New eKYC regulations: Are Financial Institutions ready?

India’s digital adoption of KYC norms – Video KYC and Aadhar Validation

India ranks as one of the top two countries in the world in terms of digital adoption as per a McKinsey report. Over the last few years, initiatives such as Aadhaar, the national biometric digital identity program, and eKYC have included over a billion Indians in it’s digital finance revolution. India has also pioneered the United Payments Interface (UPI), a singular platform available as a mobile app that allows instant and cost-effective money transfer across people and businesses. The prolific use of APIs allows UPI integration with other apps like DigiLocker that make know-your-customer (KYC) processes much faster than before.

In the midst of all this change, cyber threats, changing market dynamics, and evolving compliance laws remain constant challenges for customers as well as organizations in the financial services industry. Added to this is the emergence of digital-first challengers taking advantage of new opportunities presented during the pandemic. For instance, the Government of India announced several stimulus packages to strengthen NBFCs and micro, small and medium enterprises (MSMEs) and provide liquidity after the Covid-19 outbreak. But experts feel that these funds barely touched the target groups, citing reasons like poor financial education and awareness. On the other hand, new lending players are emerging on the scene but since trust is a vital factor, adoption rates remain low. Thus, even as challengers aim to demonstrate to stakeholders that they can manage credit risk and grow credit metrics, incumbent players need to up their digital nimbleness to prevent customer churn.

Such progress takes a mix of innovation mindsets as well as a favorable regulatory climate. There have been some milestone changes in the financial services landscape within India, driven by progressive amendments from top regulatory bodies. The climate of innovation and progressive regulations is set to attract increasing venture capital funding. At this juncture, data privacy, finance schemes, and incentivizing SMEs to adopt digital payments will set the foundation for faster growth.

India’s financial regulators

Regulator	Scope
Reserve Bank of India	The central bank is the prime regulator for financial services including FinTech in India. Its rules extend across non-banking payment companies. The RBI updates rules and regulations to address market changes and technological advances
UIDAI	As the body responsible for Aadhaar, UIDAI governs the use of Aadhaar by FinTech players across customer onboarding and verification
The Securities and Exchange Board of India (SEBI)	SEBI regulates the securities market, protecting the interests of investors and promoting the market’s development
Ministry of electronics and information technology	This department empowers citizens by enabling e-Governance through growth in the electronics, IT and ITeS industries, and by providing digital services in a secure cyber space. Some of its programs include e-government, e-industry, e-security, and e-innovation.

Table 1: Main regulatory bodies for financial services in India

Recent eKYC changes

In a circular (dated April 24, 2020), SEBI established guidelines for eKYC for the securities industry. This came as welcome relief for a market that heavily depends on physical verification processes that take up to 12 days. Some of the most pertinent changes are:

• SEBI-registered intermediaries can collect and verify proof of identity and address using government-issued ID cards like Aadhaar card, passport copy, driving license, and voter’s identity card among others.
• Integration with platforms like DigiLocker, eSign, etc., will allow players to adhere to stricter compliance layers like capturing images of wet signatures.
• Market players can design their own app-based KYC for user self-registration.

Similarly, RBI now allows financial service institutions including banks, NBFCs, and payment providers to update KYC using a video-based customer identification process that includes facial recognition and live interactions to capture informed consent. This regulation extends to customer onboarding for individuals, proprietors, and authorized signatories. It also permits the use of DigiLocker for verification of PAN card.

A look at some market trends explains how and why the recent regulations have come to pass. In a bid to reduce time and cost of verification, the Ministry of Finance and RBI introduced changes that allowed e-signatures and eKYC in 2019. Then in 2020, RBI decided to permit video KYC so banks can remotely verify customer identities. This has proved to be a boon for India that, soon after, witnessed a two-month nation-wide lockdown, halting industries across the country.

With this regulation, fortunately, retail banking was able to sustain its operations. A more recent change is the proposed creation of a central KYC registry that will be open to financial institutions to further streamline and reduce cost of eKYC verification.

Banks need a unified platform to handle end-to-end KYC

While all of these are crucial, keeping up with them requires reimagining internal processes. Subex’s IDcentral, a next-generation identity analytics platform, encompasses a variety of tools and methods that help banks, FinTechs, and insurance companies stay compliant.  It has two key modules – global anti money laundering (AML) screening as well as transaction monitoring. Both of these leverage key features such as:

• Document extraction – OCR technologies help extract data from various government-issued ID cards.
• Identity verification – With connectors to national databases, this facilitates seamless mapping of photos and documents to verify authenticity.
• Liveliness detection – This leverages AI and analytics to detect fakes and spoofs across various interfaces.

While global screening and AML monitoring support safe and speedy customer onboarding, ID Central also uses AI/ML algorithms to help companies mitigate fraud attacks. The transaction monitoring module provides fraud scores, linkage analysis, rules and alerts around identity thefts, promo code abuse, money laundering, spoof attacks, among others.

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