Aadhaar: The way forward for fintech companies

Fintech has caused significant disruption in the financial services industry. Aadhaar (a unique identity number-based on biometric data) was, probably, the single largest factor that contributed to the exponential growth in fintech products in India. With Aadhaar-enabled e-know-your-customer (e-KYC) facility, a fintech platform could on-board customers quickly and at a fraction of the cost of using physical documents.

Aadhaar judgment: In September 2018 the Supreme Court of India, in a landmark decision on the constitutional validity of the Aadhaar Act, struck down the right of any private entity to use Aadhaar authentication to establish the identity of an individual without the backing of legislation. As a result, private entities cannot do e-KYC authentication, even with the consent of the individual.

Offline Aadhaar-based KYC: Following the Aadhaar judgment, the Unique Identification Authority of India (UIDAI), the issuing agency for Aadhaar numbers, in an October 2018 circular made it clear that a bank may do an e-KYC authentication if a customer (when opening a bank account) gives a declaration that they intend to receive direct benefits or subsidies from a government welfare scheme directly into the account, and that the voluntary use of a physical Aadhaar card by the holder to establish their identity is not prohibited. The UIDAI indicated that banks may accept an Aadhaar card, e-Aadhaar card, or an offline electronic xml file (with Aadhaar details) for customer verification while opening bank accounts provided it has been offered voluntarily and the first eight digits of the Aadhaar number are masked while storing a physical copy of the Aadhaar card.

Shilpa Mankar Ahluwalia is a partner at Shardul Amarchand Mangaldas & Co and leads the fintech group at the firm.