by the Department of Revenue and sources said that regulators are in touch to allow Aadhaar-based authentication with some riders. However, fintech firms said that though the regulations may allow Aadhaar to be used for customer verification, it is likely to make it one of the many options for the process.

"Even if e-KYC through Aadhaar is allowed, this will be one of the many authentication measures that are likely to be in place. In that case, alternate methods like video-based authentication comes in handy," said Tumuluri of Khosla Labs.