SC's Aadhaar verdict rocks new-age digital cradle: All you need to know

Customer acquisition and servicing models in financial services will have to be reimagined

Business models based on the Aadhaar superstructure to on-board and service customers will be rocked to their foundations, with the Supreme Court (SC) striking down Section 57 of the Aadhaar Act.

 “Many customers were using Aadhaar as an essential proof of their place of residence whether to avail of SIM cards or to open bank accounts. The costs will go up, and just what alternative mechanism do you have to verify customer details for KYC (know-your customer) compliance?” asks Satyam Kumar, CEO of LoanTap. 

Harshil Mathur, CEO and co-founder of Razorpay, adds: “The cost of e-KYC verification was Rs 15 per person. For physical KYC, the cost will jump to Rs 100 per person.”

The digital-financial ecosystem, which has boomed in the last three years, has grown in terms of customers and transactions thanks to the speed, efficiency and reliability of Aadhaar and the Unique Identification Authority of India’s (UIDAI) network of KYC authentication entities. 

“There are three sets of application programming interfaces (APIs) that are accessed – demographic, biometric, and the third, a combination of the two. Banks, telcos and a host of others have been using the third set of APIs for e-KYC,” says Anand Venkatanarayanan, security researcher and a petitioner in the case.

Ecosystem in a flap

It’s argued the SC’s thinking that customers who avail of welfare benefits need Aadhaar is problematic as it could once again prompt the Centre to insist on Aadhaar linkage for a wide range of services even as it creates a class conflict.  

 For example, regular retail bank account customers can ‘opt out’ of Aadhaar while those with Jan Dhan accounts may be mandated to hook up. And so, too, in the case of the estimated 500 million beneficiaries under Ayushman Bharat, the national health insurance scheme. To the extent the poor will have no choice but to use Aadhaar, and the rich can opt out, it becomes a class issue too.

“When customers type in  their Aadhaar number into the e-KYC authentication form and give their fingerprint, the UIDAI and Aadhaar database gives back not only a ‘Yes/No’ answer confirming the validity of the card and customer, but also provides the company requesting the e-KYC, the demographic data of the customer,” points out Venkatanarayanan.

The Aadhaar authentication system works as follows: authentication agencies (AuAs) and KYC agencies (KuAs) licensed by the UIDAI get access to the central database and pay a fixed fee every month for its usage. They also give a guarantee of the minimum authentications, which they will provide and process.  

In effect, it is like a bulk SMS scheme and these entities end up signing up many sub-AuAs; and since these agencies have guaranteed a minimum number of Aadhaar-based authentications per month to the UIDAI, the only way the ecosystem can sustain itself is to ensure the pipe is full. Notes Bhavin Patel, co-founder and CEO of LenDenClub: “Operationally it will be challenging as we achieve scale”.

The basic issue is that Aadhaar e-KYC had been made mandatory, which prompted companies to develop and migrate to the new system. It meant a lot of capital expenditure not only for private companies but for government departments as well. Since its inception in 2009, the UIDAI’s total expenditure stands at Rs 99.42 billion as of March 2018; it has spent Rs  2.94 billion this year as of August 2018.

The only way UIDAI and licensed entities can recover their costs was to push volumes. And given that the government’s use of Aadhaar is not sufficient to recover the money, there was the push for Aadhaar e-KYC for private entities. All of that stands turned on its head.

In effect, the SC has put in a massive ‘regulatory block’ for financial companies and their business models in a fix.

Life after the Supreme Court’s Aadhaar verdict
 

• Bars private entities from asking for Aadhaar details
• Financial services industry awaits  instructions from RBI, Sebi and Irdai on the next steps
• Some fintech firms, banks, insurers and telcos continue to demand  Aadhaar details
• Cost of customer acquisition, settlement of claims and loan processing to increase manifold
• De-linking to prove costly and a time-consuming exercise
• Need for an independent auditor or body to verify the deletion of Aadhaar authentication logs from companies after six months
• Aadhaar and UIDAI need to re-think their business models to justify public expenditure outlay
• SC scraps Section 47 allowing individuals to register criminal complaints against UIDAI and its licensed entities