Digital Finance | Emerging Trends | SDG1
June 26, 2017

Aadhaar: India’s route to digital financial inclusion

By ITU News

With no pension, Surat Singh, a former Delhi Transport Co-operation driver, had no way to support his two children and four grandchildren, all of whom live together in their small house in the rural village of Surakhpur, an hour outside of Delhi, India.

“We used to be able to run our household well,” says Mr Singh’s wife, Raj Kumari. “After he [Singh] retired from his job, we did not have a way of earning a living.”

To make ends meet, Singh and Kumari opened a small shop three years ago.

Now, a new digital payment service set up by India’s government has dramatically boosted their business. In just four months since the cashless payment machine was installed, they have boosted their monthly income by 15–30%, money that has helped transform the lives of his family.

“The cashless payment machine which has been provided in our village has been very beneficial for us,” Singh says. “The ones who don’t have cash on hand are able to buy goods through this method… so it is helpful to us, and the cus­tomers, too.”

A global model?

Singh is just one of millions of Indians who’ve seen their lives improve in fundamental ways since the government started a biometric identification system called Aadhaar in 2010. Aadhaar has since been linked to digital pay­ment systems as part of a broader push for digital financial inclusion under the auspices of the Digital India programme, with a vision to transform India into a cashless, digitally empow­ered society and knowledge economy. The com­bined efforts are now seen as a model for other emerging markets worldwide as they, too, seek to improve the lives of their citizens, including many of the world’s 2 billion unbanked.

The early success — and tremendous scale — of India’s efforts are especially important to note at a time when digital financial services are increas­ingly seen as a key driver in the fight to alle­viate poverty, the United Nations’ Sustainable Development Goal No. 1 (SDG 1).

“You can open a bank account using Aadhaar, and if you link your mobile number with Aadhaar, mobile becomes another digi­tal identity… So financial inclusion, identity number and the mobile — all three are very powerful, empowering tools in the hands of the people,” says R.S. Sharma, Chairman of India’s Telecommunications Regulatory Authority (TRAI). “I think it’s a really win-win situation for all of our people, and I see India being transformed.”

Digital payments transformation

Indeed, despite having the 7th-highest GDP (Gross Domestic Product) in the world, India still had some 233 million unbanked citizens as of 2015. But that’s changing fast. More than 50% of India’s Internet users will use digital payments by 2020, according to a new report by Google and the Boston Consulting Group, which also predicts that the digital payments industry could be worth up to USD 500 billion by 2020, contrib­uting 15% to the country’s economic output.

Better systems for digital financial inclusion are paving the way for a boom in digital payments and e‑commerce.

Investment is pouring in, with Amazon recently injecting USD 10.5 million into its India payment arm and Tencent, eBay, and Microsoft recently investing USD 1.4 billion in the homegrown e‑commerce company Flipkart.

India’s payment revolution has supported com­munities across the country. Around Delhi, many shops and market stalls have digital payment terminals or QR codes. The convenience of digital payments is helping Jigyasa Grover with her studies.

“I bought all of my books this term on payTM!” she told ITU News recently. “The safe and easy option of conducting financial transactions digitally, along with not needing to carry wads of cash, plastic cards, or even queue up for ATM withdrawals, is the biggest motivator for me to use PayTM. Also, lots of discount coupons and cashback schemes makes it all the more fun to use!”

Behind the success: Aadhaar

Without formal ID, many Indians struggled to open a bank account. In response, the government launched Aadhaar in September 2010, the foundation of the nation’s financial inclusion.

Aadhaar is a 12-digit, unique identification number underpinned by biometric authentication which provides a secure, safe and unique proof of identity for India’s citizens, with no criteria for eligibility. This means that a thumbprint or iris scan at the point of service delivery can act as ID, for example when opening a bank account, or as a digital signature for a paperless cash transaction. Today, over 1 billion people in India have signed up to the programme and there are roughly 13 million authentications via Aadhaar every day.

The programme is driven by a national vision to have a cashless society — or rather, a “less cash” society, Sharma says.

