Aadhaar-Enabled Payment System Faces Decline; Transactions Falling, Interoperability Issues & More; Check

Aadhaar-enabled Payment System (AePS), a financial inclusion in India, is witnessing stagnation and marginal declines in usage. Despite its role in facilitating basic banking functions for underserved populations, including migrant workers, AePS faces multiple challenges ranging from interoperability issues to inadequate incentives for business correspondents (BCs). Recent data from the National Payments Corporation of India (NPCI) paints a concerning picture of this payment system's current state.

Declining Transactions
The value of AePS transactions has steadily decreased, dropping from Rs 27,900 crore in April 2022 to Rs 23,600 crore in September 2024. Transaction volumes have also seen fluctuations, with 205 million recorded in April 2022 compared to 202 million in September 2024. While occasional spikes occur, often aligned with government subsidy disbursals, these figures do not represent sustained customer activity.

AePS Mechanism and Role of BCs
AePS allows customers to perform basic banking activities, such as cash withdrawals, deposits, and balance inquiries, using Aadhaar-linked fingerprint authentication. Business correspondents (BCs), authorized agents of banks, serve as the system's backbone by providing these services in underserved areas. However, systemic inefficiencies and limited incentives for BCs hinder the smooth functioning of AePS.

Challenges Affecting AePS Adoption
Interoperability Issues
Interoperability, once a defining feature of AePS, has become a bottleneck. Concerns over potential money laundering prompted the Reserve Bank of India (RBI) to mandate fingerprint verification for every transaction by BCs. While this has reduced fraud, it has also given banks a pretext to decline inter-bank transactions, often requiring customers to visit their home branches for explicit consent. This reluctance is primarily rooted in banks' hesitation to pay commissions for third-party BC transactions.

Inadequate Incentive Structure
Most AePS transactions involve cash deposits or withdrawals, and the financial incentives for BCs are minimal. Banks pay a commission of 0.5% per transaction value, capped at Rs 15, to the BC's acquiring bank. For instance, if a migrant worker deposits funds through an HDFC BC while holding an account with SBI, SBI pays HDFC the commission. Similarly, the recipient bank must pay the acquiring bank for cash withdrawals. These costs dissuade banks from encouraging inter-bank AePS transactions, forcing customers to use on-us (intra-bank) transactions instead.

Over the last three years, on-us AePS transactions have doubled from 17 crore to 31.3 crore, indicating a shift driven by banks' reluctance to facilitate off-us (inter-bank) transactions.

Parity with ATM Interchange Fees
BCs have long advocated for raising AePS transaction fees to match ATM interchange fees, which are set at Rs 17 per transaction. The current cap of Rs 15 per AePS transaction makes it financially unviable for many BCs to offer these services, particularly in rural areas where cash handling involves higher operational costs.

Regulatory Pressures
RBI guidelines require financial institutions to inspect BC premises annually and ensure that all BCs undergo certification. However, adherence to these mandates is inconsistent, adding financial and logistical burdens to banks and payment providers. For BCs, especially small shopkeepers with limited education, certification requirements pose significant challenges. Suggestions for digital verification, akin to digital KYC processes, remain unaddressed by regulators.

The Role of Government Schemes
Ironically, many AePS transactions stem from government subsidies deposited into Jan Dhan accounts, primarily held with public sector banks (PSBs). These accounts, which see deposits of approximately Rs 2.2 lakh crore annually, generate minimal interest (3-4%), while PSBs lend at rates of 9-11%.

The Shift to UPI and AePS' Relevance
The rise of the Unified Payments Interface (UPI) has undoubtedly attracted a segment of users who previously relied on AePS. However, AePS remains crucial for populations without smartphones or internet access, particularly in remote areas. Migrant workers and rural communities continue to rely on this system for essential financial transactions.

To revive AePS, several measures need urgent attention:
Improved Interoperability: Regulators must enforce uniform policies across banks to ensure seamless inter-bank AePS transactions. This includes revisiting the consent requirements that hinder interoperability.

Revised Incentive Structures: Raising interchange fees for AePS transactions to parity with ATM fees would make the service financially sustainable for BCs and acquiring banks.

Streamlined Certification Processes: Digital certification and verification methods could alleviate the burden on BCs and financial institutions, fostering compliance without additional costs.

Enhanced Awareness and Support: Banks should educate customers about AePS and provide consistent support for transactions, particularly in rural areas where digital literacy is low.

*Inputs from Moneycontrol*