India has made great strides toward creating a digital economy, but the national ID system that underlies this transformation turns out to have its limits after all. And that will have consequences for the booming fintech industry.
A historic ruling by the Supreme Court of India on Sept 26 upheld the legality of the Aadhaar biometric identity system, saying it did not violate the right to privacy.
But the country's highest court added restrictions on how Aadhaar information could be used. For example, it said there is no need to link an Aadhaar number with bank accounts or mobile phone numbers.
As a result, financial service providers including banks and fintech companies will need to find new ways to verify customers' identities when opening new accounts. Their customer acquisition or "onboarding" costs will probably rise as a result.
The fintech companies that were among the first to embrace Aadhaar and the India Stack software platform that powered it are now considering their next move.
Aadhaar was a boon to fintechs because it offered a hassle-free Know Your Customer (KYC) process through biometric verification. The speed and efficiency of the new digital financial system appealed to customers, both banked and unbanked, who were quickly hooked by the services of fintech firms.
But in light of the Supreme Court decision, uncertainties on the regulatory front have caused many fintech companies to adopt a wait-and see approach.
"Aadhaar has constantly come under a lot of flak on account of data privacy and data protection," Nirupama Soundararajan, senior fellow and head of research at the Pahle India Foundation, told Asia Focus from India.
"India Stack, purely from a technology point of view, has done its bit to push India into the digital age; however, with the recent Supreme Court ruling on Aadhar and KYC norms, its impact on the financial sector may no longer be what one expected."
Aadhar-enabled KYC is certainly faster, she said, and fintechs relied on on it to keep their costs low. If Aadhar-enabled KYC is made optional or outlawed, then the cost of acquiring customers will go up and turnaround times will increase. This does not necessarily augur well for the financial sector, especially fintech startups, she said.
With more stringent data privacy norms expected to be introduced via legislation or regulation, and limitations on storing Aadhaar data, "the entire fintech sector could be staring at uncertain times", Bhavik Hathi, managing director of the consultancy Alvarez and Marsal, told Economic Times earlier.
Vijay Mani, a partner with Deloitte India, said this was a "very tense time" for fintechs that have based their business models on Aadhaar. Everyone is trying to figure out what legislation will result and what they should do in the interim.
"If [appropriate legislation] doesn't come, the future of their businesses in terms of future cost and the customer experience will be difficult to maintain," he told Asia Focus in Bangkok.
Varun Mittal, Asean fintech lead at Ernst & Young (EY), said there have been different interpretations of the 1,400-page Supreme Court ruling, and a few companies have filed petitions with the court seeking more clarity.
"Once the Supreme Court comes up with some clarification, there will be more clarity. It's a huge trend because Aadhaar used to be how startups would scale up and onboard customers. This is now in a grey area," he said.
However, whatever the result, Mr Mittal is still optimistic.
"The moment there is a change, there is an opportunity. If everything stays where it is, then everybody is doing what they are doing. This is a period where a lot of opportunities can develop," he said.
"It's not like this is the law, and this will never change. There are conversations and this is the beauty. The fact that even the smallest companies can have their voice heard by biggest state official is beautiful. We hope that the final outcome will be in the interest of the overall society."
Vivek Belgavi, a partner and India fintech leader with PwC, said he envisaged a short-term impact and higher costs as fintech firms switch to other ways to sign up customers, either through physical KYC or a system based on QR codes or other technology.
"In the long run, however, we expect innovative firms to adjust to the new normal swiftly and make innovative use of means and technologies such as blockchain, robotics and optical character recognition, CKYC (central know your customer registry), and continue to onboard and serve customers," he said.
