Aadhaar verdict: Banks, firms fear rising costs of acquiring new clients

Without the e-KYC provision, the cost of acquiring new customers will shoot up significantly, in some cases six times, claim expert

Getting new clients on board will be more expensive now, feel financial technology (fintech) firms, after the Supreme Court (SC) on Wednesday struck down Section 57 of the Aadhaar Act. 

This section earlier allowed them to ask for a customer’s biometric identification number for electronic-Know Your Customer (e-KYC) verification. Most fintech business models revolve around acquiring a high volume of customers who mostly do low-value transactions.

Without the e-KYC provision, the cost of acquiring new customers will shoot up significantly, in some cases six times, claim industry insiders and experts.

“Private companies can’t mandate customers to provide Aadhaar (number) for on-boarding anymore,” said Harshil Mathur, chief executive officer (CEO) and co-founder of payments firm Razorpay, adding, “The cost of e-KYC verification was Rs 15 per person. For physical KYC, the cost will jump to Rs 100 per person.”

The SC has not banned e-KYC; it has said this should be one of the many authentication options that customers have to be offered.

“Fintech companies need to change their business models to consider other forms of identity verification. This will increase cost and time needed for acquiring new customers,” said V Balakrishnan, chairman of Exfinity Ventures and a former chief financial officer at Infosys. 

Aadhaar had given a boost to the fintech space in the country, with many firms mushrooming. This also attracted large investments from private equity and venture capital (VC) firms. 

According to a report by EY and Indian Private Equity and Venture Capital Association, the sector got $4 billion investment in the first half of 2018. A significant one was by Warren Buffett’s Berkshire Hathaway, which pumped in about $360 million in Paytm in August this year.

With digital banking taking the lead, a lot of fintech companies, including discount brokerage firms, peer-to-peer lending platforms, and financial product aggregators, depend on Aadhaar-based e-KYC and e-signature for documents.

“Going back to the traditional model will be costly. The on-boarding cost of new customers would certainly go up,” said Vasanth Kamath, CEO and co-founder of Bengaluru-based Smallcase.

Other experts, however, feel this will not be too much of a disruption.

“Fintech firms are regulated by the Reserve Bank of India, the Securities and Exchange Board of India or the Insurance Regulatory and Development Authority of India. This (the judgment) will not create any disruption,” said Sanjay Swami, managing partner of Prime Venture Partners. The Bengaluru-based VC firm is a leading investor in NiYO, MoneyTap, and Ezetap.

A P Hota, former chairman of the National Payments Corporation of India, said e-KYC was much easier than other form of authentication. “Private entities can still continue to, even though they cannot insist on it,” he said.