Serving the Unconnected: How Aadhaar Helps 500M Indians Transact

The Role of BCs and Aadhaar in Financial Inclusion

Satya is a resident of Massani, a village overlooking the Sahibi river barrage. Massani is a small settlement of about 1400 people in the Indian state of Haryana.

The Masani Barrage [credit: Tribune India]

He sells all sorts of items in his kirana shop (a small family-owned store selling grocery and other retail products), items he purchases from the nearby town of Rewari. But apart from providing the village inhabitants access to these everyday products, he plays another important role — that of an intermediary between the residents of his village and the formal financial system.

He does this with the assistance of a mobile device called the MicroATM — that comes equipped with a biometric authentication tool and a display for navigating (this could also just be a smartphone with a fingerprint scanner!). The residents use Satya’s services to conduct basic financial activities — open bank accounts, withdraw money, check their balances and even make transfers to other accounts. Satya is what is called a Business Correspondent (BC), one of over 500,000 business correspondents in India who are instrumental in providing financial inclusion to millions of previously unbanked citizens of the country.

This article will describe each of the systems that enable BCs like Satya to bring the benefits of financial inclusion to remote areas in the country. Here’s a summary of all the systems we will cover in this post —

1. Aadhaar
2. PMJDY and JAM Trinity
3. Aadhaar Payments Bridge System (APBS)
4. Aadhaar Enabled Payment System (AePS)
5. Aadhaar Pay

We begin with the Aadhaar identity and authentication system itself, which is the bedrock upon which all Aadhaar payments are built.

Aadhaar

Aadhaar is a 12-digit unique identity number that identifies residents or passport holders of India, based on their biometric (fingerprints and iris scans) and demographic (name, DOB, gender and address) data. This data is collected by the Unique Identification Authority of India (UIDAI), a statutory authority established in January 2009 by the government of India.

Aadhaar is the largest biometric authentication program in the world, and covers about 1.26 billion people as of August 2020 (over 90% of Indian residents). [ref]

Pradhan Mantri Jan Dhan Yojana

The Pradhan Mantri Jan Dhan Yojana (PMJDY) is a financial inclusion program of the Government of India for Indian citizens that aims to expand affordable access to financial services like bank accounts and formal payments, credit, insurance and pension systems.

India opened the largest number of accounts (18,096,130) in one week under PMJDY, a feat that has been recorded in the Guinness Book of World Records.

With PMJDY, a total of over 40 crore (400 million) accounts have been opened with deposits amounting to ₹130,547.55 crores (₹1.3 trillion) as of August 2020. [ref]

JAM Trinity

For a long time, the Aadhaar card was seen as a means to obtain a SIM card in rural households — since Indian law requires the SIM to be linked to the identity of a person. This promoted widespread adoption of Aadhaar.

In an attempt to combine PMJDY with the 900 million mobile phone users in India in 2014, the government introduced the JAM Trinity whereby the Jan Dhan Account would be linked to the Aadhaar and the Mobile number. This would allow the government the ability to transfer money directly to the account of the Aadhaar holder, and subsequently allow the account holder to transact with this money using his mobile phone.

Aadhaar Payments Bridge System

Since Independence, the Indian government has provided subsidies on basic necessities like food and kerosene to help provide security for poor households. Yet even today, there are large leakages owing to inefficiencies and corruption in the distribution of these goods — up to 54% for wheat, 41% for kerosene and 15% for rice. [ref]

For these reasons, the government sought to provide these subsidies in the form of direct cash transfers. The Aadhaar Payments Bridge System (APBS) was launched in 2013 to facilitate direct cash transfers to Aadhaar-seeded bank accounts. This payment system is maintained by NPCI, which stores a mapping of Aadhaar numbers to the banks that contain accounts for these numbers. Payments intended for a specific Aadhaar holder reach her bank via this route, where the beneficiary bank contains a further mapping between the Aadhaar number and the beneficiary’s account details.

