eKYC – Know Your Customer unassisted using Aadhaar, OTP and Face Biometrics


Know Your Customer (KYC) is essential for obtaining Financial, Healthcare, Insurance, and Telecom services around the world. In the Indian context, until Aadhaar opened up its APIs, KYC was a laborious process costing billions to services providers and inconveniencing customers with a mountain of paper identity documents. The thoughts here are confined to the Banking sector but applies to other sectors equally.

eKYC “assisted”

With the advent of electronic KYC or eKYC using the Aadhaar biometrics platform, things haven’t changed a lot. It certainly has reduced paper documents. However, eKYC is still done in “assisted” mode – meaning either the customer has to be present at the Bank or a Bank Executive has to reach the customer to collect the biometric data. Besides, in most Banks, a paper trail is still maintained despite the biometrics data – reasons best known to themselves. What was costing the Banks earlier is what is costing today – perhaps more with the new biometric devices and the cost to maintain them.

eKYC “unassisted”

The Reserve Bank of India (RBI) took a significant step in December 2016 to allow opening of deposits and borrower accounts using OTP based eKYC, albeit with some restrictions (RBI notification on 08 December 2016, Chapter VI – Customer Due Diligence (CDD) Procedure – Clause 17 and 38 amendments). This has opened up the opportunity to provide this service to customers at the comfort of their homes at a vastly reduced cost to Banks. This would satisfy the two-factor authentication needed by RBI and would suffice to open an Account. However, with increasing volumes (500 million eKYCs projected for 2020 by UIDAI), and the possibility for this service to be abused through third party fraud, this would need additional authentication to ensure that the person completing the transaction is who he really says he is (as close to a physical check).

eKYC “unassisted” with three factor authentication – Aadhaar, OTP and Face Biometrics

To solve this particular problem, FRS Labs rolled out the “Atlas eKYC” solution – fully integrated with Aadhaar – with face biometrics as the third factor of authentication (watch the 60 second video here). While the face is captured by UIDAI as the third biometric element (fingerprints and IRIS being the other two), RBI has not mandated the use of face for biometric authentications – for reasons that face is considered not as unique as fingerprints and certainly not IRIS – and the false acceptance rates (e.g. twins) could be high and that people’s faces change over time – but as always research contradicts this notion and there are plenty of evidence to prove that face is a reliable biometric feature. And it can only get better.

Notwithstanding, RBI has not specified that face could not be used if a commercial organisation wishes to do so as additional factor of authentication to protect their businesses and consumers, so long as the mandatory 2 factor authentication is in force. In a similar tone, RBI has not ruled out authenticating customers using their voice (another biometric element not in Aadhaar). ICICI Bank and Citibank have rolled out voice biometrics to authenticate customers to call centres is a case in point – It is still two factor authentication (the registered mobile phone as the first factor and the consumer’s voice as the second factor of authentication). Therefore, there is a great opportunity here for Banks to provide face biometrics as the third factor of authentication for secure “unassisted” OTP based eKYC without the need for biometric devices. I can only begin to image the convenience for consumers and cost savings for Banks.

Author: P. Shankar – Founder & CEO of FRS Labs.

Disruption of Chit Funds and the Role of the India Stack.

Disruption of Chit Funds and the Role of the India Stack

Chit Funds are indigenous financial institutions in India. It is a mechanism that combines credit and savings in a single scheme. In a chit fund scheme, a group of individuals come together for a predetermined time period and contribute to a common pool at regular intervals. Every month, up until the end of the tenure of the scheme, the collected pool of money is loaned out internally through a bidding mechanism to the most deserving member. This way, people who are in need of funds and those who want to save are able to meet their requirements. Similar schemes have been known to be popular across the developing world, generally referred to as Rotating Saving and Credit Associations (ROSCA)

An interesting aspect of Chit Funds in India is that the industry is highly regulated and institutionalized. A Chit Fund can be either “registered” or “unregistered”. Registered Chit funds are organized by Chit Fund firms/companies and regulated by the Chit Fund Act. They are in essence impersonal contracts that depend on market forces. Unregistered Chit Funds which exceed Rs. 100 ($2) in chit value are illegal in India, although it is widely known that the unregistered Chit Funds industry is still very popular.

While no official or government estimates of the industry exist, The All India Chit Fund Association estimates that “the size of industry is Rs 35,000 crore, with the unregistered part estimated to be at least 100 times the registered one

Value to the consumer

Prof Mary Kay Gugerty, in her paper, “You Can’t Save Alone: Commitment in Rotating Savings and Credit Associations in Kenya” argues that, “saving requires self-discipline, and ROSCAS provide a collective mechanism for individual self-control in the presence of time-inconsistent preferences and in the absence of alternative commitment technologies”

This conclusion, although based in data from Kenya, is also supported by the data collected in India, which suggests that 72.1% of consumers participate in chit funds(Estimate of Chit Fund Industry size) to save.  While 95% of these consumers have bank accounts(Reason for Chit participation : Table 3-7), they still prefer chit funds as a saving mechanism due to higher perceived returns, paperless documentation(Banking Details : Table 3-4), familiarity and doorstep service.

