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e-KYC and the India Stack – A Transformative Blueprint for Emerging Markets

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A student newly admitted at Kenyatta University, Nairobi, wants a new mobile SIM, so she can talk to her parents back home in Eldoret. Her national identity card is used to establish her identity. A 32-year-old widow of a landless labourer in Bihar walks up to a Bank Mitragent to open an account, so she can receive her widow pension from the government. She is asked to bring documents establishing her proof of identity (POI) and proof of address (POA) in the village, before anything further can be done. A migrant vegetable hawker living in one of the night shelters in Delhi folds his daily savings into a small plastic container to keep it safe. He cannot deposit his surplus cash with banks or any reliable financial institution, as he has no regular address or document to establish his identity.

These personas represent billions of people around the world required to meet know your customer (KYC) norms to avail of services considerably important to their lives. Yet, widely prevalent archaic methods for KYC come in their way. e-KYC, a fully digital solution, leveraging resident Indians’ centrally stored demography details and biometrics (fingerprints and/or iris recognition) is changing how KYC has been done for ages. This note examines how e-KYC is an established and proven solution and (together with the India Stack presents a compelling and transformative blueprint for a majority of the emerging markets to consider.

Know your customer (KYC) is the first step that most financial and several non-financial institutions worldwide take to commence relationship with new customers. The common underlying objective is to unequivocally establish the identity of all customers of a service provider. Additional objectives, often prescribed for financial institutions, are to prevent identity theft, financial fraud, money laundering and terrorist financing. Reliance on paper-based documents as evidence to establish KYC has been most ubiquitous. This is not only hugely expensive and time consuming; it is also one of the most significant barriers to effective financial inclusion in the developing world.

A recent study on KYC benchmarking and harmonisation conducted by MicroSave[1], highlighted that Aadhaar-enabled e-KYC could result in an estimated direct saving of over US$ 1.5 billion[2] within the next five years.[3] Apart from substantial cost savings for banks and financial institutions, Aadhaar-enabled e-KYC is significantly more efficient compared to current paper-based KYC. Traditional customer enrolment processes followed by banks can take from two to four weeks before an account is activated, and all KYC details have been verified and stored for future retrieval. On the other hand, Aadhaar e-KYC enabled bank accounts can be activated and readied for transactions within a minute.

The existing practices prevailing in Indian banks are majorly paper-based, manual KYC processes. There is also a widespread tendency in banks towards over-compliance for static KYC, compared to dynamic risk profiling of customers, based on transaction data and analysis. This results in unnecessary costs for banks, and poor customer experience through delays and inconvenience.

In order to avoid repeated KYC verification for customers availing multiple services, there is a need and an opportunity for greater harmonisation of KYC processes across diverse financial institutions and indeed with players in the telecom sector. This will speed up the process and result in massive savings in time, effort and money.

The passage of the Aadhaar Bill in the Lok Sabha provides much needed legitimacy to the existence and the usage of Aadhaar. With Aadhaar enrolment covering nearly 97% of adults in the country, e-KYC could provide a number of benefits to service providers. Given that e-KYC provides digital information and near instant verification of applicants’ identity and addresses, substantial cost reduction and efficiencies can be achieved through elimination of paper based verification, movement, storage, archival and retrieval. Several regulators[4]have already approved the acceptance of Aadhaar e-KYC. These include RBI, IRDA, Department of Revenue, SEBI and PFRDA. Many more now accept Aadhaar letters.

 

Suvidhaa Leads The Way …

Suvidhaa Infoserve, a leading provider of financial services in India, has 35 million customers and an extensive network of over 32,000 BC agents (retail touchpoints) across India. Its outreach extends to 4,100 PIN code zones* in India. Suvidhaa, in association with Axis Bank, was the earliest adopter of e-KYC for its customers and has made it hugely successful.

Suvidhaa has already on-boarded over 125,000 customers through e-KYC. The process for opening a new bank account / issuing and activating a prepaid card at its BC agent touchpoints takes less than one minute, is seamless, and entirely paperless. Customers do not need to carry or sign any document. Customers can instantly transact using their account or prepaid card handed over by agents. The cards are fully interoperable and can be used at any ATM or Point-of-Sale terminal, besides Suvidhaa’s agent touchpoints across India. The one-time investment from agents for fingerprint reader is below US$ 50.

e-KYC is a beginning of relationships with customers. Suvidhaa leverages data analytics and consumer insights to offer innovative products in collaboration with Axis Bank including Nano Credit, a first of its kind, credit programme for migrants and the under-banked in India.

* With a vast majority of villages in India having no numbering system for households, PIN (ZIP) codes tend to be the de facto mechanism to reach residents.

