Rebooting India: Realizing a Billion Aspirations (10 page)

The Aadhaar-based model overcame these drawbacks in a number of ways. Many banks functioned as registrars of the UIDAI, enrolling people for Aadhaar; they could set up bank accounts for these individuals at the same time. Identity verification through Aadhaar is, by design, completed online, without requiring a card or any other physical document. If the customer’s bank details were also easily accessible online—much in the way core banking systems operate—all transactions would be entirely digital, completely obviating the need for physical documents.

Online access conferred other benefits as well. Unlike the earlier smart-card system, customers now had the freedom to operate their accounts either through a business correspondent or through a physical bank branch or ATM. It was now possible to build an interoperable system, one where a customer could do business with any business correspondent from any bank. This would create a level playing field in which customers had more bargaining power, and monopolies could not arise. Thanks to the core banking system, a bank account opened in Mumbai can be operated seamlessly in Agartala, in effect following the user wherever they go; the microATM network was designed to confer the same mobility upon its users.

Finally, the UIDAI and NPCI worked closely with the RBI to widen the regulations around who could function as a business correspondent so that a greater number of people could now offer banking services in the field. The RBI finally agreed that profit-making companies would also be permitted to function as business correspondents. The official notification to this effect was released by the RBI on 28 September 2010—coincidentally, just a day before Ranjana Sonawane of Tembhli village became the first Indian resident to enrol for an Aadhaar number. These three principles, of online access, interoperability and the incorporation of for-profit organizations into the business correspondent network, guided much of UIDAI’s thinking in the later design of the microATM system.

It was 7 p.m. in the dead of winter in Ranchi, a city of nearly 900,000 and the capital of Jharkhand. With less than twenty-four hours to go for the first field test of an Aadhaar-enabled electronic payments system, Rajesh Bansal, the assistant director general in charge of financial inclusion at the UIDAI, was told that the microATM device to be used in the test was not working. He recalls, ‘I informed the team that nobody was going home until the problem was fixed, and made the necessary changes to the software myself.’

It had been a long road to get to even this point. Despite being
what Viral calls ‘an expert wielder of both the carrot and the stick’, Rajesh had found it difficult to get things working from New Delhi. He says, ‘I remember telling Viral outside the UIDAI office in Delhi that I was going to Jharkhand myself and wouldn’t come back until I got everything sorted out and the first live transaction went through successfully.’ Once he got there, he had to deal with one challenge after another. The payments were supposed to be disbursed under the MGNREGA scheme; by the time a specific block and panchayat of Ranchi district had been identified as the test location, the MGNREGA work for the season had already been completed. Rajesh had to go to the district commissioner and request him to restart the project in that area.

The work was completed on 22 December, with payments scheduled to go live two days later. Rajesh spent most of the 23rd in the block development officer’s room trying to get the payments released for distribution, drinking endless cups of tea and refusing to budge until he had the paperwork in his hands. That evening, while the microATM snafu was being sorted out, Rajesh also had to ensure that all the payees had bank accounts, and he furnished a personal guarantee to the bank (Bank of India, in this case) that he would provide the required documentation for those who didn’t.

The first payment was scheduled for 9.30 a.m. on the 24th. At 8.30, the bank again informed Rajesh and his team that there was a problem of some kind, which they managed to fix. Rajesh says, ‘Until 9.20, nothing was happening and we were getting seriously jittery. Finally at 9.24, the first account got credited electronically. That was an amazing moment. I messaged Nandan telling him that his vision had finally come true in the field. The villagers couldn’t believe it either. It used to sometimes take them six months to get their money and now they were getting it in a matter of minutes.’

The groundwork for this pilot project had begun three years ago, within the few months of the UIDAI itself being established. Nearly a year before the first Aadhaar number would be issued, we were already designing a payments network based on Aadhaar and biometric authentication. There were two reasons for getting such an early start;
one was that we were giving ourselves enough time to iron out the kinks in the design and build a working solution that would be ready to hit the ground as soon as Aadhaar enrolments gained momentum. The second was that building such a network also required us to build consensus across all stakeholders—banks, payment industries, central and state governments—which we knew would be a lengthy process.

The same principle of asynchronicity that guided the design of the Aadhaar platform also informed our decision to start building both the system and its future applications simultaneously. We believe that asynchronous design should be adopted widely in all government projects—too often, waiting for one part of the system to be ready before beginning work on the next leads to bottlenecks and delays, a state of affairs that we were largely able to avoid.

