Technology in Microfinance

Responsible digital transformation

of financial institutions
Is microfinance industry facing an existential crisis?
The microfinance industry is impacted by a confluence of factors and the emergence of digital credit and fintech

Factors Impact

Limited innovation
Digital credit has
begun to displace
Cultural shift from digital microfinance
aliens to digital natives

Limited digital adoption or

digital self-exclusion
Digital credit providers
will eventually cream
Lack of user level off the high value
personalization customers

Limited customer
relationship management
Digital credit
undermining the credit
Limited use of data discipline in the
analytics market

Is this a race to the bottom? And unless MFIs adapt, they are in the suicidal race, and so the investors funding them.

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Microfinance industry by and large lacks capacity to transform digitally and adopt
technology

Poor understanding of

01 changing clients’ expectations

and hyper competition
Lack of institutional
commitment and focus 04
Limited understanding or

02 experience of digital
transformation
Limited resources for
digital transformation 05

03 Low to moderate
technical skills
Limited external support
to transform 06
3 All rights reserved. This document is proprietary and confidential.
Why should investors worry?

Microfinance institutions are facing Fintechs are displacing

huge losses consequently the microfinance institutions
investors’ value of microfinance
investment portfolio will decline
Fintechs do not
essentially have social
goals and have limited
Microfinance institutions understanding of low-
are rapidly losing urban and moderate-income
and high value business,
how will they cross
subsidize rural and low- Digital financial
value business inclusion or exclusion

Digital divide on account of illiteracy, lack of

technology understanding, economic
inequality, lack ownership of devices, or lack
of trust on digital means

4 All rights reserved. This document is proprietary and confidential.

Microfinance industry needs to re-invent itself to remain relevant

For microfinance industry to remain relevant, it needs to transform digitally and adopt technology. It may do so by:

Developing solutions Delivering innovative Driving the institutional Managing emerging

Reinventing its culture aligned with users’ solutions within time focus based on user institutional and user-
expectations and space transitions experience level risks

Users expect
Cultural change and Digital finance eliminates User experience is The microfinance industry
• Efficient services
adopting innovation human touch, fundamental to adoption. faces risks of relevance and
• Fair pricing physical touch points, innate This can be achieved sustainability by not
mindset
• Explanation in user customer awareness, and a through: transforming or replicating
language humane approach to • Mimicking users’ others. The ones
Evidenced by a renewed • Access to services as and customer problem. behaviours and attitudes transforming face risks such
focus on improving when required • Clear, obvious, and as:
products and services, • Easy to understand A high-tech and human intuitive services • Institutional risks such as
processes and policies, services touch model is a key • Assessing adoption technology, partnerships,
systems and approaches • Immediate recourse in
opportunity for bottlenecks and resolving
operational risks
case of a problem microfinance as MFIs have them • Client risks such as

Better integrate • Transparent processes

the relationships, data, • Implementing design pricing, agent-related
innate customer awareness, risks, fraud, recourse,
technology for service • Trust in processes thinking to personalise
and local understanding and data privacy
delivery, monitoring, • Human touch at key
experience
data analytics moments (especially in
decision making and if
there are problems)

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Responsible digital transformation – What investors need to know?

► Change has to happen for institutions to remain competitive, much of this change will be digital
► Clients need to be at the very centre of the change in terms of improved services and channels, and in
solutions which meet real needs, some clients will need very different solutions
► Institutions have to see the need for change, desire change, and be prepared to invest in change
► Institutional change needs to be backed up by an enabling policy and regulatory environment and an
evolving digital ecosystem
► Digital transformation is a journey, not a destination. This means, that there are many paths to
digitisation, some faster, some slower, some more costly, some less expensive
► Not being on a digital transformation journey is an untenable position for almost all institutions – the
scope, scale and timelines may vary
► Each institution starts at a different point on the journey and has different capacity to implement digital
transformation
► Digital transformation need to account for and mitigate client risks

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Responsible digital transformation of financial institutions entails
Responsible digital transformation
strategy pillars
Design around users’
needs and aspirations Drive customer trust
Enhance awareness of financial
products and services
Support institutions
Incorporate human access points
to transform
Responsible Build right technology architecture/
digital platforms and data structure that
transformation facilitate analytics
Leverage technology Partnerships to operationalize digital
and infrastructure banking (including FinTechs)
Use data for decision making
Emphasize on responsible elements
Build strategic within services, channels, processes,
partnerships technology, and user experience

Financial institutions will have to leverage on investors, donors, infrastructure players, third-party
service providers, and others as they carry out digital transformation responsibly and sustainably.

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 Technology for 1.2 Billion Indians

67 billion Total number of digital identity verifications

5.47 trillion INR total value of monthly real-time mobile
payments
2.8 billion Total volume of monthly real-time mobile payments
4 Operational Account Aggregators

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 Identity :
The bedrock of India Stack is a set of digital identity products centered around Aadhaar, India’s national
identity program. More than 1.31 bn (95%) Indians possess an Aadhaar number, which allows them to
perform a number of actions including:

Remotely authenticating any one, or indeed all, of these attributes via two-factor or
biometric authentication: name, age, address, mobile number, email address, gender.

