Are digital payments finally set to become easier for merchants as well as customers? The answer is yes if one goes by the government’s promise of introducing a universal app that merchants can use to accept payments even from people who don’t have a mobile phone or a debit card. The only thing you need is a bank account linked to your Aadhaar number.
While the formal launch of the government’s app is still awaited, banks like State Bank of India (SBI) and IDFC Bank Ltd have launched their Aadhaar-based payment systems. On Saturday, SBI adopted Shirki Village in Maharashtra to make it completely cashless on the back of its Aadhaar enabled payment solution.
IDFC Bank, too, launched its Aadhaar-based platform over the weekend. Both lenders promised a payment experience more seamless than any other.
Mrutyunjay Mahapatra, deputy managing director at SBI, said in a media statement.
The simplicity of this solution is its USP as the consumer does not have to struggle with any technology, remember any password or PIN to make an instantaneous payment.
Rajiv Lall, founder and chief executive officer of IDFC Bank had a similar pitch to make and said in a statement that even “citizens in the deepest corners of the country can participate in India’s digital movement” if they have a Aadhaar-linked bank account.
How Do These Apps Work?
IDFC Bank’s Aadhaar Pay app gives us some idea of how these payment systems will work. The app, which can be installed on a retailer’s smartphone, just needs a biometric device which scans a customer’s fingerprints for authenticating transactions. The customer just needs to know the name of the bank.
The bank has already onboarded 100 merchants who are using the Aadhaar-based payments app, said an official from the bank requesting anonymity. The government will be using IDFC’s app to model the umbrella app that they intend to launch, this official added.
Apart from the convenience of paying with a tap of a thumb, the Aadhaar-based payment app may also end up being cheaper than payment systems (like credit and debit cards) which use Point-of-Sale (PoS) machines.
There is a merchant discount rate (MDR) of about 1.0-2.5 percent involved in card transactions done through PoS machines which the merchants are required to pay. Aadhaar-based payments, meanwhile, happen at a much lower cost since there’s no MDR involved, the IDFC official said.
This is because the network is developed by the National Payments Corporation of India (NPCI) on the existing Aadhaar Enabled Payments Systems (AEPS) railroad used to authenticate customers at public distribution centres. In merchant transactions, the same infrastructure is being utilised to authenticate customers as well as their bank accounts.
A white paper on service delivery using Aadhaar published in 2012 said:
The interoperable architecture of AEPS and micro-ATMs enables online and real-time fund transfer across banks, thus enabling an efficient and cost-effective remittance ecosystem.
Can Banks Scale Up?
Theoretically, the reach of Aadhaar-enabled payment application could be higher than that of the NPCI’s Unified Payment Interface, which requires the user to have a smartphone.
“It’s quite intuitive, and is the logical next step for payments in India. But, the main challenge for banks and the government will be merchant acquisition. For this service to work, a large network of merchants need to get on board,” said Vivek Belgavi, Partner and Financial Services and Technology Consulting Leader, at PwC in a telephonic interaction with BloombergQuint.
According to Belgavi, the fingerprint scanner, at less than Rs 5,000, can be much more pervasive than point of sale devices.
The infrastructure for this has been in place for a while in the form of the Aadhar Enabled Payment Systems bridge, which is already being used for direct benefit transfers. Now all that remains is for banks to aggressively push this as a means of transaction.Vivek Belgavi, Partner - Financial Services and Technology Consulting Leader, PwC
There are, however, still questions on quickly such applications would scale up.
For one, since the transaction fee charged by the bank is quite low, banks may not find it viable to push such payment applications aggressively. According to Belgavi, there needs to be a review of the incentive policy on these transactions, or it may get off to a slow start like the Unified Payment Interface (UPI).
The UPI service, which was launched when former RBI Governor Raghuram Rajan was at the helm, has so far failed to take off in a big way. The reason, Belgavi said, could be the fact that banks have not spent much money on marketing.
Another major challenge that banks will have to contend with is the number of Aadhaar linked accounts. Despite a push by the government, there are still a large number of accounts which are not linked to the holder’s Aadhaar number. For State Bank of India, the country’s largest bank, around 52 percent of the savings bank accounts are linked to Aadhaar numbers, a senior SBI official told BloombergQuint on the condition of anonymity.
The final challenge, according to Belgavi, will be that of security. Biometric scanners could be at the risk of not just data theft but identity theft. There is a fraud management and grievance redressal mechanism handled by the NPCI, but the accountability is first and foremost with the acquiring bank, Belgavi said.
(This article was first published in BloombergQuint.)
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