Aadhaar-Enabled Payment System: Connecting the Banks with the Unbanked & Underbanked

In one of the villages of Jharkhand, the lives of Basudeb Pahan and Kalamati Devi are not the same anymore. There’s been a change, and one that’s for the better. Now with old-age pensions and school stipends being paid through the Aadhaar enabled payment systems or AEPS, the lives of thousands are being transformed. As Basudeb puts it, those days of walking a 15 kilometer stretch through hilly and difficult roads and then queuing up at the bank for hours for a just a meager sum of Rs. 400 are now over.

So, what exactly does AEPS do? The AEPS system leverages Aadhaar online authentication and enables Aadhaar Enabled Bank Accounts (AEBA) to be operated in anytime-anywhere banking mode through Micro ATMs. This system is controlled by the National Payments Corporation of India (NPCI).

The 5 Aadhaar enabled basic types of banking transactions are:

  • Cash Withdrawal

  • Cash Deposit

  • Aadhaar to Aadhaar Funds Transfer

  • Balance Enquiry

  • Gateway Authentication Service

So how does, AEPS work? The beneficiary bearing a UID number (say Ram) approaches a business correspondent (BC) with the request to withdraw cash. A Business Correspondent (BC) is an approved Bank Agent providing basic banking service using a Micro ATM. The business correspondent feeds Ram’s UID number, fingerprints and amount into the micro-ATM.

A micro ATM is a biometric authentication enabled hand-held device (also known as a Point of Transaction [PoT] terminal) which serves as the doorstep banking system. Micro- ATM can perform all types of transactions including deposits and C2C transfers. The Aadhaar server authenticates the beneficiary’s ID and gets his bank account using the ID mapper. Once this is successful, the debit and credit transaction is carried out. An sms is sent to the beneficiary and BC and beneficiary gets his cash.

There are two forms of payment systems under the AEPS. The first facilitates crediting money into the beneficiary accounts, whereas the second enables account-holders to withdraw their cash.

The first form has been implemented around 8 banks like Central Bank of India, SBI, ICICI, HDFC, Indian Overseas Bank, Syndicate Bank, Union Bank of India etc. through payments’ company, Visa called the ‘Saral Money’ (Convenient cash) initiative under the AEPS system. There are 11 other banks which have already implemented it for second phase of AEPS to enable withdrawal of the money by the beneficiary. Presently the pilot schemes are working in states like Karnataka Jharkhand, and Andhra Pradesh, and service which is to be operational in all parts of the country by 2014.

The Aadhar card claims to allow ease of payments at doorstep, minimized queuing, cutting out of middlemen,

Benefits and drivers

  • Ease of payments at the doorstep instead of travelling long distances

  • Minimized queuing leading to operational efficiencies at Banks

  • Accurate and fast transaction/s

  • Eliminating middlemen

  • Interoperable system ensures that customer is not tied to one bank’s BC

  • Banks do not need to invest in enabling capture of biometrics

Problem areas and drawbacks

  • Authentication failures due to failure in recognizing user fingerprints at micro ATM’s

  • Existence of gaps in issuing passbooks to all account holders as per commitment, which led to users adopting traditional banking

  • Irregular commission and incentive payments to business correspondents

  • Banks are reluctant to step in, to position micro ATMs & go on board for AEPS due to lack of clear service oriented goals

  • Service providers are slow to adopt to new technology & requirements

  • In case of an identity theft, it’s not yet clear between the 2 (bank or government) who will be responsible to solve such problem

Similar payment systems in other countries

Bolsa Familia is a social welfare programme of conditional cash transfer started by the Brazilian Government in 2003 with the merger of existing conditional and unconditional cash transfer schemes. Poor households with pregnant and lactating women and children upto 15 years of age are eligible for this scheme. The condition associated is that school attendance for the 6-15 year old should be 85% and regular health check-up for pregnant women and immunization and health check-up for children upto six years is a must. The cash is transferred to the female head of a household through a ‘Citizen card’ issued by a government owned saving bank. The impact of this scheme was the fall in Brazilian Gini Index by 4.7% between 1995-2004 with Bolsa Familia contributing to 21% of the decline according to a report by UNDP. Moreover, the probability of dropping out of school declined by 1.6% and probability of absence from school declined by 3.6%.

Another such scheme is the unconditional cash transfer in South Africa (CSG). This was rolled out in 1998 targeted at the primary care giver, i.e. women. Poor households with children upto 9 years are eligible and there are no conditions attached. Cash is transferred to the female head of a household through a ‘Citizen card’ issued by a government owned saving bank.

LTP View: Aadhaar remains a technology solution that can be integrated with an existing social welfare scheme. It could help reform but might not completely remodel the existing system. Success of the AEPS depents on the support it receives from other stakeholders which includes the state government and banks.