Receiving digitally signed and universally accepted copies of lifetime records such as
driver’s licenses, educational diplomas, insurance policies, and more.

Signing documents or messages using a government-backed digital signature service.

Aadhaar Authentication:
The entire point of the Aadhaar program is to seed the population with secure, versatile digital IDs
that can be used to quickly authenticate a user’s identity. There are currently a variety of ways in
which a petitioner can prove a user’s identity using Aadhaar:

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 Understanding Aadhaar e-KYC service

Aadhaar Authentication
Aadhaar authentication is the process wherein the Aadhaar Number, along with other
attributes, including biometrics, are submitted online to the CIDR for its verification on
the basis of information or data or documents available with it.

All biometric/OTP (single or multi-factor) authentication schemes are valid for e-KYC
service too.

Eliminating Photo copies and Costly, Insecure Paperwork

Aadhaar is now a valid Proof of ID (PoI) and proof of Address (PoA) for most services is
fast being the key document for banking, telco, insurance, Government subsidy
programs, Passport, PAN card, etc. Considering the large number of Aadhaar holders in
India and the ability to uniquely authenticate all Aadhaar holders, more and more
services are accepting Aadhaar for their service delivery.

The Aadhaar e-KYC API provides a convenient mechanism for agencies to offer an
electronic, paper-less KYC experience to Aadhaar holders eliminating insecure and
costly paper process that exist today.
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 QR Code Scan

Secure QR code is a visual code containing demographics and photograph of the Aadhaar
holder which is digitally signed by UIDAI.
Data stored in QR Code is as follows:
 Ref ID
 Name
 Gender
 DOB
 Mobile
 Email
 Address
 Photograph
 2048 bit digital signature

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 Aadhaar Paperless Offline e-kyc
Introduction
UIDAI has launched Aadhaar Paperless Offline e-KYC Verification to allow Aadhaar number holders to
voluntarily use it for establishing their identity in various applications in paperless and electronic fashion,
while still maintaining privacy, security and inclusion.

Why Aadhaar Paperless Offline e-KYC ?

UIDAI provides a mechanism to verify identity of an Aadhaar number holder through an online electronic
KYC service. The e-KYC service provides an authenticated instant verification of identity and significantly
lowers the cost of paper based verification and KYC. However, this method of online e-KYC is not available
to all agencies and may not be suitable due to some of the following reasons;

•Online e-KYC requires reliable connectivity

•Agency needs to have technical infrastructure to call online e-KYC service and deploy devices (as
necessary)
•The resident may need to provide biometrics for the online e-KYC
•UIDAI maintains a record of the KYC request for audit purposes

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 Advantages of Aadhaar Paperless Offline e-KYC
•Privacy :
• KYC data may be shared by the Aadhaarnumber holder directly without the knowledge of UIDAI.
• Aadhaar number of the resident is not revealed, instead only a reference ID is shared.
• No core biometrics (fingerprints or iris) required for such verification
• Aadhaar number holder gets a choice of the data (among the demographics data and photo) to be shared.
•Security:
• Aadhaar KYC data downloadable by Aadhaar number holder is digitally signed by UIDAI to verify authenticity
and detect any tampering.
• Agency can validate the data through their own OTP/Face Authentication.
• KYC data is encrypted with the phrase provided by Aadhaar number holder allowing residents control of their
data.
•Inclusion:
• Aadhaar Paperless Offline e-KYC is voluntary and Aadhaar number holder driven.
• Any agency working with people can use it with consent of the Aadhaar number holder allowing wide usage.
How does it work?
Aadhaar Paperless Offline e-KYC eliminates the need for the resident to provide photo copy of Aadhaar letter and instead
resident can download the KYC XML and provide the same to agencies wanted to have his/her KYC. The agency can
verify the KYC details shared by the resident in a manner explained in below sections. The KYC details is in machine
readable XML which is digitally signed by UIDAI allowing agency to verify its authenticity and detect any tampering.
The agency can also authenticate the user through their own OTP/Face authentication mechanisms.

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 How to obtain Aadhaar Paperless Offline e-KYC Data
Aadhaar number holders can obtain Aadhaar Paperless Offline e-KYC data through the following channels:
•Download Aadhaar Paperless Offline e-KYC from resident portal (https://resident.uidai.gov.in)
•In future, obtain Aadhaar Paperless Offline e-KYC will also be available via:
• mAadhaar mobile application on a registered phone number
• Inbound SMS using registered phone number
• Aadhaar Kendra using Biometric Authentication
What Data is covered in e-KYC
While downloading/obtaining offline e-KYC data, following fields are included in the XML.
•Resident Name
•Download Reference Number
•Address
•Photo
•Gender
•DoB/YoB
•Mobile Number (in hashed form)
•Email (in hashed form)
Aadhaar Paperless Offline e-KYC data is encrypted using a “Share Phrase” provided by the Aadhaar number
holder at the time of downloading which is required to be shared with agencies to read KYC data.

