RBI’s Green Light To Video-KYC A Boost For Digital Financial Services

The Reserve Bank of India’s decision to permit all banks and non-banks to begin on-boarding customers through a video identification process is seen as a boost to financial services firms ranging from payments companies to non-bank lenders. The video identification promises to replace a more cumbersome and expensive physical know-your-customer process.

On Thursday, the RBI amended its master direction for the know-your-customer process and said that firms can use video-KYC when on-boarding customers. This will significantly reduce the costs of customer acquisition, especially for non-bank lenders and fintech firms, who lack a widespread geographical presence.

“ ..with a view to leverage the digital channels for Customer Identification Process by Regulated Entities, the RBI has decided to permit Video-based Customer Identification Process as a consent-based alternate method of establishing the customer's identity, for customer on-boarding,” the RBI said in its notification.

Post the Supreme Court ruling on Aadhaar in September 2018, fintechs, e-wallet players and non-banks were denied access to the Aadhaar system, which restricted their ability to use e-KYC to complete customer verification. Instead, they had to rely on a network of agents, who had to be physically present at the customers’ location to verify their details. This increased the compliance burden and costs for these entities.

Policy makers have been trying to ease that burden.

Last year, in August, central government amended the Prevention of Money Laundering Act, 2002, allowing for digital KYC. The RBI has now taken that a step further by allowing video-KYC, said Navin Surya, chairman of the Fintech Convergence Council and chairman emeritus of Payments Council of India.

Ankush Aggarwal, founder of Avail Finance, said the decision comes as a major relief for fintech startups and digital non-bank lenders catering to the gig economy with the new remote customer authentication option. “The service providers needn’t physically reach out to customers in remote locations, which will cut down costs significantly.”

How Will It Work?

The video-KYC process involves lenders and their agents capturing a live photo of the customer and geo-tagging it to ensure that customer is physically present at that location.

The RBI says that the process can only be operated by officials (of the lender) that are specifically trained for this purpose. Lenders would need to maintain activity logs with the credentials of the official or business correspondent performing the video-KYC, the RBI said.

The documents that a customer needs to submit to complete verification can either be uploaded or captured by video.

Should the customer choose to use Aadhaar as a identity proof, financial services companies can use offline Aadhaar verificatio through Aadhaar XML files or by scanning the Aadhaar Secure QR code.

If the customer does not wish to provide their Aadhaar details, lenders will have to use other officially valid documents which contain the customer’s identity details. This could include Permanent Account Number or any other documents which state their business and financial status, the RBI’s notification said. Documents uploaded onto the government’s ‘Digi-Locker’ facility can also be accepted by lenders while on-boarding customers, the notification added.

The RBI’s move follows the recommendations of the Expert Committee on Micro, Small and Medium Enterprises, headed by UK Sinha, former chairman of the Securities and Exchange Board of India in June last year.

While the committee had proposed allowing lenders to use video-KYC, by citing applications like Google Duo or Apple FaceTime, the RBI has not allowed any third-party video service to be used.

The notification states that the video interaction can only be “triggered from the domain” of the lender and has to be is stored in a safe and secure manner.

Who Will It Benefit

While all financial services firms can use the newly introduced facility, it is the non-bank lenders who will benefit most.

Wallet companies were already permitted to do limited KYC for their customers, who would load up to Rs 10,000, said Arpit Ratan, co-founder, Signzy Technologies, which provides KYC software. As such, it is the non-bank lenders who stand to benefit more.

To be sure, the technology may take some time to be rolled out.

“While the technology is ready, it will take a few weeks for banks and non-banks to begin the video-KYC onboarding process as there are many regulatory requirements they have to fulfill at their back-end. This includes changing policies and processes, along with training staff,” Ratan said.

Rajesh Mirjankar, managing director and chief executive officer, Infrasoft Technologies Pvt. Ltd., said video-KYC would help all financial services players as it eases verification and on-boarding process.

“The video-KYC will now allow lenders to match the customers’ identity documents through the video and they can also scan the documents remotely without needing to be physically present,” he told BloombergQuint. “Lenders and payment companies that are targeting rural customers and millennials will be the ones who will greatly benefit.”

But the logic of artificial intelligence tools that companies use to scan and read documents, according to him, may need to be upgraded for video-KYC to be reliable in the long run.

As for the customer, while there may not be any financial benefit, the permission to do video-KYC makes the process more convenient.

“There may not be any immediate direct financial benefit to the customer, but indirectly the speed of on-boarding and ability to service the customer will improve. Also, the RBI has said that it will encourage the use of face-matching software and AI, which can drastically benefit customers as more data can be captured by entities,” said Surya of Payments Council Of India.