Despite its massive potential and enabling environment (regulatory, technology integration and stability offered by UIDAI, high levels of consumer enrolment for Aadhaar, and so on) the adoption of e-KYC by financial and non-financial institutions has been limited. We believe that the Government of India (GOI) and the key regulators can nudge service provides towards adoption. e-KYC will be vital for the success of PMJDY, DBT, Digital India, to name a few of the important government initiatives. We recommend that the Department of Financial Services, Ministry of Finance, and RBI issue guidelines highlighting advantages and recommending transition to e-KYC by banks, gradually, but within a specified timeframe. This can be accelerated by GOI, RBI and/or UIDAI through suitable incentives and subsidies of the costs required to create e-KYC infrastructure (primarily integration to UIDAI and biometric recognition devices) at Bank Mitr agent locations, and at bank branches. Concurrently, GOI and UIDAI should aim to provide Aadhaar identity to the remaining residents in India. The day is not far when (as Bill Gates mentioned) “India will become the forerunner of the financial inclusion space in the world”.

[1] The benchmarking study covered a range of institutions including banks, mobile operators, mobile money providers, and semi-closed and open wallet providers.

[2] The savings potential can be viewed in light of the US$ 3.7 billion capital infusion into public sector banks (to tide over the high NPA situation and twin-balance sheet challenge) that the Government of India has announced in the budget for FY16-17.

[3] The estimate is conservative, considering over 212 million new accounts have been opened under PMJDY since August 2015. As a result, the rate of opening new accounts will be lower in the foreseeable future.

[4] Refer http://uidai.gov.in/fi-e-kyc.html

Payment Systems in India and Current Status: A Perspective

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The payment system in any country needs to pass the litmus test of safety, security, soundness, efficiency, and accessibility. In order to address all these, payment systems have evolved from barter to currency, to digital systems. We are witnessing enormous change in the payment systems, disrupting the monopoly of physical/paper-based system by electronic ones.

There are basically two types of payment systems:

1. Paper-based, like cheques and drafts; and

2. Electronic payments, like ECS, NEFT, and RTGS; and payment systems extensively used by people at large, such as PPI, mobile banking, and ATM/POS.

Paper Based System

Electronic Payments – Retail Electronic Clearing

It started with ECS (Credit) in 1990s and has evolved over a period of time as captured in the diagram below.

NECS leverages the Core Banking Solutions (CBS) of member banks, facilitating all CBS bank branches to participate in the system, irrespective of their location across the country. Around 31 million ECS (Credit) transactions leading to Rs. 828 billion (US$13 billion) were processed in the first three quarters of FY 2015/16.

The popular Electronic Fund Transfer (EFT) system, introduced in the late 1990s to enable account-to-account transfers, was replaced by one-to-one NEFT system in November 2005. Available on all banking days from 8 AM to 7 PM, the NEFT system provides 12 batch settlements at hourly intervals, thus enabling near real-time transfer of funds. Other unique features, including acceptance of cash for originating transactions; initiating transfer requests without any minimum or maximum amount; facilitating one-way transfers to Nepal; providing confirmation of the date/time of credit to the account of the beneficiaries, etc., were also made available with the NEFT system. The NEFT accounts for a lion’s share (91%) of transactions in terms of value, with close to Rs. 58 trillion (US$892 billion) from 886 million transactions, by the end of the first three quarters of 2015/16.

The establishment of the National Payments Corporation of India (NPCI) to act as an umbrella organisation, in early 2009, is considered to be a landmark for retail payments in India. The NPCI has taken over National Financial Switch (NFS) from the Institute for Development and Research in Banking Technology (IDRBT). The NPCI launched the Immediate Payment Service (IMPS) in November 2010, which allowed instant 24/7 inter-bank fund transfer through the Internet, mobile, and ATM at a very low cost (Rs. 1.50 per successful transaction, or about two US cent) using the NFS switch. Though IMPS accounts for only Rs.1.08 trillion (US$16.6 billion) from 148 million transactions as of December 2015 (FY16), it has come as a boon for small value transactions.

Overall, the volume of transactions handled by India’s retail electronic clearing system has been growing by leaps and bounds, and touched Rs. 64 trillion (US$1 trillion) in 2.2 billion transactions by Q3 2015/16. The IMPS has seen a meteoric rise in the 5 years of its existence. In the month of December 2015 alone, IMPS processed over 20 million transactions handling Rs. 142 billion (US$2.2 billion). This has taken IMPS way ahead of money remittance services of Department of Post, which have been in existence since the late 18th century. The last published data of 2013/14 indicates that Rs.122 billion (US$1.9 billion) were remitted by DoP through Inland Money Orders – compared to Rs.96 billion (US$1.5 billion) transacted through IMPS for the same period and there was then a fivefold increase in value transacted through IMPS the following year.

