Aadhaar paperless e KYC = lower costs + efficiency + more customers
The impact of an end to Aadhaar paperless e-KYC verification will be felt well beyond a handful of private enterprises. Millions of customers across the country will face the direct and indirect consequences of this event.
To understand what these consequences are and how any one of us might get affected, let us first understand why a system like Aadhaar e-KYC is a necessity in today’s world.
Paperless, presence-less e-KYC
- reduces the cost of conducting KYC by 70-85%
- reduces the time taken to onboard a customer from 3 to 4 days, and
- makes it possible for businesses to establish relationships with customers in locations where it would simply be impractical for them to conduct a physical KYC
To understand what this means for a business, let us take the case of an online small loans provider or a mobile wallet provider.
Physical KYC = Rs. 85 lakhs more and 821 years longer!
To acquire their first 1 lakh customers, conducting physical KYC would require a budget of Rs. 1 crore. With Aadhaar-based e-KYC, those 1 lakh customers could now be onboarded for Rs. 15 lakhs.
For entrepreneurs, the Rs. 85 lakhs saving on customer acquisition costs could be the difference between a business being viable or not.
The cost impact of a physical KYC is even more significant when you consider other factors like the additional time taken in onboarding customers and the number of people who end up not becoming customers, because of the inconvenience of going through the KYC procedure.
For a business onboarding customers using physical KYC, the cumulative days spent waiting for onboarding 1 lakh customers is 3 lakh days or almost 822 years! At 10 minutes per customer and assuming eight-hour work days, the same number of customers can be onboarded using e-KYC in around 260 days.
That’s almost 821 years’ worth of cumulative time that could have been used to serve customers and create value from that, now being used simply to verify and onboard them.
Some suffer more, but eventually, everyone suffers
Interestingly, the businesses that suffer the most from this increased burden of KYC, are the ones who are at the forefront of technology and innovation and the customers who suffer the most are the ones that have seen the biggest transformation to their lives because of these businesses.
Technology has allowed entrepreneurs to offer innovative solutions like e-wallets, small loans, or peer-to-peer lending platforms. Many of these solutions are exclusively offered through digital channels. They also focus on high volumes of transactions with low margins to be made on each of these transactions.
An approximately 80% increase in the cost of acquiring each customer thus delivers a crippling blow to the ability of these businesses to offer these services at the same costs.
Customers who get affected are mostly those who are being able to enjoy the benefits of the organized financial sector for the first time in their lives.
Access to small ticket loans quickly and without procedural headaches has been a boon for rural entrepreneurs and people in remote locations can get access to simple facilities like the ability to receive and transfer funds using their mobile phones.
All these customers may soon be pushed back to the days when these services were either inaccessible or prohibitively costly, because businesses may simply be unable to offer them anymore.
Even larger companies like established banks and NBFCs with physical infrastructure across the country will definitely feel the pinch of the added costs, as a significant percentage of their customers were also being onboarded using e-KYC.
The additional cost burden will eventually be passed on to customers – both individuals and business customers.
Businesses, that will now be charged more by banks and NBFCs will in turn charge their customers more for goods and services and in this way, the indirect costs of increased expenditure on KYC will be borne by almost everyone.
And what about security?
The other big concern that will need to be addressed is the failure of traditional KYC mechanisms to address loopholes that can be exploited.
Frequent reports of people using fake identities to open bank accounts and carry out large-scale financial fraud clearly indicate that current KYC practices can easily be cheated and money laundering carried out with impunity.
This becomes especially easy when insiders within these companies are hand-in-glove with criminals. It will be interesting to observe if cases of money laundering and misuse of the financial system by criminals, increases with KYC procedures reverting to old ways.
Where do we go now?
The case for a paperless, presence-less KYC ecosystem is too strong to ignore.
With the Aadhaar database already holding the records of citizens of the entire country, it is practically the only tool that can facilitate this ecosystem.
However, the Supreme Court order brings an abrupt halt to this existing system that was transforming the Indian fintech landscape, as well as having a major positive economic and social impact.
The onus now lies on the government and regulators to find a solution within the framework of the court’s order, that enables the use of this powerful database for the good of the country, while protecting the right to privacy and other concerns of the citizens.
The longer the delay in crafting a solution to this problem, the more businesses whose very viability depends on the ability to carry out KYC using Aadhaar paperless e-KYC will be forced to shut shop and deny services to customers.
If the matter is left to linger, for the exciting fintech sector in India, this could well be a case of two giant strides backward after a promising step forward.