DigiLocker: The Future of KYC in India?
The Finance Minister of India Nirmala Sitharaman , in her budget speech for 2023-24 earlier this week, has announced the government's intention to expand the scope of services of DigiLocker, a flagship initiative of the Ministry of Electronics & IT launched in 2015 under the Digital India programme which enables citizens to store and access authentic digital documents and certificates in a digital wallet. DigiLocker is currently used by 146 million individuals and has issued 5.6 billion documents so far.
With the introduction of an ‘Entity’ DigiLocker for companies, Permanent Account Number (PAN) as a common identifier for all digital systems, and a suggestion to financial regulators to encourage the use of DigiLocker for Know Your Customer (KYC) requirements, this initiative is likely to have a far-reaching positive impact and added convenience for both individuals and companies.
For those of you interested in following the Indian digital journey, here are some initial reactions from compliance leaders in the banking and financial services industry on this recent announcement by the Finance Minister:
Unlocking the DigiLocker
DigiLocker as a one stop ‘golden source of truth’ for KYC is a welcome move and needs evangelisation. The ease of doing business can be made easier with a simple consented (OTP based) link to access DigiLocker by reporting entities. The aim should be to make it simpler than extant paper KYC procedures and if an entire KYC form can be pre-filled and downloaded with digital signatures of investors, it is directionally the way forward. Make everything accessible using Permanent Account Number (PAN) as reference or a DigiLocker provided reference number for small investors. The validity and verification process of some Officially Valid Documents (OVD) can be eliminated, also meaning lesser self-attested physical documents needed for KYC.
Some issues need to be tackled like a need for latest photograph, not to allow access to an invalid document etc. Mandating all OVDs to have embedded QR codes is desirable going forward. Collaborated smart investor education is perforce needed for DigiLocker proliferation. India has led the digital revolution on many fronts like UPI, Aadhaar and it’s time to add to that stack by unlocking the DigiLocker.
Amplifying the J-A-M Effect
The Union Budget 2023 has highlighted the Indian Government’s serious effort at capacity building for a digital economy. The Hon. Finance Minister has categorically mentioned that PAN would be the “Common Business Identifier” for all digital systems of all digital agencies, which is a welcome step from the KYC AML perspective. This is further enhanced by the fact that this would help simplify the KYC process to a “risk-based” approach and would facilitate a one stop solution for the updation of identity and address of Individuals at various levels within the Government and its myriad regulators. KYC documents in DigiLocker were already considered as equivalent e-documents for OVD purposes and it seems this would be the way forward considering that mass adoption is planned at Entity level in Micro, Small and Medium Enterprises (MSME), large business units and trusts. This would truly amplify the effect of the already growing J-A-M trinity (Jan Dhan, Aadhaar, Mobile), UPI and India Stack in consonance with the planned National Financial Information Registry, the details of which are awaited.
DigiThoughts
There is history of significant AML measures being announced along with the budget. The Finance Minister has revived it. The four measures: a) DigiLocker and Aadhaar combo -?foundation for ID and Address purposes; b) PAN - a common business identifier; c) Unified filing - for various purposes; and d) ‘Entity DigiLocker’ – for businesses and charities, are well-thought highly potent ideas that will benefit both service providers and service users. A significant step in the ‘Digital India’ Program.
India’s UIDAI and COWIN initiatives have been acclaimed by global institutions; UPI has gone cross-border. Aadhaar + PAN will go a long way in weeding out fake identities of individuals, and shell entities for businesses.
Enhancing DigiLocker for entities, along with widening the range for individuals means that the CEOs and CFOs will be able to carry Annual reports, Tax Returns, Certificate of Incorporation, Memorandum of Association, in their smartphones! And at an important meeting instantly provide that key document to facilitate go-ahead for a crucial transaction! This ease of document handling can raise customer and transaction due diligence to a much higher level (if bankers and the finance professionals are keen)?!
There will be hurdles for which solutions will need to be found by the facility creators and the user service providers. The onus of reaping various benefits will be on the service provider professionals – who will benefit the most!??