What were some of the factors we had to consider when drawing up the blueprint of the electronic payments system? Firstly, it would have to reach millions of people, and the only network in India with the kind of reach and ubiquity that was required was the mobile telecommunications network. The mobile telecom network would have to be the first piece of the puzzle. Secondly, the system had to be based on a technology that would be easy to use for poorly educated or even illiterate people, who might not be able to remember or enter a PIN number into a device. Thirdly, the system had to ensure that social security payments were being correctly targeted to their intended beneficiaries, while also raising the barriers against potential fraud. This meant that any identification mechanism would have to be extremely specific to the person using it so that nobody else could fraudulently claim their benefits. With these constraints, the only technology that answered all requirements while still allowing deployment at large scales was that of microATMs using biometric authentication.

The UIDAI set up a microATM committee chaired by Prof. H. Krishnamurthy from the Indian Institute of Science, which worked for over three years and met more than twenty times to firm up the microATM standards. Such a long period of deliberation is rather uncharacteristic, but the committee was determined to produce a
working solution rather than just a set of guidelines. The entire system was designed to function as a thin layer on top of the existing banking infrastructure. It was compatible with existing industry regulations and standards so that it could be easily adopted for use without much effort on the part of banks or payment corporations. The microATM itself would use Aadhaar-based biometric authentication to identify the customer, who could then carry out withdrawals, deposits, transfers and balance inquiries.

While the microATM technology was being put in place, the question of incentives had to be figured out. In a payment transaction, the party that benefits the most from that electronic payment typically bears the cost. In this case, the clear beneficiary was the government, which would profit from the high levels of transparency and accountability provided by the Aadhaar-linked microATM network. The savings generated by switching to this model were sufficient to cover the government’s transaction costs; while the official recommendation was 3.14 per cent, the government currently pays a transaction fee of 2 per cent.

The operational model for microATMs is much like the public call office (PCO) model, where thousands of small entrepreneurs benefited from operating a pay-per-use phone. The only capital investment needed is Rs 15,000 to purchase a compact operating device, much like a payment card terminal. Factoring in the cost per transaction (a maximum of Rs 15), the total cost is far lower compared to the expense of setting up and operating an ATM or a rural bank branch, making the microATM model financially attractive to banks.

In the first few years after implementation of this model, we expect that cash will still be moving across the country, since people will withdraw the money disbursed into their bank accounts for their own consumption. There are many benefits to this process: money is now transferred to a bank account without requiring any intermediaries or approvals. As the following diagram shows, an Aadhaar-enabled bank account should ultimately allow the customer access to funds from multiple sources, whether they be a salary paid by a private company or disbursements from government social security schemes.

In the accompanying diagram, we sketch out a road map for the transition to a cashless economy in India. As we will discuss in the next chapter, Aadhaar can serve as documentation to complete an electronic Know Your Customer process, turning what is currently a heavily paper-based system into one that is entirely digital. Aadhaar-based e-KYC has been used to open many of the 170 million bank accounts under the Jan Dhan Yojana scheme, and soon over Rs 3 trillion worth of government social security and subsidy benefits will start flowing into these accounts. In order to handle this expanded customer base, a strong network of 1 million business correspondents will spring up, just like it did in the case of mobile phone operators providing top-up services.

We have already discussed some of the regulatory changes needed to support a move towards electronic payments: the business correspondent model and interoperability among banks, among others. The RBI has also further deregulated the banking sector, allowing small banks and payment banks to enter the arena.

But what about technology? Within a few years, one in every two Indians will own a smartphone, giving them access to the burgeoning ecosystem of online payment applications. We anticipate that the next year or two should see the launch of smartphones with iris readers, making it possible to use Aadhaar as an authentication factor for online transactions.

Another contribution towards a cashless society is the launch of a Unified Payments Interface (UPI) by the NPCI.
¹⁷
The goal of the UPI is to create a single, seamless platform for any kind of electronic transaction, whether it’s payments from the government (subsidies, for example), payments to the government (taxes), payments from customers to vendors, and ultimately even money transfers between two individuals. The danger with so many players is that each will evolve their own payment method, making things unnecessarily complex. The UPI is designed to prevent such ‘payment islands’ from
emerging, and to create a central system that anyone can join and use. Since it is entirely digital and runs on existing infrastructure, the UPI is also cheap to implement. Nandan currently serves as honorary advisor (innovations and public policy) to the NPCI, focusing on the development of the UPI.