Curbs on use of Aadhaar data a blow to fintech firms and payment banks

New Delhi: In a major blow to fintech companies and payment banks which rely on Aadhaar to authenticate customers, the Supreme Court in its landmark judgement on Wednesday held the use of Aadhaar information by private companies as unconstitutional.

Private companies, mostly from the fintech industry, which sell various products such as loans, mutual funds and insurance, use Aadhaar to verify customers. The move by the apex court is likely to adversely impact such companies which rely on Aadhaar-based KYC (know-your-customer) aimed at creating an electronic authentication infrastructure without the need to submit any paper and be present physically.

“That portion of Section 57 of the Aadhaar Act which enables body corporate and individual to seek authentication is held to be unconstitutional,” a five-member constitution bench headed by Chief Justice Dipak Misra said in its judgment.

Section 57 of the Aadhaar (targeted delivery of financial and other subsidies, benefits and services) Act, 2016 allows the use of Aadhaar number for establishing the identity of an individual for any purpose, whether by the state or any body corporate or person.

The provision has been read down by the court which can also be viewed as a major setback for India Stack—a set of application programming interfaces (APIs) that brings governments, businesses, start-ups and developers to create and utilize a presence-less, paperless, and cashless service delivery infrastructure. “Section 57 allowed Aadhaar to be used for any purpose in any other law. This gave wide scope as against for purposes of establishing the identity of a person where state subsidy was involved,” said Ashish Aggarwal, a consultant at the National Institute of Public Finance and Policy.

“With the SC judgement, Aadhaar is no longer mandatory for other purposes. For example, payment banks, banks, telcos, etc would not be able to insist on Aadhaar. This would affect paperless and presence-less authentication if the customers do not volunteer. Essentially, focus will shift to providing value proposition to consumers and encourage voluntary use of Aadhaar,” he said. According to Harshil Mathur, chief executive and co-founder, Razorpay, an online payments solutions provider, the apex court’s decision will increase the cost of doing business for these companies.

“Till now, an e-KYC verification and on-boarding cost ₹ 15 per person and soon the same verification will cost ₹ 100 per person for a physical KYC,” said Mathur. Among other significant steps by the court, mandatory usage of Aadhaar has been restricted for central and state government welfare schemes (PDS, LPG, MGNREGA etc), linking of PAN and filing of income tax returns. “Private sector business models will now need to evolve in order to provide greater privacy protections to individuals while also ensuring inclusive innovation,” said C.V. Madhukar, investment partner at Omidyar Network, who leads the firm’s work on digital identity globally.