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As the government strives to create an inclusive society, direct benefit transfer (DBT) forms an integral part of this nationwide mission. DBT aims to cover even marginalised sections of society that have traditionally remained outside the purview of the mainstream financial ecosystem.

To facilitate this goal, the Central Government introduced India Stack, seeking to digitise the nation’s financial system to benefit all citizens while making banks an integral part of this process. The Reserve Bank of India reported that India’s financial inclusion index reached 60.1 in the fiscal year 2023, rising from 43.4 in 2017.[1] This inclusion is achieved on the back of smartphone penetration and using Aadhar for KYC.

Initiatives such as digitising KYC, specifically e-KYC, can help non-banking financial companies (NBFCs) and digital startups offer financial inclusion to last-mile consumers by providing basic financing services and more.

Why KYC is critical?

Even as this mass outreach is underway, KYC norms must be followed. Businesses need to ensure they are primarily speaking to the original customer and that there is no identity theft or diversion of funds. KYC protocols aid banks and other lenders in identifying and verifying every customer before establishing a financial relationship with them.

In popularising digital transactions, NBFCs and fintech firms have been the leading players, mainly because they reach customers who the traditional banks struggle to serve through a physical presence. Nonetheless, it must be noted that even though fintechs and NBFCs serve customers whom banks consider ineligible for their services, all the RBI-mandated KYC guidelines must be followed to prevent money laundering and terror financing activities.

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However, KYC guidelines were originally followed via cumbersome and time-consuming physical, paper-based procedures. During this complex process, customers had to submit copies of several documents, such as Aadhaar, PAN, passport, utility bills, etc., that provided proof of their identity and place of residence. These manual procedures delayed customer onboarding and led to higher chances of human error while inflating operational costs.

What’s worse is that paper-based documentation remained highly vulnerable to fraud since crooks found it easy to provide fake or forged documents. Therefore, detecting fake documents within a short period before the approval of loans or for other banking purposes was challenging. Enterprises also struggled to update databases regularly as they sought to comply with evolving regulatory guidelines.

Accordingly, manual KYC was problematic for companies as non-compliance with regulatory rules could incur fines or even lead to legal consequences and damage to their brand reputation. Recently, a major fintech firm had its licence suspended after purportedly failing to comply with stringent KYC norms despite repeated reminders from the RBI over a prolonged period. Such cases highlight the criticality of adhering to all KYC norms.

Broad benefits of e-KYC

Against this backdrop, the transition from manual to digital KYC is a blessing for both customers and companies. Besides streamlining customer onboarding, it holds various benefits for all stakeholders. Various factors propelled the early innovations and the move towards digitisation. These included lowering the turnaround time for verifying KYC details, reducing the overall cost of customer acquisition, and curbing the carbon trail of onboarding procedures that were compliant with the latest laws of the land.

Technological innovations such as biometrics (fingerprint recognition, retinal scans, facial feature checks, and voice authentication), blockchain (an immutable digital ledger), and multifactor authentication (based on multiple authentication methods), among other breakthroughs, also fast-forwarded the digital transition of KYC. The rapid rise of these tech advances bolstered the reliability of e-KYC.

The introduction of Aadhaar further boosted digital KYC initiatives. By entering an Aadhaar number, financial entities can immediately identify the antecedents of prospective customers. These strong and swift verification means quickened the pace of customer acquisition and onboarding at exponentially lower costs compared to traditional paper-based mechanisms.

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Moreover, unlike conventional financial security systems that rely on PINs and passwords, Aadhaar uses biometrics that offer higher safety and security. An added advantage of digital KYC is that it can be done swiftly through smartphones, saving tremendous time, money, and effort for financial firms and customers. Advanced mobile cameras ensure customer images and documents can be captured instantly, resulting in high-definition pictures that were unthinkable a decade ago. The universal use of smartphones has transformed e-KYC, enhancing consumer convenience. 

For example, customers can have their KYC done within minutes via a live video call with a bank officer[2] or an authorised verification agent. During this process, the officer can record/verify the KYC documents of customers and their signatures via video call, eliminating the need to submit physical documents. Thanks to the seamless onboarding of customers through video KYC, NBFCs and fintech have been penetrating deeper into non-metro cities and beyond.

Boosting inclusive growth

Given the easy e-KYC process and the quicker availability of customer data, fintech firms and NBFCs can customise their products and services according to specific customers’ financial needs and preferences, boosting customer loyalty and satisfaction.

Finally, the use of AI (artificial intelligence) and ML (machine learning) algorithms is also increasing the penetration rates of customer acquisition with e-KYC since it augments fraud prevention and identity verification efforts. AI and ML also allow automated data extraction, more robust risk management and fraud detection, and speedy adaption to frequent regulatory changes, among other things.

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RBI data regarding domestic trends and progress in banking indicate that 9053 cases of overall fraud worth Rs45,598 crore were reported through several banking operations in 2021-22.[3] However, e-KYC has helped reduce these numbers since fraudsters find it more challenging to operate anonymously. Furthermore, it has boosted the accuracy and speed of KYC compliance.

Similarly, blockchain is poised to revolutionise customer identity verification and the safety of online transactions by providing a secure, transparent, and decentralised system that permits greater data privacy. As a result, the secure, seamless and streamlined procedures of e-KYC are now driving the faster spread of inclusive banking. Undoubtedly, the transition from manual to digital KYC is propelling a steady increase in smooth online transactions.

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