Via this system, Direct Benefit Transfer (DBT) schemes such as LPG subsidy, MGNREGA, etc. are carried out for provision of government subsidies and welfare to the population. In FY 2019–20 alone, ₹99,000 crores (₹990 billion) were disbursed through the APBS.

Aadhaar Enabled Payments System

Once Aadhaar seeded bank accounts were receiving cash from direct benefit transfers schemes, it became necessary to enable people to open accounts and perform deposits, withdrawals and payments from these accounts in a convenient and accessible way.

The Aadhaar Enabled Payments System was launched publicly in 2016 to facilitate payments via Aadhaar number and biometric data. The AEPS works with the help of a MicroATM device operated by Business Correspondents like Satya.

For example, a user wishing to withdraw goes through the following steps. She enters her Aadhaar Number, her Bank’s Identifier and withdrawal amount. Then she scans her biometrics on the MicroATM. At this point the MicroATM authenticates her using her biometric information stored at UIDAI. Once this is done, her Aadhaar Enabled Bank account is debited and the money is made available to her.

Here’s an excellent video in Hindi explaining the AEPS process,

Now a valid question here is to ask why such a system needs to even exist, given that the underlying transactions are through bank accounts. The answer is that AEPS facilitates bank accounts and transactions in villages and remote areas where opening a bank branch is infeasible for the bank. This is usually because there are too few customers in the region to make it economically viable. In the absence of AEPS residents in villages like Masani would have to spend several days just travelling to larger towns or cities to open a bank account or maintain it.

If you’d like to see a little more detail on the transaction flow, here are the steps that take place in the background —

AEPS Payment Flow

Here’s a step-by-step breakdown of what’s happening in the picture —

1. Customer enters his Aadhaar Number, Bank IIN, withdrawal amount in the MicroATM and provides his fingerprint in its scanner.
2. The MicroATM captures these details, encrypts and sends them to the Business Correspondent’s bank.
3. BC’s bank forwards these transaction details to the NPCI.
4. NPCI requests UIDAI authentication for the customer’s fingerprint.
5. UIDAI verifies the fingerprint matches the customer’s Aadhaar number, and if yes, it authorizes this fingerprint.
6. NPCI checks the institution that holds the account seeded with the Aadhaar number provided and forwards the transaction to that bank.
7. Customer’s bank debits the customer’s account and returns a confirmation to NPCI.
8. NPCI authorizes the BC’s bank to complete the transaction.
9. BC’s Bank returns an authorization message to the MicroATM device.
10. Upon seeing this confirmation, the BC disburses the cash to the customer.

AePS transactions have been instrumental in providing much-needed access to money from welfare schemes for migrant workers during the COVID-19 pandemic — between March and April ’20, AePS transaction volumes rose from 173 million to 403 million.

Aadhaar Pay

BHIM Aadhaar Pay is an application for merchants that allows them to receive payments using Aadhaar biometrics. It is akin to a merchant version of AEPS. It allows merchants to accept payments using the Aadhaar number and biometrics of their users, requiring only a mobile device and a fingerprint scanner.

Looking Forward

With the proliferation of mobile internet in recent years through industry initiatives like Reliance Jio, the benefits of policies like the JAM trinity and Aadhaar Payments are being realized. This is particularly important in providing access to financial services to the poor in a country like India — which has a significant rural population. While we wait for the unconnected to get connected, Aadhaar Payments enable serving the unserved.

Quick check on where we in this mini-series of deep-dives on the payment systems in India. So far we have covered —

• What Happens When You Make a Credit Card Payment?
• How Do UPI Payments Work?
• Aadhaar Payments (in this article)

Next week, we will round out this series with a deep dive into a new system of bill payments, the Bharat Bill Pay Service (BBPS).

About DICE

DICE (Digital India Collective for Empowerment) is an industry body focused on the Indian Digital Payments ecosystem. DICE takes an India first approach to creating collaborative industry-regulator relationships in the thriving ecosystem. Follow us at @indiadice on Twitter.