India’s Latest Advances in Financial Inclusion: A Day in Royyuru
It’s only 8:30 a.m., but elderly men and women are already lining up in the Indian village of Royyuru to collect their monthly pensions from the government. They are accustomed to waiting in long lines before presenting multiple forms of identification to banking agents and collecting their pensions in cash. But today, all they need to do is visit a mini-ATM and scan their fingerprints. In an instant, they can withdraw cash from their pension accounts or make transfers to other accounts.
A pensioner visits a mini-ATM in the village of Royyuru, India. Photo credit: Gayatri Murthy, CGAP
This is because IDFC Bank is among India’s first private-sector banks to pilot digital financial services that leverage the country’s new Aadhaar-enabled payment systems (AEPS), which makes digital money more accessible and practical for everyday transactions than ever before. Now, to do anything from receiving government payments to buying groceries, all a customer in Royyuru needs is a unique Aadhaar identity number and fingerprint to authenticate the transaction.
On our recent trip to India, we had the opportunity to see Royyuru residents using these new services. Along with mini-ATMs, IDFC has introduced digital payments at government-run fair-price shops and small local stores, enabling residents to transact digitally, even with very small amounts. The ease and speed with which customers received their pensions and paid for everyday goods showed us the potential of these services to make digital payments more secure and convenient for low-income residents across India.
First Stop: Mini-ATM
A woman withdraws her pension at the IDFC micro-ATM. Photo credit: Gayatri Murthy, CGAP
The first place we visited was a shop equipped with an agent-managed mini-ATM. Mini-ATMs consist of a tablet equipped with a biometric reader, debit-card swipe facility (to be used if biometrics fail), printer, data-enabled SIM card, and PIN device. Regardless of where mini-ATM users bank, they can initiate transactions, such as deposits, withdrawals, and transfers, by selecting from the options on an agent’s tablet. We witnessed a customer withdrawing cash. With the agent’s assistance, she entered her withdrawal amount and Aadhaar ID number on a touch screen. Then she authenticated her identity with a quick scan of her fingerprint. The transaction was confirmed within 30 seconds, the agent printed her receipt, and she was on her way with her cash.
An IDFC micro-ATM consists of a biometric reader, card swipe facility, printer, data-enabled SIM card, and PIN device. Photo credit: Gayatri Murthy, CGAP
Obviously, this experience was convenient for the customer, but what about the agent? Getting a mini-ATM is relatively cheap. IDFC bears the $600 cost of the device, and agents pay only an onboarding fee of $167 to cover the cost of the bank’s branding (which creates “skin in the game” for agents). Most agents we visited ran local businesses in addition to mini-ATMs. Some ran government ration stores, others had small grocery stores, and a few were managers for women’s savings groups. While none considered mini-ATMs their primary source of income, they were happy to earn the extra cash at little additional effort.
Second Stop: Fair-Price Shop with Point-of-Sale Device
At fair-price shops like the one pictured here, discounted food grains are weighed electronically and linked to a buyer’s Aadhaar ID and fingerprint. Customers can pay digitally, making the whole transaction paperless and cashless. Photo credit: Gayatri Murthy, CGAP
Our next stop was a nearby fair-price shop. As part of the government’s Public Distribution System, fair-price shops sell basic food grains and supplies to low-income people at highly discounted rates. At the check-out counter, customers entered their Aadhaar numbers and scanned their fingerprints on a point-of-sale (POS) device. The store owner then weighed their goods on an electronic scale connected to the device, which reliably identified customers and allotted them the right quantities. Thanks to an IDFC app installed on the POS machine, customers could even check their account balances at any bank before paying digitally.
Third Stop: Bakery with IDFC Aadhaar Pay Smartphone App
A bakery store owner demonstrates how to use the IDFC Aadhaar Pay app, which can be used to purchase any goods and services at merchant locations. Photo credit: Gayatri Murthy, CGAP
We ended our day at a bakery that was participating in IDFC Aadhaar Pay, India’s first pilot of Aadhaar Pay. IDFC Aadhaar Pay is a smartphone app operated by merchants that allows customers to make small digital purchases using their Aadhaar number and fingerprint. Mobile payments are becoming common in India’s cities, but Aadhaar Pay represents a better value proposition because it is so easy to use. As with the mini-ATM and POS device, all a customer needs is a bank account linked to her Aadhaar number and thumbprint.
The app is convenient for merchants to acquire and use. Any merchant with a smartphone, even a mobile street vendor, can provide Aadhaar Pay if she has internet connection and a current IDFC account. IDFC provides participating merchants with the app and a biometric reader that connects to their smartphones.
The baker we visited logged into the app using his Aadhaar number. Once he typed in a sales amount, his customer typed in his Aadhaar number and authenticated with a fingerprint. The sale was completed instantly, and both the baker and customer received confirmation SMS messages on their phones. The app also allowed the baker to check the day’s sales and view a complete monthly statement of his transactions.
Value for Customers, Businesses, and Society
New services like these could help India solve one of its biggest financial inclusion challenges: dormant digital financial accounts. Even though more Indians than ever before have access to digital accounts, 43 percent of their accounts are idle. Repeatedly, studies have attributed India’s high dormancy rate to the lack of convenient digital payments options at stores frequented by low-income customers and to the difficulty of cashing in and out. The cost of travel to branches, long lines at banks, poor customer service, tedious forms, and the possibility of losing one’s authentication numbers and PIN can also make digital accounts seem like more trouble than they are worth.
AEPS and services like IDFC Aadhaar Pay have the potential to remove such barriers in a few ways:
Simpler authentication. Linking customers’ accounts to their Aadhaar numbers, then connecting their accounts to AEPS, simplifies the payments and transaction authentication experience.
Easier access to agents. Agent banking can be cheaper for providers than operating brick-and-mortar branches, and it can be more convenient for customers. Services like the ones IDFC has introduced are likely to increase agents’ transaction volumes and profits, incentivizing more merchants to become agents, even in rural areas.
Lower transaction costs. Customers are not charged a fee for accessing their bank accounts through IDFC’s services. These services are also cheaper and more interoperable for the merchant than are mobile money payments or card payments.
Greater efficiency in government services. These services make government payments and services more dependable and efficient for customers — and save the government money — by preventing leakage through middlemen and reducing opportunities for fraud.
There will be challenges ahead as the government and financial services providers like IDFC look to scale AEPS-linked digital financial services across the country. For example, system loads must be tested before services are scaled nationally to avoid authentication failures. In case of errors, redressals must be completed in a defined period. Finally, as services are scaled, the central bank must clearly specify what banks can charge customers or what banks can charge each other for interoperability in these services. This will protect customers and clarify the business case for banks and all other providers.
But, as we were reminded at the end of our visit, there are reasons to be optimistic. Just before we left, one of the pensioners who had collected her money from the micro-ATM approached the IDFC official who was accompanying us. She touched the sides of his forehead with her knuckles to bless him and ward off the evil eye. For her and her friends, the facility is a blessing that now provides much-needed convenience and relief.