Going Cashless in India – What is Aadhaar Pay and How Does It Work?

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By Koushan Das 

The Aadhaar is a 12-digit unique identification number issued by the Indian government to every Indian citizen. The number serves as proof of identity and address, but now the government will expand its functionality to include digital payments.

Finance Minister Arun Jaitely announced in the Budget 2017 that the Aadhaar Pay app will be launched within the financial year (FY) 2017-18. Even if the new Aadhaar-enabled payment system will not directly affect your operations, businesspeople should review the new app to understand how the government is promoting Digital India and encouraging a cashless economy

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What is Aadhaar Pay?

Aadhaar Pay is an app on the Android platform that will enable merchants to conduct cashless transactions.

A key benefit of the Aadhaar Pay app is that it removes the need for any physical payment instrument. Consumers can easily pay for transactions through the merchant’s app.

Presently, about 14 banks are integrated into the Aadhaar Pay system, while 1.11 billion Indians are registered into the Aadhaar system and have an Aadhaar number.

How does it work?

Merchants that adopt the Aadhaar-enabled payment system (AEPS) need to download and install the Aadhaar Pay application on their smartphone from the Google Play Store on the Android platform.

After registering on the app, the merchant’s mobile phone will then need to be linked to an Aadhaar biometric reader. Once the merchant has this infrastructure in place, the consumers can start transacting via the AEPS.

To make a payment, the consumer will have to enter his or her Aadhaar number. The consumer’s fingerprint will be the password for the transaction.

What are the benefits of adopting Aadhaar Pay?

Payments made via the Aadhaar Pay app will not hold any extra charges, making it an attractive method of transaction for both merchants as well as customers.

Moreover, cashless payment is possible even for those customers who do not have credit or debit cards or smartphones, which could encourage consumer activity in rural areas.

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What are the costs of adopting Aadhaar Pay?

The Aadhar Pay App makes the payments very easy for the customer, but merchants will need to bear a one-time expense of buying a fingerprint scanner.

Nevertheless, the fingerprint scanner is a cheaper payment instrument to procure than a POS (point-of-sale) machine. The price of a fingerprint scanner starts at US$29.71 (Rs 2000).

One of the shortcomings of AEPS is that it cannot facilitate person-to-person fund transfers due to the requirement of a fingerprint scan. Moreover, the system is based online and thereby requires strong internet coverage. Unreliable internet connectivity can thus render the system worthless.

Growing digital payments infrastructure

India’s digital payments infrastructure is slowly diversifying. Electronic payments can be made to offline merchants using credit/debit cards, online wallets, Unstructured Supplementary Service Data (USSD), and the Unified Payment Interface (UPI).

The announcement of the Aadhaar-enabled payment system incentivizes both Indian merchants and consumers to adopt cashless modes of payment.

Moreover, the government’s regulatory measures to check huge cash transactions (after November 2016’s demonetization) has accelerated the transition to ‘go cashless’.

Overall, these changes offer significant benefits to the government, bankers, regulators, and consumers as it promotes transparency and expands the formal economy. Greater digitalization also bodes well for India’s burgeoning fin-tech sector and technology entrepreneurs.


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Asia Briefing Ltd. is a subsidiary of Dezan Shira & Associates. Dezan Shira is a specialist foreign direct investment practice, providing corporate establishment, business advisory, tax advisory and compliance, accounting, payroll, due diligence and financial review services to multinationals investing in China, Hong Kong, India, Vietnam, Singapore and the rest of ASEAN. For further information, please email india@dezshira.com or visit www.dezshira.com.

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