While the actual rate of returns (for savers) and cost of borrowing are highly variable based on a given fund, on average(Reason for participating in Chit Funds : Table 3-11) 6%-42% per annum(Rate of return calculated based on the cost of borrowing, assuming 5% commision, 10 people, Rs 10,000 chit fund and 1 borrower plus 9 savers. Cost of borrowing from Table 5-4 Outside Options – Interest Rates for Loans,)

Housewives and Small business owners are the two most prominent cohorts within the chit fund users(Figure 3-1  Frequency of Occupation based on Gender). Daily chits are popular with small business owners, presumably because it allows them to manage their daily cash flow and allows control over their interest rate when the need for a loan arises(Section 9, Chit funds and Small Business, Para 3).

The chit funds are also perceived to be liquid, Most consumers bid to get the pot when they had an emergency need or when an lucrative business investment came about(Reason for participating in Chit Funds : Table 3-11).

Finally 96% of chit members overall think that the Chit Funds they participate in are safe and about 85% of these chit members are loyal to fund company they are participating in.

Legal framework for Chit Funds

The Government of India passed the Chit Fund Act in 1982, with implementation of the Act left to the Registrar of Chit Funds in each state. This Act, it is relevant to note, contains many restrictions like a minimum Capital requirement (Section 8), prohibition of transacting business other than Chit Business (Section 12), a ceiling on the aggregate chit amount which is 10 times of the net-owned funds (Section 13), Utilization of funds (Section 14), security to be given for full value of chit (Section 20), a self-contained machinery for settlement of disputes etc and a number of penal provision for various defaults(All India Chit Funds Association submission to parliamentary committee), etc.. Notably there are stringent requirements on written formalities like notice to the customer, minutes of the meeting, record keeping and audit by certified chartered accountant(6(1), 15, 35, 40-Chit Agreement, 22(2)- Intimation to Registrar of deposits, 26(1), 34(1) Withdrawal of foreman 28(1) Removal of defaulting subscribers 33(1) Demand note 38(1) Minutes of the meeting).

The regulatory hurdles that the chit companies face due to the stringent rules proposed by the Government progressively, have been a setback to the growth of the industry. The effect of the increased costs of operations for the registered chit companies has been to push these companies ’underground’. Many companies have, in the recent past, either folded up or shifted their operations entirely to the informal arena becoming an ’unregistered’ chit fund(Chit Funds Boon to Small Enterprise).

Economics of running a Chit Fund

Apart from the capital and compliance requirements highlighted above, the key risk of running a chit fund is default. The default rates in the chit industry hover around a meager 1-2%. This is because the chit members are, in most cases, personally known to the chit managers(Section 5, Defaults How are they handled ? – Chit Funds Boon to Small Enterprises). Also,  Defaulters are sanctioned socially as well as being prevented from any further participation(Page 794, Paragraph 2, Economics of Rotating Saving and Credit Associations).

The key source of revenue for a Chit fund manager is commission which is capped at 5%. Alternatively the chit fund managers take the first installment in full. The chit manager can also generate revenue from float interest charges i.e. by disbursing the loan a month after the money is collected, he can earn the interest on the full amount(Section 7 : Sources of Income to the Chit Manager

Role of the India Stack

With the size and scope of the chit fund industry, as outlined above, it is clear that there is a large addressable market for innovators. What makes this opportunity more lucrative is the presence of India Stack. India Stack is set of technologies (primarily Aadhaar authentication, e-KYC, e-Sign, Digital locker and UPI) that together dramatically reduce the cost of transactions. For example, an analysis on the Mutual funds business indicated that by use of India stack, the  average transaction cost would drop from Rs 50 to Rs 2, making it viable for Mutual funds to go after the small ticket business.

Opportunities for Start Ups

Given the background above, following is the most promising opportunity for startups:

Organize the unregistered chit fund companies

  1. Hypothesis: With the recent crackdown on black money and tax evasion, it will become more difficult to run unregistered chit funds circumventing the law. This will give the unregistered chit funds incentive to become registered and follow the law
  2. Product: An easy platform that allows management of chit funds through mobile phone app/apps and make it compliant with the law
  3. Key Customers :  Unregistered chit funds
  4. Key Stakeholders : State Government, Unregistered Chit Funds, Users of chit funds
  5. Key activities:
    1. Build technology based on India Stack to meet KYC requirements, sign chit agreements using e-sign, transfer money between people using UPI and keep an account.
    2. Strong sales network to bring the chit funds onboard
    3. Product and legal expertise to liaison with the state governments and registered chit funds to build products that meets all requirements
  6. Need for funding:
    1. Initial product could be built with a relatively small investment
    2. Scaling with scale will likely need venture investments (but no access to large capital should be needed)
  7. Revenue generating activity:
    1. Pay per instance or per user from the funds
    2. Lead generation for Chartered Accountants
    3. Aggregate data reports could be sold
    4. Could also build a government facing interface for monitoring
  8. Competitive Advantage:
    1. No real competition at this point
    2. Network effects could become significant advantage
    3. Implicit or explicit endorsement from Government agencies
  9. Key Risks:
    1. Product adoption risk: The success of the idea is hinged on pressure from government creating the need, which drives adoption. In the absence which it will be significantly harder to move people from the familiar. The risk is somewhat contained because of a supreme court order directing government to act on this.
    2. Regulation risk: A parliamentary committee has recommended that the government revise the regulation. This means that government could do away with a number of provisions, making compliance much easier of chit funds thus eliminating the need for such a company. Again this is low likelihood event given the scrutiny on this sector
    3. Reputation risk: The company will have to be careful not to associate with chit funds with malicious intents. Being associated could result in penalties and damage to reputation.