“The government of India is really pushing cashless and digital transactions in a big way and I think Aadhaar and mobile pene­tration in this country, and financial inclusion have made it very easy to have these things done.” — R.S. Sharma, Chairman of TRAI

“Under the JAM [Jan Dhan, Aadhaar, Mobile] scheme, the government has opened 240 million bank accounts in a matter of a few months. So in that way, everyone in the country who has a bank account, now has mobile phone, and now has Aadhaar. So it is a complete picture.”

Moreover, Aadhaar’s platforms are inclu­sive, offering multiple options for people to make payments. Smartphone users can make payments via Unified Payment Interface (UPI); Unstructured Supplementary Service Data (USSD) is available on a fea­ture phone; and those without a mobile phone or payment cards can make payments through AadhaarPay.

Saving the government money

The programme is also beneficial for the government, which uses the information on Aadhaar as a ledger through which to clean benefit delivery system databases of duplicate and fake accounts. Every year, the government conducts roughly 1.5 billion individual credit transactions for LPG (gas), with the 120 million eligible citizens receiving 12 gas cylinders a year. After linking LPG gas direct benefit trans­fers with Aadhaar cleaning out the database, the government made a saving of INR 20 thousand crores (ten million) in one year — twice the cost of Aadhaar.

“So there is a huge substantial saving to the gov­ernment without compromising the benefits to people,” Sharma notes. “It has reduced the cost of delivery, it has made subscription to those facilities paperless, and it has saved the govern­ment from duplicates and costs.”

Transforming lives through Aadhaar-enabled digital payments

Surrounded by sugar, flour, cold drinks, chil­dren’s snacks, and basic stationery for school children, Singh reminisces on the benefit that digital payments have had on his business and his customers, who used to have to travel 4 km to the nearest ATM.

“It is really beneficial. We don’t have either a bank or an ATM here in the village,” Singh says. “Every family has a provision to pay through digital payment. Some very old people do not know how to use digital payment, but everyone else does use it.”

This has had a significant impact on his revenue. “Installing the machine, there has been some increase in sales. So earlier, we used to conduct sales of about INR 2000 (USD 31), now it goes up to INR 2500–3000 (USD 39–46), which has been possible because of the machine,” Singh said.

Villagers also see the benefit of this cashless payment system.

“Digital cards are very convenient. We don’t need to carry cash with us. Whatever we want to buy, with just the swipe of the card, the work gets done,” says another Surakhpur resident, Ranbhir Singh. “It used to be dangerous to carry cash around, lest someone would steal it, but we don’t have to worry about that [now].”

Connectivity is key

However, network connectivity issues can often interfere with Singh’s business, meaning that Singh can lose a sale.

“We are facing network connectivity issues. There are no telecom towers in about 4 km range and sometimes, that leads to poor con­nectivity,” Singh tells us. “The network is inter­mittent. It usually works and sometimes loses connection… There is a mention of installing a tower. Only then the problem will get solved.”

Steps are being taken to ensure reliable and robust mobile connectivity throughout the 3.28 million km² country, says Sharma.

“We have a voice connectivity spanning to more than a billion people. So everybody in this coun­try, more or less, has voice connectivity through mobile,” he says. “We also have data connec­tivity — of course, the speeds and everything are not reliable in some parts of the country. So we, and the telecom operators, are working to ensure that we have better data delivery.”

This is being achieved through a growing net­work of undersea cables, and TRAI has made recommendations for using digital cable TV as a broadband delivery system. WiFi hotspots throughout the country also provide cheap data through WiFi, but there are currently less than 10 000 across India.

The country needs “at least a million, so I think there is huge scope for increasing these WiFi hotspots,” Sharma says.

“What we are visualizing is actually a grid of WiFi hotspots, which means that you have to authen­ticate your identity once, and you will have to attach your payment instrument once.

So, authentication and accounting is taken care of on the cloud,” Sharma says. “In a way, it will be an unbundled model, where certain work can be done by aggregators, and the guy on the field is basically putting his WiFi hotspot router and just powering it, and that’s about all.”

By Lucy Spencer (@inquisitivelucy), ITU News

© All Photos: Julie Marchand/ITU News

[For more on-the-ground examples of how ICTs are accelerating the SDGs, read the latest edition of ITU News Magazine.]

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Aadhaar: India’s route to digital financial inclusion

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