Since 2012, the government of India has been driving forward the idea of a “Digital India” with a vision to transform the country into a digitally empowered society. A unique digital identity for every person — universally acceptable and accessible — was core to this vision. This twelve-digit identity number, based on biometric data, is called “Aadhaar,” and it has been issued to over 1 billion residents of India by the Unique Identification Authority of India (UIDAI). This number has been leveraged by financial service providers, utility companies, and mobile operators to make it simple for customers to register for services. It reduces the cost of identification for individuals and has enabled many millions of underserved people and businesses to access financial and other services more efficiently.
In August of this year, the Supreme Court of India upheld that the government can mandate the need for an Aadhaar number to distribute subsidies and benefits and require that it be linked to the individual’s tax ID number. However, they also ruled that an Aadhaar number cannot be required by private entities to provide services. Therefore, Aadhaar can no longer be mandatory for opening bank accounts or mobile phone sim cards.
At Accion, we have developed a significant body of work on IndiaStack, Aadhaar, and digital identity more broadly. We believe that IndiaStack, as was initially intended, would bring millions of Indians into the formal economy by breaking down the barriers that kept them out.
While the Supreme Court aimed to safeguard data and protect customer interests, it may unintentionally tarnish the goal of a “Digital India” and curtail the promise of IndiaStack for financial inclusion. Initial reactions from the financial services industry agree that this ruling may move India back to an era of manual entries and paper-based systems. Many inclusive fintech companies and financial institutions have developed products and services that use the Aadhaar identification service to reduce the cost of onboarding customers, targeted at more marginalized communities. However, now, these organizations will need to adopt in-person verification systems in addition to their digital identification processes, for clients that do not want to share their Aadhaar number. This will drive up costs, potentially making these new business models unfeasible.
While the full results of this ruling are still unraveling, the increased cost of operations will likely dissuade service providers from targeting the underserved with newer technology-driven models, making it difficult for these individuals and small businesses to access financial services. The ruling states that customers may offer their Aadhaar number voluntarily when registering for a service, but it remains to be seen whether they will be willing to provide the information. Despite new challenges, we hope that the providers who have made remarkable progress in driving financial inclusion can continue to find innovative ways to bring underserved Indians the financial tools they need. While this ruling may make it harder to sustain the pace of progress in India, it’s crucial that policymakers, financial institutions, and entrepreneurs don’t give up on achieving a “Digital India.”