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 DigiLocker is a public utility provided to Aadhaar holders by the Government of India. The service allows an
Aadhaar holder to sign in using a one-time password sent to the mobile number used to enroll on Aadhaar. Once
inside, residents of India will find a number of digitally signed, legally valid electronic documents waiting for
them.
Currently, there are more than 4.6 billion documents issued directly into Digilocker by authorities. These
documents range from driver’s licenses, to educational diplomas, to insurance policies. In total, there are
currently 1460 institutions signed up as document issuers on Digilocker, 233 are integrated with DigiLocker as
requesters who can verify user documents with consent.
DigiLocker is implemented as a government-operated mobile app and web app.

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 ISSUERS REQUESTERS
Organizations issuing documents & certificates to
citizens can now do so digitally through Digi locker Organizations that need verified digital documents and
by becoming a registered issuer. certificates for various services can become a registered
Some examples of issuers requester.
•Govt departments / agencies Some examples of requesters
•Educational institutions
•Financial Institutions • Govt depts / Law enforcement agencies
•Others • Educational institutions, Financial service providers
• Employers , Embassies
• Others

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 eSign

eSign is a digital signature product built atop Aadhaar. It allows any Aadhaar holder to produce legally
valid digital signatures on any document, at any time, using any device. Consent for this signature is
obtained through a one-time password sent to the signer’s Aadhaar-linked mobile number.

Presently, eSign is used to streamline workflows for multiple fields including financial services, legal
services, healthcare, and more.

In order to gain access to certified eSign in their workflows, application developers must enroll as
eSign Application Service Providers (ASPs).

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 Payments
In 2016 the National Payments Corporation of India (NPCI) announced the launch of the United Payments Interface
(UPI), catapulting India into the age of digital payments.
UPI is India’s homegrown real-time mobile payments system. It was intended to continue the journey of financial
inclusion that had begun with the goal of providing every Indian citizen with a bank account, now enabling them to take
part in a digital economy that was rapidly becoming smartphone-enabled.
UPI was designed to enable interoperability between money custodians, payment rails and front-end payment
applications. In just 5 years, it has grown from an ambitious idea to becoming the world’s 5th largest payment network
by volume, behind only Visa, Alipay, WeChat Pay, and MasterCard.
There are a number of reasons why UPI has so rapidly gained ground share in India’s payment ecosystem. This is
primarily down to the superiority of the end user experience when compared with digital wallets, card networks or
traditional bank transfers.
As an interoperable payment rail, UPI obviates the need to fund any kind of intermediary wallet as users can make real
time payments directly in and out of their bank accounts, at essentially no cost. UPI also makes use of a separate UPI
PIN as a means of second factor authentication, and a Virtual Payment Address (VPA) in addition to typical identifiers
like bank account numbers or debit card CVV’s making for a more flexible and secure payment experience when
compared with alternatives. Lastly UPI apps allow consumers to make payments via QR codes as well, thus allowing any
UPI-enabled application to account for all the online and offline payment requirements that an Indian user may have.

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 UPI Autopay also paves the way for the eventual introduction of event-based triggers for UPI payments, as
outlined in the seminal UK Sinha RBI Report on MSMEs (2019). This means that individuals and MSMEs
would be able to ascribe specific conditions under which payments are to be made (like the meeting of a
specific threshold or occurrence of a particular event. Both time-based and event-based triggers represent an
important step forward in the programmability of payments in India, something that so far has been an
innovation restricted to the emerging domain of crypto assets and smart contracts.

More recently, the NPCI announced the launch of a new digital payment mode on UPI called e-RUPI, which
functions as an electronic voucher system that can be utilised by any mobile phone user in India. The goal of
e-RUPI is to provide an improvement over existing prepaid payment modes. It is intended to be a single-use
digital payment solution (represented by an SMS-string or QR code) that is specific to a person and purpose
for use cases such as donations, gift vouchers or even Covid vaccine subsidies.

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 The Account Aggregator framework seeks to change that by providing a catalyst for India’s new
data democracy, where the time and cost of retrieving and sharing user data will no longer be a
hindrance in building sustainable financial products. Consumers can approve/manage/revoke all
their consent agreements in one place, while at the same time institutions can clearly define their
data requests at a granular level. For the first time, individuals and businesses have the ability to
prove any data about themselves in a permissionless and verifiable manner.
The entire AA system is interoperable by design, so a service provider that integrates with one
AA app can make data requests to users of any other app too. This takes away the need for
custom integrations with different banks, and it also gives users the freedom to use whichever AA
they want to.
While initially earmarked to be piloted in the financial services industry, the grander vision is to
enable consent-based data sharing across a number of important sectors like healthcare and e-
commerce where ordinary citizens will have the ability to leverage their own data to avail of
relevant products and services like loans, telemedicine, portfolio advisory and a litany of other
use cases that are waiting to be developed.

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