A year ago, in this newspaper I said 2018 would be the year of paperless finance. This year, a large number of banks have partnered with fintechs and have launched instant paperless approval of loans and credit cards. However, our job is half done. There remains a roadblock to fully digitised, secure finance where consumers can purchase financial products on their phones without submitting a shred of paper or having a face-to-face meeting with the bank.
The roadblock is the in-person verification of KYC (know-your-client) requirements for loans above ₹60,000 or credit cards. In 2018, while the financial industry has moved to electronic processing of applications, income documents, e-signatures and electronic repayment mandates, banks still need to meet you to physically complete your KYC through countersigned documents or biometric. Resultantly, the benefits of secure digital mobile delivery are curtailed in three ways: a) the industry’s reach is limited to branch locations, b) operation costs increase due to physical meetings, and c) the risk of documentation fraud remains as no e-authentication process exists for physical KYC documents other than for Aadhaar.
This logically brings us to the question: is it safe to deliver credit without a single physical meeting for KYC verification? Fraud risk data from 2018 indicates that it is, thanks to India Stack platform. In physical on-boarding, the customer’s paper proofs of identity can’t be authenticated real time. But in presence-less onboarding, digital KYC processes provide a combination of real-time checks to provide customers complete digital footprint. This helps instantly complete the KYC, fight identify fraud, and in assessing high-risk individuals. Consider that the risk of a stolen mobile phone by faking OTP-based KYC is negated by combining it with UPI or netbanking PIN authorisation of a ₹1 penny drop.
The RBI took a giant step in fostering digital innovation in December 2016 when it acknowledged and enabled paperless and presence-less mobile delivery of unsecured loans capped at a low ₹60,000. It enshrined the principle of secure, technology-based delivery. But the low cap left out a good third of borrowers earning ₹30,000 per month eligible for a loan of ₹1.5 lakh, and another third of borrowers earning ₹50,000 eligible for a ₹3 lakh loan. Now, three more policy changes are needed to make 2019 the year of presence-less finance and unleash the next wave of digital innovation in financial services.
Non-face-to-face account opening: Section 40 of the Master KYC Direction of the RBI should be reviewed to include all digital checks like combination of e-KYC via OTP, video KYC, e-sign, PAN NSDL check, and Penny Drop as complete KYC. These should be regarded as an alternative to biometric based e-KYC and will help remove any ambiguity or interpretation around presence-less account opening.
Permitting larger loans via e-KYC: The e-KYC via OTP caps under the New Direction (Section 17) should allow for increased loan sizes. The current cap of ₹60,000 needs to be raised to ₹6 lakh, as the average loan size through the online mode is approximately ₹3.5 lakh.
Also, using biometric Aadhaar authentication for small ticket loans will increase the already high operating expenses of digital lenders. As the digital ecosystem matures, the time is right for focused clarifications in the KYC Directions and Guidelines to increase the cap. This will enable hassle-free borrowing of small loans for both retail consumers and small and medium enterprises (SMEs).
Including credit cards in e-KYC accounts: In the absence of an express mention of credit cards in Section 17 of the Master KYC Direction, banks and regulated entities are reluctant about OTP-based credit card account openings. An express mention will enable customers to easily apply for the cards they need. It will provide retail consumers and SMEs easy access to digital payment options which fits in the Union of India’s objective of migrating to a secure and scalable digital payment infrastructure with the additional benefit of data to enable alternate credit-based lending options.
Support from UIDAI
A holistic approach is required from UIDAI in encouraging digital on-boarding innovation. RBI, Sebi, Irdai and PFRDA have all accepted the digital transformation, aligned their regulations around PMLA and accepted Aadhaar e-KYC to onboard consumers digitally. UIDAI must evaluate ensuring even playing field in Global AUA (Authentication User Agency) access for all entities regulated by RBI, Sebi, Irdai, PFRDA and that fall under the category of Reporting Entity under Prevention of Money Laundering Act (having an obligation to comply with the AML and CFT guidelines).
In conclusion, 2018 is turning out to be the year of paperless finance. We’re now focusing on presence-less access to financial products in 2019, which will allow financial services to reach the remotest corners of India, lower costs via leverage of the India Stack platform, and reduce identity fraud risk due to e-authentication of identity via two-factor OTP and PIN validation. Presence-less finance will turbo charge the next wave of fintech innovation in India.
Adhil Shetty is CEO, BankBazaar.com