How India's AadhaarPay jumped the payment network rails
by Suresh Rajagopalan, President of Software Products, FSS
India has one of the world's fastest growing economies with $2.2 trillion in GDP. Still, more than 85 percent of personal consumer expenditures are made with cash. Despite a growing middle class and relatively strong cardholder base of 645 million cardholders, debit and credit card use at the point of sale is 1.7 transactions per cardholder in India.
A principal reason for slow progress toward greater adoption of electronic payments is the absence of available acceptance locations. India has approximately 2.7 million point of sale devices concentrated in India's primary cities, which account for an estimated 70 percent of terminals and spend. India's estimates that the country needs approximately 20 million POS devices to create a card acceptance infrastructure equal in size to other BRIC countries.
Currently, an approximate 90 percent of noncash payments are processed through established card network infrastructures. At the heart of the traditional POS payment acceptance network is the interchange fee averaging between 0.75 percent and 2.5 percent typically charged by a consumer's bank to a merchant's bank to facilitate a card transaction. The high processing fee renders the value proposition uncompelling for the micro and small merchants who form the bulk of India's retail sector.
Aadhaar Pay leverages alternate clearing and settlement rails for person-to-merchant transactions originating at the point of sale. Rather than ride on traditional card rails, Aadhaar Pay leverages the real-time interbank network for transaction clearing and settlement.
By disintermediating traditional interchanges and riding on less expensive bank rails, Aadhaar-based person-to-merchant payments lower processing fees and promote higher merchant uptake. The service uses Aadhaar — a unique national identity number issued by the government to every citizen based on their biometric and demographic information — as a proxy for the customer's bank account to facilitate transactions at the point of sale.
How it works
Aadhaar Pay exploits three critical elements — bank accounts, mobility and digital identity — to disrupt traditional POS business models. The service leverages the universal availability of the mobile device and Aadhaar to advance the growth of digital payments.
Envisaged as an open platform, the Unique Identification Authority of India, or UIDAI Stack, allows payment service providers to consume APIs, "on-demand" to authenticate customers. Besides establishing user credentials, the national identity also serves as a financial address that can be directly linked to the customer's bank account.
Any merchant with a biometric reader and an Android phone can download the Aadhaar Pay application, self-register for the service using e-KYC, and start receiving payments. Customers make payments by scanning their fingerprint and entering the amount at the point-of-sale terminal.
Aadhaar Pay uses Aadhaar APIs to authenticate the customer's biometric credentials mapped to the social security number. Upon successful authentication, transactions are routed to the customer's issuing bank.
The system takes minutes to set up, compared with weeks for a POS terminal, and the initial cost is 80 percent less.
Aadhaar Pay triggers a virtuous cycle of growth by providing:
1) A ready market of 900 million captive customers
By leveraging Aadhaar, Aadhaar Pay creates a ready addressable market of more than 900 million customers by leveraging Aadhaar. Customers can initiate payments using their fingerprint and Aadhaar number, eliminating the hassle of downloading apps, swiping cards, remembering PINs, loading e-wallets or even carrying a phone.
2) A broader merchant ecosystem
Aadhaar Pay reshapes expensive acquirer distribution models, allowing banks to ease the way for rapid onboarding and expansion of new acceptance points. The smallest street vendor with a basic 2G phone and a fingerprint scanner device can accept digital payments.
3) A low-cost solution
The Aadhaar Pay mobile application can be downloaded online — even on a 2G Android phone — and connected to a biometric reader that costs 2,000 rupees ($30). This is one-fourth to one-sixth the initial cost of a POS terminal that subsequently costs the merchant up to 3,000 rupees in annual operating expense. The substantially lower cost of using AadhaarPay makes it an ideal solution for all merchant segments, especially those with low turnover and transaction volumes.
4) added-value services
Hardware can be replicated easily, but software and services are much harder to copy, and this is where Aadhaar Pay brings a sustainable competitive advantage. Beyond the transaction, merchants, big or small, could benefit from a business solution, with the ability to customize specific components, including:
- Support for QR codes.
- Ability to dynamically configure offers and discounts.
- Electronic invoices.
- Analytics and reporting.
5) Real-time transaction settlement
Aadhaar Pay uses the bank account as a source of funds and all transactions are cleared and settled using India's real-time fund transfer network, IMPS, ensuring immediate crediting of accounts, freeing funds and lowering working capital requirements for merchants.
6) Reduced fraud liability
As AadhaarPay leverages the bank account, it offers a low-risk product, directly linked to the availability of funds in the customer's account. This significantly lowers fraud liability and enables onboarding of merchants traditionally deemed high-risk under conventional acquiring models.
For banks in India that now offer no frills "Jan Dhan" accounts for the low-income demographic, a broad-based acceptance network would prevent instant encashment and improve the circulation of money in the digital format.
And, with the regulator waiving merchant fees, at least in the near term, Aadhaar Pay can help to develop sustainable acceptance that can enhance and fast-track the benefits of electronic payments.