How Aadhaar's Massive ID Project Could Transform The Indian Banking Industry

Before being enrolled in the program, Indians were excluded from banking services, government aid, and many other services that demanded identification.

India’s unique identification project, Aadhaar, is gaining traction--and that's a boon for the country's banking industry.

In a recent study the economists Arun Sundararajan (of NYU’s Stern school) and Ravi Bapna (of Carlson School of Business at the University of Minnesota) noted that the program has been successful in enrolling Indians who didn’t have any form of ID at all. These newly registered Indians have until now been excluded from banking services, government aid, and numerous other facilities that demanded identification.

When the study was published this spring, roughly a sixth of the nation had been enrolled. Based on how enrollments were going at last count, the two economists estimate that 25 percent of Indians will be enrolled by the end of 2012. (They are currently revising that estimate.)

But that isn’t all. “The data from the surveys suggest it's a mix: on the one hand half the people they're targeting don't have an ID,” Sundararajan tells Fast Company. “On the other hand, it's not just the underprivileged. Registered Indians with other forms of ID like the PAN Card were also signing up for Aadhaar numbers.”

Snowballing into the millions, this large number of Aadhaar enrollees opens up an opportunity for innovation in a broad range of sectors. “Like any two-sided network, once you have more people, more applications, UID becomes more valuable,” Sundararajan says. With a critical mass of Indians on board (Sundararajan unofficially estimates we’ll hit this hypothetical mark in about six months from now) services of various kinds, beginning with the financial sector, have an opportunity to plug into what is a largely open, sharable Aadhaar platform and roll out new kinds of services. 

India's initially reluctant central government is also rallying behind the project, encouraging sellers of government subsidized goods or services (like LPG) to launch or progress pilots tests using Aadhaar. June this year, the finance minister sent out an open letter addressed to chief ministers in 16 states, saying that "it is in our mutual interest to get these pilots going at the earliest."

The fact that Aadhaar is reaching the currently ID-less, and could allow more Indians to open bank accounts would be a good thing for the country as a whole, and its welfare effects are largely agreed on. (As testament to its importance, the Bill and Melinda Gates Foundation has pledged $500 million to help the world's poor gain access to savings accounts.) 

The banking sector is likely to be among the first to use the Aadhaar authentication system on a nationwide scale. For one, the Bank of India, ICICI Bank, and the Union Bank of India, are well along with pilot tests in the state of Jharkhand since 2010. Residents of about 35 villages have been offered a chance to open a bank account associated with that number, and receive their government-issued wages from the MGREGS welfare program at "microATMs." These microATMs aren't full-blown banking sites. Rather, they consist of a bank-sanctioned business local correspondent carrying around a cheap authentication device that dips into the Aadhaar records to verify an ID. To date, the program has reached 70,000 people, ICICI's General Manager of rural and inclusive business, Avijhit Saha tells Fast Company, “It’s the first and only place where this is being enabled.”  

While that pilot seems to be chugging along promisingly, Saha observes that much of rural India still needs to be infrastructurally backed before services based on the Aadhaar can be rolled out. One of the bigger advantages of a biometric ID system like Aadhaar is that a bank (like ICICI) can confirm the identity of a prospective client who wants to open an account in real time, using scanners to take a reading, and verifying that information with Aadhaar’s existing database. (This transfer of information is part of what ICICI is testing at its microATM-equipped Jharkhand sites.) But such a system requires a connection to the network and reliable access to electricity.

In Saha’s view, Aadhaar’s rollouts would have to begin on a small scale and be strategically planned to start in places which are already rigged up to support the needs of real-time authorization. In other words, don’t get too carried away, he says.

Which is perhaps why other financial schemes, like Visa, are already thinking about rollouts closer to commercial centers like Mumbai, where wiring is already in place. “The minute [the government] give us the license, we're geared up to do financial inclusions programs,” Uttam Nayak chief of services, Asia, at VISA tells Fast Company. Nayak says that the Aadhaar IDing feature could be overlaid on a similar system they already have in place in partnership with the Development Credit Bank (DCB).

Late last year DCB and Visa introduced a pre-paid card called the Freedom Card, which can be bought and topped up at a number of stores in the country. Visa and DCB signed up an army of merchants--”business correspondents” they are called--who can sell the prepaid card through their grocery stores or mom and pop shops.

Considering India is a huge cash economy, the use of these business correspondents has converted many more Indians into card users. However, Nayak says that most of their potential customers don’t usually walk into the corner store prepared to present their government-issued IDs--and this has stood in the way of signups. “We have challenges to scale up because they don't carry around documentation.”

If Visa’s partner DCB was inclined to take the Aadhaar route, the process would be much faster. A Freedom Card purchaser would be verified in real time, without the additional documentation. As Nayak puts it, "An Aadhaar guy comes in [to the store] out he goes with a prepaid card, and he's transacting in the next ten minutes."

The minute he gets a license from Aadhar people, Nayak says, he’s going to introduce biometric scanners and readers into the stalls he already has in place.

But while the platform is open in theory, the government is tight-fisted about handing out licenses to plug into the authorization system. So, while institutions like ICICI have filed an application to be allowed to access Aadhaar’s database, those licenses have yet to be handed out. “For two years we've been waiting and we'll be ready to hit the ground running,” Nayak says.

[Image: Dinesh Cyanam]

Nidhi Subbaraman writes about technology and India.  Follow on Twitter, Facebook.