Budget: New DigiLocker and KYC will simplify digital identity requirements

New Delhi: In a Budget speech with a wide-ranging focus on technology and tech-driven solutions, finance minister Nirmala Sitharaman pitched for simplification of the know your customer (KYC) processes for financial services, gave the DigiLocker platform more utility for individuals as well as businesses, and allowed fintech platforms greater flexibility to tap India’s digital infrastructure.

“The Union Budget emphasises on technology and knowledge-driven comprehensive growth. Digital public infrastructure such as the well-established UPI to the newly announced National Digital Library will continue to be a significant enabler to India’s economic growth,” says Jaideep Ghosh, COO, Shardul Amarchand Mangaldas & Co, a law firm.

Fintech platforms in India will soon be able to use documents available in the DigiLocker for individuals, to be able to authenticate users for access to financial services. This won’t be the first piece of infrastructure fintech firms have been able to access. India’s fintech market is estimated to grow to $1.3 trillion by 2025, according to latest numbers by research firm EY.

“Fintech services in India have been facilitated by our digital public infrastructure including Aadhaar, PM Jan Dhan Yojana, Video KYC, India Stack and UPI,” Sitharaman said in the Budget speech. Recently, the Reserve Bank of India (RBI) said it’ll be possible to link credit cards with the Unified Payments Interface (UPI) to make payments. Progress on that is expected through 2023, with RuPay cards already supported.

India’s fintech space for consumers can largely be put in five major buckets – payments (these include QR payment, bill payment and aggregator services), lending (buy now, pay later and loan platforms), digital banking platforms, insurance platforms and wealth (investment platforms and AI-based advisory services, for instance).

“This Budget is a great step towards supporting the long-term growth potential of India’s fintech ecosystem amidst increasing global headwinds,” said Anirban Mukherjee, CEO of PayU India, a digital payments platform.

If you hold a bank account, a credit card, bought a postpaid mobile connection or have applied for a loan, you would have encountered something called the KYC, or know your customer, check. That includes authenticating the identity, address and financial details using a variety of tools, including the Aadhaar card and PAN (permanent account number).

The government wants to make the KYC process dynamic, with what it classifies as “risk-based” instead of a one size fits all approach. “Financial sector regulators will also be encouraged to have a KYC system fully amenable to meeting the needs of Digital India,” said Sitharaman.

It is likely the risk assessment will be done using the Aadhaar and PAN card data, which links a holder’s financial history from credit bureaus. Banks report credit history, such as loans and repayments as well as credit card usage, to these financial bureaus.

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The Budget also wants a “one-stop solution” for data of individuals maintained by various government agencies, regulators, and regulated entities. For this, the DigiLocker service and Aadhaar, will be the foundation. “Simplifying KYC by adopting a risk-based approach will ensure faster onboarding of consumers and deepen the journey of Digital India initiatives,” said Abhishant Pant, founder, the Fintech Meetup, and general partner, YAN Angel Fund.

DigiLocker for individuals, at present, can be used to create digital versions of documents issued by central and state governments, banking and insurance services, health certificates as well as transport documents (such as driving licences). The government says the scope of documents that can be added to the DigiLocker for individuals will be expanded.

“Initiatives around risk-based KYC and a unified mechanism for updating it for customers and businesses will ease their access to credit, enabling the expansion of the fintech lending industry,” said Sugandh Saxena, CEO, Fintech Association for Consumer Empowerment.

The DigiLocker is accessible via the web browser on computing devices and smartphones, alongside apps for Android phones and the Apple iPhone. One example of the DigiLocker and Aadhaar being used to provide a KYC-esque identity verification is the DigiYatra app, for contactless entry, check-in, and security at some Indian airports.

“Expansion of DigiLocker services to the fintech sector will be a great boost for individuals, banks and financial institutions to store and share data online in a secured and faster manner,” said Anish Shah, partner - M&A Tax and Regulatory, BDO India, an accounting, tax, and advisory firm.

It is not just individuals. the DigiLocker will be expanded to include medium and small businesses (MSMEs), large businesses and charitable trusts. Think of this as the platform to host digital versions of documents issued by regulators, banks, and other businesses.

“By enhancing the DigiLocker to now cover MSME and large businesses for storing and sharing documents, digital and smart governance will get a significant turbocharge,” said Prabhu Ram, head - Industry Intelligence Group, at Cyber Media Research.

Gaurav Chopra, founder and CEO of IndiaLends, an online credit product aggregator, is approaching the announcements with caution. “There were announcements related to the centralisation of financial information and the expansion of digital storage, which are seen as positive steps towards the digitisation of financial services. However, there is still a need to review the details before determining the true impact,” he said.

The speeding up and simplification of the KYC process will potentially have widespread impact. “Simplifying the KYC system process will enable a seamless experience for consumers,” said Gaurav Kapoor, chief finance officer, Baazi Games, an online gaming platform.

“Adopting PAN as a standard identifier and simplifying the KYC process is a winning proposition across the entire fintech landscape. This standardisation will accelerate customers’ digital onboarding process,” said Preekshit Gupta, vice-president - APAC & MEA, Bureau.id, a fraud prevention platform.

It remains to be seen how quickly the contours of the simplified KYC process for customers can be put together, followed by implementation across a variety of online platforms.