Guest Post by Kunal Kashyap, IIT KGP graduate, Spent 8 years at Capital One, a US based Fortune 100 Fintech company. Volunteer for iSPIRT.  

India Stack takes the Digital India campaign to a whole new level

India is the third largest smartphone and mobile internet user market in the world with over 200 million internet users in 2013. The figures are expected to touch a staggering 500 million users by 2017, including 314 million mobile internet users according to a report by IAMAI and KPMG. Clearly, mobile phones are the ‘computing device of choice’ for the country. To keep up the momentum, the Government of India is keen on developing the digital infrastructure of the country under the Digital India program.

Digital India is a revolutionary program that will empower the masses and leapfrog India into the next generation of government services. Fortunately, the lower level of investment in earlier generation technology means India has skipped the legacy era and waited for the right technology to arrive at its doorstep. To kick-start and empower the Digital India program in a very democratized form and involve the great innovation talent of the nation, the Government of India has launched an open API policy. An open API, often referred to as a public API, is a publicly available Application Programming Interface (API) that provides programmers with programmatic access to a propriety software application. This set of open API is known as the India Stack and these would enable the ease in integration of mobile applications with the data securely stored and provided by the government to authenticated Apps.

India Stack is a complete set of API for developers and includes the Aadhaar for Authentication (Aadhaar already covers over 940 million people and will quickly cover the population of the entire nation), e-KYC documents (safe deposit locker for issue, storage and use of documents), e-Sign (digital signature acceptable under the laws), unified payment interface (for financial transactions) and privacy-protected data sharing within the stack of API. Together, the India Stack enables Apps that could open up many opportunities in financial services, healthcare and education sectors of the Indian economy. What this essentially means is that developers and tech startups can now build software and create businesses around the readily available infrastructure offered through India Stack, thus opening a huge potential to tap into the booming smartphone market in the country. Since the consumer market in India is very large, such startups could also hope for institutional funding and gain from the early mover advantage.

Through the digitized elements like e-KYC, e-Sign, digitized Aadhaar information and digital locker, the entire ecosystem has now become a presence less, paperless and cashless based system. A Digital Locker enables users to have all their legal documents in a digitized format that is stored online and can be accessed from any part of the country. The e-Sign makes it simple for people to sign deals, contracts and legal documents through their phones and the Unified Payment Interface lets people make payments with ease through their smartphones from anywhere.

India Stack makes a user base of over a billion people readily available through its API. This means that startups and tech companies can build over this to be able to integrate various functions for their businesses or for larger enterprises. Every bank or telecom operator scans through tons of paperwork every day to be able to verify customers and generate KYC documents. Now imagine the impact if this entire process could be digitized by building an application which would integrate India Stack and the user base of over a billion Indians!

With the technology, documentation and sample code available, entrepreneurs and startups can get started with innovating, prototyping as well as building India Stack enabled applications. The commercial applications are endless with multiple opportunities, as the large user base opened up by India Stack is nascent, solution-hungry and largely untouched by technology. Now even a local vegetable trader can take an intra-day loan almost instantly through his mobile phone and pay it back the very same or next day without even physically visiting the bank or wasting any time (time is money when earnings are proportional to time spent)! With their e-KYC documents and digital signatures, a loan can be processed almost instantly and the money transferred through the Unified Payment Interface. Long queues at banks, telecom offices and all other government and non-governmental processes should be the thing of the past, through proper integration of India Stack.

The nation is looking for “a transition from technology-poor to innovation-rich society” and entrepreneurs have a good role to play. The problems (read opportunities) in financial services, healthcare and education are all so large that only the right technology can cost-effectively solve them. Solving these scale problems would mean great business sense too.

iSPIRT, the non-profit software product industry think tank powered by industry veterans, has been actively involved in the development of India Stack and is helping entrepreneurs make the best use of business opportunities provided by India Stack, while building their startups. iSPIRT believes that India Stack creates a whole new generation of business opportunities around the mobile phone and early movers would have tremendous market advantages.

On a recent visit to India, Bill Gates commented on India Stack saying, “India is on the cusp of leapfrogging!” And it truly is; considering it is the only country in the world offering such an open and secure API, India is certainly looking at taking the Digital India campaign to a whole new level.

The future is here and now is the time to act.