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Oops, there goes India’s model of financial inclusion

  • India has the largest biometric ID database in the world.
  • Good for fintechs, but that might have all changed this week.
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Oops, there goes India’s model of financial inclusion

The path to digital finance doesn’t run in a straight line. As a fintech destination, India stands out with its homegrown solutions to big problems. The country has made serious moves towards demonetization as it attempts to connect a large percentage of its 1.2 billion citizens to the financial system. The country, with its Aadhaar program and series of APIs, provides fintech firms with digital authentication tools unseen in many countries. But now, with a new ruling, the Supreme Court has dealt a blow to the Indian fintech community.

What is Aadhaar?

India runs the world’s largest biometric ID system on its citizens. Functioning like a social security number, the Aadhaar number is 12 digits long, can be linked to mobile sim cards and bank accounts, and include biometric data like eye and finger print scans. Aadhaar is the backbone of the India Stack — a set of APIs used by an ecosystem of government, startups, businesses and developers to power a move to a cashless society for 1.2 billion Indians.

Having such a robust database like Aadhaar has been a boon for Indian fintech startups that use the database to digitally authenticate new users. India has seen a record number of fintech investments in the first quarter of this year (39 versus just 3 in 2013) and Aadhaar is partially responsible. For such a populous and demographically and geographically diverse country, authentication was a real barrier to entry.

Aadhaar functions as a e-KYC platform that is particularly useful to authenticate the unbanked and underbanked, who were previously invisible to the banking system. Aadhaar covers 99 percent of Indians with a digital identity.

What changed?

Earlier this week, the Indian Supreme Court barred access to Aadhaar data by private companies. This means any fintech company that relied on Aadhaar to offer loans, mutual funds, or insurance needs to find another way to onboard new customers. This is expected to increase costs for startups.

“Till now, an e-KYC verification and on-boarding cost ₹15 per person and soon the same verification will cost ₹100 per person for a physical KYC,” Harshil Mathur, chief executive and co-founder of Razorpay, an online payments solutions provider, told LiveMint.

It also crimps the velocity of financial services. It’s estimated that old-school physical authentication takes at least a couple of days in India, while Aadhaar sped things up to a manner of minutes.

The ruling definitely makes it harder for digitally-native firms to compete against incumbent financial institutions.

Where does Indian fintech go from here?

Costs and speeds are expected to be affected for the startup community. Higher costs and slower processing times will be passed on to the Indian consumer. It’s possible that, pushed to the outside of digital identity, fintech firms will have a harder time raising capital, as well.

But interestingly, this ruling has spawned some honest comments about how digital Indian fintechs really are in the first place. There seems to be a lot of the fake-it-until-you-make-it, common in the fintech community around the world. Seen through this lens, digital authentication was something fintechs told their investors they did while in reality, their operations relied on much more manual processes.

“What this judgement does is affects the way in which we could target the next set of consumers which in turn loosens our pitches [to investors],” said one anonymous fintech executive to the Economic Times.

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