Electronic Payments – RTGS

Real Time Gross Settlement (RTGS), introduced in 2004, is a funds transfer systems where transfer of money takes place from one bank to another on a “real time” and on “gross” basis. RTGS is primarily meant for large value transactions. It processes customer transactions above Rs.200,000 (US$3,076) and is available between 9 AM and 4.30 AM on all the banking days. The RTGS is the largest payment system in India in terms of value and had handled Rs.729 trillion (US$11.2 trillion) in 72 million transactions by Q3, FY 2016.

The table below has captured the data of last FY and till Q3 of the current FY for various payment systems

Other Payments System

Of late, we have seen other innovative payment systems (like closed wallets, PPI, eCom, etc.) propelled by the environment and changes in the regulations. Pre-paid instruments (PPI) facilitate purchase of goods and services against the value stored on these instruments. The PPIs can be issued in the form of smart cards, magnetic strip cards, Internet accounts, Internet wallets, mobile accounts (issued by banks), mobile wallets, paper vouchers, etc. With 68.67 million transactions in December 2015, this has generated a throughput of Rs.44 billion (US$682 million) – an average ticket size of Rs. 646 (US$10).

With the ever increasing penetration of mobile phones, RBI brought out a set of operating guidelines on mobile banking for banks in October 2008, under which only banks were permitted to offer mobile banking. With almost all banks promoting mobile banking, the latest data as of Q3,FY16 shows that a significantly lower number (39 million) of mobile banking transactions resulted in throughput of more than 11 times (Rs. 490 billion – US$7.5 billion), of PPI.

Debit cards in India have overtaken credit cards. As of December 2015, there are more than 630 million debit cards as against 22.75 million credit cards. With about 193,000 ATMs and 1.25 million POS, debit cards are generating 816 million transactions per month comprising Rs.2.3 trillion (US$35 billion) in retail payments.

The last 3 years’ trends clearly show the direction of the market ― less and less paper, and more and more electronic payments ― with all electronic categories growing both in volume and value terms. The electronic clearing comprising of ECS, NEFT and IMPS are growing at the highest rate. With this and the new Payment Banks, there will be ever-increasing focus on electronic payments. These will be accessible to a large section of society at remarkably low cost. Since June 2015, electronic transactions of EFT/NEFT has surpassed paper-based, in volume terms. Even in value terms, this has overtaken beginning September 2015, highlighting a clear trend towards adoption of electronic payments over paper-based payments.

The Future of India’s Payments System

Looking at the trends, we can be sure that electronic payments is the future and that digital will redefine the payment systems of years to come. This will be significantly more pronounced with the entry of 11, resource-rich, technology-focused payment banks in 2016/17. Based on our experience, these are some of the broad trends that will redefine payment systems in India:

a. Inter-operability: With a myriad of payment service providers servicing millions of customer accounts, the time is ripe to unleash network effects through inter-operability between various digital channels.

b. Proliferation of acceptance networks: As of now, India has about 1.2 million POS terminals. This needs to increase rapidly (some estimates suggest it should expand to around 20 million), given India’s population, geography, number of merchants, etc.

c. Government initiatives: The Government of India has been at the forefront in the drive to encourage digital payments. Furthermore, it is working to use direct benefit transfers for its various schemes and thus deliver entitlements directly into beneficiaries’ accounts, identified and authenticated by the Aadhaar system. Buoyed by the success of DBT for LPG, the Union Budget 2016 announced trial of DBT for fertilisers.

d. Customer convenience and affordability: With a critical mass of 50 million transactions per month happening over mobile wallets – increasingly in rural areas of country, the continued focus on convenience (without losing sight of security and risk mitigation) will be essential. There are very real concerns about client service and protection that should be addressed urgently. With this, and a low-cost 24X7 backbone offered by IMPS, the time is ripe to reduce the transaction cost for the customer. This would be something that will be hastened with the entry of new players.

Given various experiments and initiatives in the market, they need to ensure safety and security of transactions, in addition to adding convenience for the customer and affordability for the service provider.

Customer Protection in Indian Digital Financial Services: Part 2: Transparency and Privacy

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MicroSave’s study for the Omidyar Network on customer protection, risk and financial capability in India sought to understand the extent to which customer protection practices were embedded into DFS offerings in India. The research examined the effectiveness of these customer protection practices and the ease with which customers and agents could access them. In the first blog of this series, we examined Customer Recourse. This blog looks at Transparency and Privacy

2. Transparency

Communication with customers is typically verbal in nature

Our research showed that in most deployments, a well-developed customer support system in the form of regular interactions (SMS/voice) and monitoring visits by supervisors/managers to agents for optimising customer service is missing.

