Articles

Hurdles to paperless financial products remain frictions in the offline processes: KYC and collection of wet signatures. What is needed now is regulatory reform

Following demonetisation, Indians made great haste in bringing cashless payments into their daily lives. Year 2017 has been the year of cashless payments. But there is another important side to digital finance—paperless access to financial products on your mobile phone. Being able to open a new bank account quickly, get an unsecured loan instantly, or buying a paperless mutual fund or fixed deposit is critical for India’s advancement. But legacy paper-based processes are an obstacle to providing the entire population paperless, cheap, and fast access to credit, insurance and savings. How do the hundreds of millions of Indians, who often don’t have a government ID or an address proof except their Aadhaar card, access financial products on their mobile phone that will help them transact cashlessly?

Aadhaar is helping in instant account openings and verifications (read more here). Thanks to path-breaking amendments of the Reserve Bank of India (RBI’s) KYC Master Circular, the Indian Evidence Act, 1872, the Negotiable Instruments Act, 1881, and the Income-tax Act, 1961, Indians can now open limited functionality accounts for savings and loans paperlessly, complete their e-KYC via one-time passwords with their Aadhaar-linked cellphones, and start operating these accounts—all without having to step into a branch or submit a single piece of paper. But this is just the starting point of truly paperless access to financial products.

Present, and future
Internet connectivity and smartphone penetration have significantly improved, and remarkable progress has been made in consumer awareness about online access to financial products. Mobile-centric consumers want their expectations to be fulfilled instantly on a mobile device. Data collected online indicates that the Indian consumer actually prefers to submit documents on a secure online platform versus meeting sales agents or submitting paperwork. They are comfortable transacting 100% online via Aadhaar. On BankBazaar, about 60% loan applied are paperless. Our data also indicates that paperless applications now have 300% higher conversion into disbursed accounts in comparison to normal online-cum-offline process. In western markets, volumes for digital issuance increases eight times when paperless replaces the friction-prone physical loan processes. Hence, it is possible to believe that if access to financial products is 100% paperless, there will be a monumental increase in all Indians with a mobile phone (which is almost everyone) getting access to these products.

Another heartening facet of paperless in the age of non-performing assets (NPAs) is that paperless applicants have significantly lower NPAs than offline customers because: a) there is no intermediary between customer and bank; b) electronic documents collected from source in a paperless process cannot be manipulated by borrower; and c) there is no mis-selling as information on product features (rates, payouts, fees, risks and others) are transparently listed on the site or app of the fintech firm, bank or insurer.

All these are consumer-focused benefits of paperless finance. We can also briefly touch upon benefits to the industry: paperless products, where the processing is mechanized, helps financial institutions reduce costs by 2-3% in banking products and 20-30% in insurance products. Additionally, fraudsters can be weeded out since they would struggle to beat the Aadhaar-linked verification process.

Reports suggest that 330 million new cellphone users will emerge in India by 2020, taking the total smartphone user count to half a billion. This presents not just unique opportunities for banking and fintech, but also suggests that we are on the cusp of rapid transition to paperless finance.

Challenges to paperless
Consumers, no matter where they are in India, should be able to access paperless loans, cards, deposits, mutual funds and insurance from 100-plus financial institutions on their mobile phones without a shred of paper or the need for a physical meeting. The hurdles to this dream remain frictions in the offline processes: KYC and collection of wet signatures. What we seek now is regulatory reform. Despite amendments to various laws granting legality to e-signatures, they haven’t gained traction. Early adopters are using eSign via Aadhaar to get customers to complete loan and card applications, and loan agreements, but the wider industry still prefers wet signatures. If regulators offered an express clarification about eSign, it would pave the way for banks and other institutions to use it widely.

In 2016, the RBI allowed new loan accounts to be opened using Aadhaar-linked e-KYC via one-time password (OTP). However, the limit on these accounts is Rs60,000, whereas the average loan size in online digital modes is Rs3 lakh. The regulators may consider lifting this limit so that loans up to Rs3 lakh may be disbursed though instant, paperless routes. There also needs to be clarity on permitting e-KYC via OTP for credit card applications. It would also help consumers and the industry alike if the Aadhaar-based e-KYC via OTP process and central-KYC (c-KYC) norms are aligned, since the current interpretation of c-KYC may require regulated entities to complete paper-based verification, which undoes the good work done towards paperless finance.

Lastly, paperless loans also need paperless repayment modes. E-NACH helps banks streamline the process of onboarding repayment mandates.

But the process continues to be physical, requiring a wet signature. The mandate part of the loan disbursal process can be made completely paperless with the introduction of either e-signed mandates or an e-mandate revocable only with the consent of the lender. Unified Payments Interface 2.0 (UPI 2.0) is a step in the direction of enabling paperless repayment mandates to financial institutions.

These paperless processes should be supplemented with Digilocker, which enables a secure consent-based sharing of documents from the issuer. Addition of more Digilocker issuers—enabling users to share documents such as income tax returns, TDS records, indirect tax challans and invoices, banking transactions, and mobile payments—will create a trusted paperless ecosystem that enables individuals and small businesses to share their data for availing credit from the formal financial system.

Today, India has the technology and the underwriting processes in place to deliver paperless access to financial products. If financial institutions and regulators come together to solve the above-mentioned obstacles, while at all times ensuring information security and privacy as mandated by financial regulators, cellphone-based paperless finance will be a mass reality in a few quarters.

Adhil Shetty is CEO, BankBazaar.com