Promoting financial inclusion

The UID Authoritys database will use biometric identifiers to establish an individuals uniqueness. A committee is at present deciding the set of biometric identifiers that will be used. All the ten fingerprints,the persons picture,and perhaps his iris scan are likely to be included.

The Authority will also ensure that nobody gets more than one number through an exercise called de-duplication. Whenever a person who already has a number tries to get another,his biometric parameters will be run through the database. If the search produces a match,his application will be rejected right away.

Online authentication of identity

What will aid financial inclusion will be the ability to provide online authentication of identity at short notice and at low cost. Any point of transaction that is equipped with a mobile phone and a fingerprint reader will be able to act as an authentication point. Whenever a persons identity has to be confirmed,his fingerprint will be scanned and forwarded to the authority which will check its database and provide confirmation over the phone within minutes.

The benefits

Portability. Once you have got the number,you could use it throughout your life for authentication anywhere in the country. Someone who was born in a village in Bihar and obtained the number there could later,if he comes to work in Delhi,use the number to establish his identity and get a government benefit that he is entitled to.

Promoting financial inclusion. Distributing financial products and services at the lowest rung of the pyramid requires a low-cost model that allows accepting and making of a large number of micro payments to and from the poor. At present the costs are so high that reaching out to the poor becomes unviable.

The mobile phone industry has,by reducing the cost of making a call from Rs 17 per minute in 1997 to one paisa per-second now,transformed itself from a high-cost,low-volume industry to a low-cost,high-volume industry. Unless the financial services industry is able to make that transformation,it will not get the kind of penetration that it wants. You must be able to reduce transaction costs and allow people to make 10 contributions a month of Rs 10 each. The UID will enable the industry to create a low-cost high-volume ubiquitous transaction platform, said Nandan Nilekani,chairman,UID Authority,at a recent pension industry conference.

At present the cost of establishing a persons identity is high. This drives transaction costs up. And when transaction risks are high,the industry has to make higher provisions for bad debts,which pushes their costs further up. UID,by providing a means to authenticate a persons identity,will reduce transaction costs and lower risk.

In the model that is visualised,every transaction point will have a mobile phone and a fingerprint reader. The customer comes in and undergoes the verification procedure as described earlier. Once his identity is established,the financial transaction is done. After the transaction,both the customer and the financial correspondent will attest to the transaction by putting their fingerprint to it.

Once this kind of a transaction model has been created,the distribution of financial products and services can be opened up to whoever is willing to invest in a mobile phone and a fingerprint reader. Millions of financial correspondents could be enrolled. The neighbourhood kirana store,an NGO,or a customer service centre could all become distributors of financial products and services.

Global addressability. When you call a person on his mobile phone,the telecom networks switching mechanism enables you to reach him wherever in the world he is. A mobile number thus provides global addressability. The UID will similarly provide global addressability to the financial industry.

A construction worker working on a project in Chennai may buy the new pension sceme NPS there. Six months later he could move to another construction site in Bangalore. Once the UID is introduced and the financial model envisaged above introduced,he could go to a neighbourhood kirana store and make his NPS payments there. Similarly,the UID number linked to an elderly citizens bank account will allow his pension benefits to be paid irrespective of where he is.

As Nilekani said: Changing the last mile of distribution of financial services is the fundamental issue. This low-cost high-volume platform will enable financial products and services to achieve the kind of penetration that the industry desires.