Furthermore, most customer communication is verbal. A small proportion of customers are not even provided information, either at the beginning or during the course of operation of their account.  Some of the reasons for this were: agent did not have time; agent did not take interest; customers did not ask; and the agent explained initially, but they could not understand.

High dependence on agents both for terms and conditions of service, as well as for recourse options, makes customers highly vulnerable to agent-perpetrated fraud. Since most of the communication is verbal, the customers would not even know whether they are being defrauded or not.

Around 2/3rd of the customers do not fully understand the terms and conditions of DFS service that they are using. Lack of awareness of service among customers is the largest stated barrier for DFS growth, according to MicroSave’s recent ANA India Survey.

Communication Between Agents, Agent Network Managers, and Banks Needs to Improve

After the initial agency agreements, there is no active communication between the agent network managers (ANMs), banks and agents. The table below suggests that some agents try to reach out to the most responsive option, but a few just do not make any effort to reach out. This suggests that an active dialogue between agents and service providers is missing, and details are communicated only on the basis of a specific request from the agent.

Agents point out that lack of support for them in running the agency is one of the reasons why they do not recommend DFS/bank agency as a business to others.

The current system of providing fraud and risk-related information to the agents is ad hoc, and only 63% of agents are provided information on frauds. In most cases, the information about risks is verbal and, thus, informal.

Proper formal communication about the terms and conditions of service is also not complete. Only 68% of all active agents reported having received documents with terms and conditions of service. Poor communication both at the customer as well as at the agent level means that the situation will facilitate external frauds as DFS grows and matures in India.

Moreover, coupled with low awareness levels about recourse among customers and high dependency on the agent for information and recourse, most customers, ANMs, and banks will not even know about risks/frauds until they have become big.

3. Privacy: Customers

Experienced customers (who have had an account for more than one year) are more aware of the means to protect their account information. More than one-third of all customers interviewed highlighted that they do not share their PIN. But, once again, agents are the most important source of information about methods to protect accounts.

As highlighted earlier, one of the major risks is transaction data security. However, MicroSave’s qualitative study shows that most transactions are assisted by the agent who thus has access to account details.

CGAP notes that assisted transactions are common particularly with elderly customers and in rural areas where literacy levels are low.

3. Privacy: Agents

Agents are very proactive in protecting their personal and account information and do not share personal account-related information with others.

Though these are good practices, there are a number of ways in which fraud can happen, about which they are not aware and thus do not know about its prevention. (See Survival of the Fittest: The Evolution of Frauds in Uganda’s Mobile Money Market (Parts 1 and 2)).

In the same way that operational issues often lead to service denial (“Real and Perceived Risk in Indian Digital Financial Services”), the precautionary measures adopted by agents also often result in service denial to customers in different forms. As highlighted before in a variety of MicroSave and CGAP publications, this service denial undermines trust in digital financial services.

There is a clear need for significant improvements in the communication of both DFS products and how to use them in India. Not all agents will be able to do this, as it involves fundamentally different skills than conducting transactions, but many will be able to do so, given their existing (remarkably – almost alarmingly ― trusting) relationships with customers.  Agents who really can only perform basic transactions to service existing products, should be supplemented with sales agents charged with clearly explaining products and how to use them.

Fair Price Shop Ownership: How Viable Is It?

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India’s Targeted Public Distribution System (TPDS) is  the largest food security distribution network in the world. The National Food Security Act (NFSA) 2013, aims to cover 75% of the rural and 50% of the urban population through this network. The network also provides employment for 478,000 Fair Price Shop (FPS) owners, their employees, and hired labour, who work across the supply chain in corporations and godowns. In order to curb diversions, FPS automation was proposed.  In this Note, we specifically talk about the revised commissions proposed by the Cabinet Committee on Economic Affairs (CCEA) of Rs.70 (US$1) per quintal of ration and an additional Rs.17 (US$0.25) per quintal for FPS owners making sales through Point of Sale (POS) devices are not proving enough for FPS onwers. With these levels of commissions, many FPS owners are likely to close their shops. In the end we recommend developing an economic model to optimise the business case for FPS owners.

Low Cost Housing Markets

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Access to housing is a basic right and is important in improving livelihoods of poor people. There have been various efforts to support the poor to access low cost housing. MSC recently with support from Habitat for Humanity International and some microfinance institutions in Kenya, supported the development of housing microfinance to improve housing situations among low income people. In this video, George Muruka, Senior Specialist, Private Sector Development, at MicroSave speaks on the key concerns affecting low cost housing market in Kenya.