India’s Fintech sector has received a massive impetus, thanks to the technological advancements made over the last few years. Non-banking financial companies (NBFCs) and online lending institutions have given the traditional banking system a good competition. Besides online loans and instant loans, Fintech companies are also offering a range of financial services such as insurance, brokerage, P2P lending, investment, online banking and asset management. Wide reach, easy access and a huge customer base are some of the driving factors of this industry. However, the recent Aadhaar verdict is expected to have a serious impact on the Fintech start-ups. Let us examine the verdict and its effect on the Fintech industry.
Quick overview of the Supreme Court verdict
Ever since the introduction of Aadhaar, there have been debates over its constitutional validity. Both the Aadhaar Act, 2016 and the Aadhaar Scheme were challenged on the claim that they invade people’s privacy. Some experts also suggested that the usage of Aadhaar will lead to mass surveillance. Justice Arjan Kumar Sikri discussed various aspects of the right to privacy and concluded that fundamental rights are never absolute and that it cannot impose without a reasonable, fair and just law. The Supreme Court also stated that the Aadhaar Act aims at serving the welfare state.
Even though the apex court upheld Aadhaar’s constitutional validity, it stated that the project will only be used for delivering subsidies and benefits under welfare schemes that are aided by the government. Section 57 of the Act was struck down, and as a result, private entities can no longer use Aadhaar’s biometric authentication for identification of individuals. That means linking Aadhaar to bank accounts, mobile connections and school admissions is not mandatory anymore. Therefore, Fintech companies can no longer ask their customers to provide Aadhaar details.
Effect of the verdict on Fintech companies
The Aadhaar verdict will now directly affect Fintech start-ups, e-wallet payments, and P2P lending platforms. Most of the NBFCs and online lenders are known for their paperless loans and quick processes, which were only made possible due to online authentication. It was both cost-effective and time-efficient. The verdict will also have an impact on the Aadhaar-based payment systems that allowed people to operate accounts using the unique Aadhaar number. Here, the primary concern was that people’s sensitive information will be misused by the agencies. The Court’s judgment essentially erases this issue. Here are a few more ways the verdict will affect the Fintech sector:
- Most online loan companies use Aadhaar for the purpose of e-KYC. After this judgment, they are now required to look for alternatives, one of which is acquiring verification from customers in person. It would not just be time-consuming, but it will also be fairly costly. Both customers and companies will have to bear the costs, which can become a significant problem for business.
- Without access to the biometric data that Aadhaar provides, companies will no longer have the means for creating specific customer profiles, which they use for targeted advertising. That means the major Fintech players as well as start-ups will have to create new and improved digital marketing strategies.
- Fintech companies were known for their fast processes and efficiency. However, the lack of Aadhaar will create significant delays in their work. For example, instant loan disbursement, risk-evaluation and repayment will require a lot more time than they used to. In fact, the average turnaround time may increase by up to 24 hours!
- It is not just major Fintech brands that will be affected. Even micro-medium enterprises and start-ups will have to bear the brunt of the verdict. That is because these companies are reliant on low-cost business models, which were primarily designed on the Aadhaar verification of customers. That is why the Supreme Court judgment will directly impede their strategic and financial infrastructure.
- Finally, the verdict will negatively impact government initiatives such as India Stack and Digital India, which are the foundation for several major and small Fintech players. With Aadhaar, there was the simplicity of acquiring just one paperless identification. Now, customers will have to provide a ton of documentation and ID proofs.
It is evident that e-KYC through Aadhaar was not only profitable for Fintech companies, but it was also beneficial for the customers. What was once a smooth and hassle-free process will now be a time-consuming and hefty affair. As a result, many people may be reluctant to use the services provided by these companies.
The future of Fintech after the verdict
Though the Supreme Court verdict has brought some significant challenges, it has also offered some good possibilities to the Fintech industry. Some of these positive impacts include:
- Reserve Bank of India is likely to provide some clear and structured guidelines for KYC. That is expected to make the customer identification process much smoother and more systematic.
- A new law may be enacted to allow Fintech companies to use, collect and protect customer data carefully.
- Fintech companies will now need to come up with new business models which will not only ensure sustainable innovation, but will also provide better customer security.
- Though Aadhaar is no longer obligatory, companies may still use it on voluntary basis.
Overall, the Supreme Court verdict poses some serious challenges to the Fintech industry. The best way to address these issues will be to make some favourable amendments to the Aadhaar Act while also maintaining the verdict. Even if the Parliament chooses to introduce a new legislation for overcoming some parts of the verdict, it is expected to receive some backlash. Even if such a law is enacted, it will undergo severe judicial scrutiny.
In the absence of such a law, the best move for Fintech companies will be to take the verdict in stride. They would also need to make some necessary changes to their business model to facilitate quick customer identity verification. That is the only way to ensure customer retention. It will also help them to maintain their profit margins. The Fintech industry is defined by technological innovation. Though the Supreme Court judgement has added some hurdles in its path, competent organisations are sure to overcome them in time.
