Aadhaar’s benefits for financial inclusion

The public interest litigations (PILs) filed before the Supreme Court against compulsory linking of Aadhaar to bank accounts raise issues about the right to privacy, concerns of being treated on par with money launderers, and the right to be not deprived of property as a result of blocking of bank accounts. One of the PILs contends that there are numerous, less disruptive methods of authenticating the identity of account holders. Do these concerns represent all segments of people across the country appropriately? If not, how does one evaluate the impact of a policy which has a varying effect on different segments of society?

Nearly one in three Indians do not have access to a bank account and one in seven do not have access to credit. These ratios would be much poorer for the eastern and north-eastern parts of the country. Financially excluded or barely included, the choices faced by these people should be an important consideration in the current debate on linking Aadhaar to bank accounts.
A large number of people from the lower socio-economic rungs of society have been financially included in the last decade. Guidelines for establishing business correspondents (BCs) were introduced by the Reserve Bank of India in 2006 to ensure availability of banking services at an affordable cost. A company, acting as a business correspondent for a bank, appoints agents to run the brick and mortar customer touch points.

Initially launched with a biometric-based authentication system managed by individual banks, these agents have aggressively shifted to Aadhaar-enabled payment system (AEPS) to provide a network for delivery of banking services in far- flung areas. An agent runs a low-cost operation which opens “small” savings accounts, provides deposit and withdrawal services and offers products like micro insurance and Atal Pension Yojana. Central and state government direct benefit transfers are also routed through these accounts. Instead of filling up forms and using wet signatures, the customer transacts with the help of an identity card having the details of her bank account and uses a fingerprint reader for authentication.

According to the RBI Annual Report, 646,000 agents carried out 1,159 million transactions worth Rs2.65 trillion in FY 2016-17. Availability of small savings accounts in far-flung areas has enabled a large number of poor Indians to experience formal banking systems for the first time in their lives. A robust biometric-based authentication system which provides secure access to their bank account has contributed greatly to the effort.

Is biometric authentication necessary to provide banking services to these customers? Authentication can also be signature-based, smart card based, PIN based or a combination of any two. For this particular segment, any authentication system other than biometric would be inferior and impractical due to low literacy rates and lack of experience in handling smart cards and PIN numbers. There is anecdotal evidence of individual PIN numbers being common knowledge in villages.

A centralized database and authentication system, like Aadhaar, is better than a distributed system where each bank builds and maintains the biometric database of its own customers. Collecting the biometric information of a customer is a long and expensive process. The high entry costs associated with a distributed system make moving one’s account between banks a cumbersome process. A Centralized system, like AEPS, makes it easy for a new financial services provider to plug in and launch its services. A widespread network of agents associated with different banks, operating on AEPS, would expand the choice set for the customer, increase competition and improve customer service. Flexibility in using the branch, agent or biometric ATM to access bank account would put such a customer on an equal footing with the customers who access the existing network of ATMs using a card and PIN for authentication. The choice of authentication system would no longer define the extent of access to the banking network.

Should it be mandatory to link Aadhaar to bank accounts? A mandatory linkage would build economies of scale and improve the network of AEPS enabled point of sale devices and biometric ATMs. This would benefit not only the users of small accounts but also the richer classes with multiple PINs for credit and debit cards.
In case Aadhaar linking is made optional, what should be the default option? In the famous case of the 401(k) pension scheme in the US, Nobel laureate Richard Thaler convinced lawmakers to pass a law encouraging employers to enrol workers automatically in the pension scheme but offer the right to opt out to anyone who did not want to participate. This small change in the presentation of choices “nudged” the participation rates to more than double. To build economies of scale, reduce costs and put all customers on an equal footing in terms of access to the banking network, a default option of consent for linking Aadhaar to the bank account should be preferred.
For customers using AEPS to receive government benefit transfers, remittances and transact their business, the question is stark—would they continue to have restricted access to the banking system or can they look forward to be treated on par with others? It would be unfair if the final policy takes into account the concerns of the vocal and media-savvy segment of society, while overriding the aspirations of the silent masses for equal access to opportunities.