A Major Step Forward
The?Union Budget has provided a very forward looking??announcement to expand the use of DigiLocker for Fintech companies This move, which will allow Fintech companies to store financial documents securely in the digital locker without having to rely on paper documents would be a major step?forward in the digital revolution taking place in India. The expansion of DigiLocker for Fintech companies is part of the government’s larger initiative to promote digital payments and financial inclusion.
DigiLocker will leverage both digital Identity and document verification service to verify a customer’s identity in real time, cost effectively, seamlessly and efficiently. Adoption of a risk-based approach using a?PAN-based KYC?will help Fintechs to provide a more streamlined?onboarding of consumers and simultaneously?increase the regulatory compliance.
Additionally those Fintechs that currently??rely on paper documents for their transactions will now be able to store their documents digitally, enabling them to?make digital payments?securely?and more?efficiently.?
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Scope for Data Misuse?
From a compliance point of view, it is a good initiative by the Indian Government to have a centralized repository to enable the Financial sector to access the KYC system and that it would serve the purpose of the One-Stop-Solution for various Financial sector nitty-gritties. The only concern that I see is that the government in power should not mis-utilize the data for any hidden agenda and that the individual data is not compromised!?
An Important Step Towards Digital India
Expanding the scope of DigiLocker on users and types of documents will significantly boost the customer journey as we all know that simplifying KYC by adopting a risk-based approach ensures faster onboarding of consumers and deepens the journey of Digital India initiatives. This is an incredible announcement in this budget. It is proposed to allow Fintechs to store financial documents securely without relying on the cumbersome process of storing paper documents.?
The proposed “Entity” DigiLocker to be used by MSMEs, large business and charitable trusts will go a long way towards government’s larger initiative to promote digital payments and financial inclusion. Fintechs will now be able to store their customers’ documents and bank account details securely in the digital locker. This will help fintechs to provide a streamlined experience to their customers, while also ensuring that their data is secure and protected. This move will definitely prove to be a major step towards India moving towards becoming a cashless economy.
Enhanced Due Diligence Still Required!
The idea of PAN as a common identifier for all digital systems is a welcome move and will avoid repetitive and multiple documents. Also PAN covers both individuals and non-individuals and therefore has a wider level of acceptance. Further, this seems to indicate that the project of linking Aadhaar to PAN has been largely successful. However, certain persons like those earning below taxable limits, having agricultural income, hailing from certain tribal areas and certain non-resident Indians may not have PANs, and presently submits Form 60/61 for specific financial transactions. It will be important to understand how this category will be covered.
The extension of digilockers for individuals will be very useful as the details will be updated automatically in these documents, once there are any changes in the physical documents. Proper access, if either directly or through National Financial Information Registry is made available to banks and financial institutions, then not only will the initial Customer Due Diligence (CDD) be conducted seamlessly, the re-KYC process will become much easier as any changes in address or contact details of the customer can be tracked. However, Enhanced Due Diligence (EDD) based on risk perception will still be required to be done on a personal level.
The Enterprise wise DigiLockers for MSMEs, Charitable Trusts and other businesses will help the CDD process immensely in movement, verification and storage of documents if the banks and financial institutions have access to the same on an ongoing basis. However, the EDD process will still have to carried out to the satisfaction of the banks and financial institutions based on the nature and complexity of the business, transactions etc.
A word of caution:
Preparing for a Digitally Empowered New India
The Government's thrust on expanding the scope of the?Digilocker to include (in addition to individuals) documents of MSMEs, trusts, charitable trusts?will help reduce pain points in compliance requirements for?customers of banks and financial institutions besides facilitating the security and integrity of data.This would do away with the need to submit documents multiple times for various requirements like opening ,bank account, availing loan facilities etc. Permitting Fintech firms to use the DigiLocker to store and share documents online with regulators and banks would simplify the KYC, identity and address verification process to provide ease of customer onboarding in a safe and secure manner. This should also be seen against the background of other calibrated measures being contemplated by the Government?which include a risk-based KYC process, financial sector regulators being encouraged?to have a KYC system amenable to the needs of Digital India, PAN as a common identifier for?business establishments, and?overhaul of existing financial sector?statutes and regulations to ease compliance burden and improve bank governance. Banks and financial institutions would need to overhaul their technology, systems and processes to meet?the challenges and?the?opportunities provided by a digitally empowered new India.
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