Transformation of the fintech sector in 2021 and expectations from 2022

Disruptive technologies have transformed the fintech industry tremendously, especially amid the pandemic. With restrictions on the physical movement of people to contain the spread of the coronavirus, regulatory bodies like RBI, IRDA and SEBI knew only too well that technology is the need of the hour, and passed circulars on implementing disruptive technologies for identity verification.

These decisions modified customer onboarding processes for fintech companies, transforming it into a wholly digitised process benefitting the entire fintech and banking and financial services industry (BFSI) industry.

Previously, customer identification was a painful and tedious task for both companies and customers. Tons of paperwork was involved, and despite the paperwork, there was no guarantee that the submitted documents were accurate. Apart from being tiresome and time consuming, the process of customer identification also included a hefty cost.

Introduction of UIDAI - a gamechanger

The digital identification revolution began in India with the Unique Identification Authority of India’s (UIDAI’s) Aadhaar. Way back in 2013-2014, the concept of Aadhaar based e-KYC entered the market and paved the way for a digital journey.

The concept of e-KYC was simple - the customer had to provide their Aadhaar number and any one of the three authentication factors, i.e., One Time Password ( OTP sent to the registered mobile number or Email ID), fingerprint or retina scan.

With this data as input, the request would hit the UIDAI servers and instantly, the KYC details, which includes name, gender, date-of-birth, address and photograph, would be retrieved by UIDAI.

Almost all the regulators accept e-KYC in India, including RBI, SEBI & IRDA. Apart from companies regulated by these regulators, governments also had started to utilise these Aadhaar services for e-governance.

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Restrictions on usage of Aadhaar

The 2018 Supreme Court of India verdict on Aadhaar had restricted the use of Aadhaar services only to banks and governments. Post the Supreme Court judgement, there was a significant impact on the fintech/BFSI industry. The industry was struggling to implement various technologies for faster identification of citizens.

Some of the solutions that were tried by the industry included OCR extraction, facial matching, offline KYC (provided by UIDAI), etc. However, although these solutions were available, regulatory approvals remained a major challenge.

Nevertheless, right before the pandemic, the concept of video KYC, a method in which a customer can be identified with the help of a video call, was approved by the RBI. IRDA and SEBI later followed it.

The RBI approved process of video KYC has four steps:

• PAN validation
• Aadhaar validation
• A video call between the customer and the agent of the fintech company where the agent asks questions based on the customer’s PAN & Aadhaar details.
• And finally, a facial liveness check - a facial matching between the live photo and the photo on the PAN card/Aadhaar card. This step is performed on the backend with the help of AI-powered tools/algorithms during the video call.

How the pandemic pushed the adoption of video KYC

The outbreak of COVID-19 and restrictions followed by the lockdown led the fintech and BFSI industries to implement video KYC as it was a contactless and instant solution to onboard a customer.

Recently, IRDA requested UIDAI to allow some entities regulated by them to resume using e-KYC services provided by Aadhaar. This request by IRDA was based on a PMLA Circular, which allows regulated entities to use Aadhaar services if these companies follow all UIDAI compliance and guidelines.

And towards this, a total of 53 companies were allowed by IRDA to utilise Aadhaar services. Following IRDA, RBI also, in September 2021, allowed NBFC’s & other companies regulated by RBI to use Aadhaar services.

With Aadhaar services back in action and video KYC being implemented by many fintech/BFSI industries, 2021 can be considered a year where organisations transformed their business to go digital.

Apart from going digital, these services also helped in saving time and cost.

Summing up

This is just the beginning of the digital revolution, with a lot more to expect in 2022 and thereafter. Facial matching and liveness detection services, the backbone of video KYC, are now being considered by the majority of the fintech/BFSI industries as the simplest tools for customer identification.

It is also to be noted that UIDAI is taking significant steps to introduce the fourth modality of identification - face. Currently, UIDAI validates citizens based on OTP, fingerprint and iris. However, as mentioned earlier, UIDAI is looking to roll out facial-based identification shortly.

In 2022, it is a given that the majority of the fintech/BFSI industries shall opt for these digital identity services that shall enable them to offer services at a very affordable price instantly.

Also, the concept of bucketing customers while they walk into a branch or outlet is being piloted in certain fintech companie,s where facial liveness and facial matching plays a key role.