The decline in Aadhaar-based digital payments, specifically through the Aadhaar-enabled Payment System (AePS), has raised concerns about financial inclusion in India. This system, which allows users to authenticate transactions using their Aadhaar number and biometric data, has seen a significant drop in both transaction value and volume over the past few years.
Over the past few years, the Aadhaar enabled payment system (AePS), which is used by a significant portion of the country’s migrant population, has either remained stagnant or seen a slight decline. According to National Payments Corporation of India (NPCI) data, the value of AePS transactions in April 2022 was around Rs. 27,900 crore in September to Rs. 23,600 crores. The number of transactions changed, from 205 million in April 2022 to 202 million in September 2024, Money Control reported.
What is Aadhaar Enabled Payment System (AePS)?
Through AePS, bank customers can perform basic banking operations including checking their balances, deposits and withdrawals and remittances through a Business Correspondent (BC) using Aadhaar-based authentication, i.e. fingerprint verification. A business correspondent is an agent of the bank who is authorized to perform most banking functions for customers on behalf of the bank.
A product that includes a financial inclusion component lags behind for three main reasons, while there are other components at work. Although AePS is not directly involved in product implementation, it operates the system as it was built by NPCI. Both the volume and value of transactions increase significantly during certain months when the government subsidy is credited to the beneficiary’s account. However, it does not represent customer transactions.
Some of the reasons leading to the decline of AePS are given below:
Transactions within the same bank only
AePS transaction numbers relate to off-us transactions, which are financial transactions that take place between two banks through the NPCI settlement channel. Due to the use of NPCI technology by AePS, all bank transactions on the network take place through the NPCI network; However, NPCI is unaware of the value of these transactions.
Interoperability
According to reports, some years ago there were concerns about money laundering using AePS, thus the regulator required BCs to verify themselves with fingerprints for every single transaction. Although this has reduced the frequency of fraudulent transactions, some banks have started using this as an excuse to refuse interbank transfers because they are unaware of the account holder. To carry out such transactions, they demanded that account holders visit their local branches and give express approval.
Regulatory changes
A few more regulatory rules could make the entire BC sector unprofitable for both banks and agents. RBI recently said that financial institutions should check all BC facilities once a year for verification. It is also mandatory that all BCs obtain certification.
While these two requirements are not unique to AePS, they will certainly impose difficulties on smaller private sector banks and payment institutions that have established significant BC networks on the ground.
ATM Parity
AePS is not a profitable service for many BCs, so they are asking RBI to increase the interchange. Their demands are similar to ATMs, where the regulator imposes a per transaction limit of Rs. 17 allowing a flat expenditure.
The irony of shyness
A large portion of the funds transferred by AePS are subsidized by the government through direct benefit transfers. These accounts are Jan Dhan accounts opened in public sector banks. Annually in these accounts approximately Rs. 2.2 lakh crore are deposited, which do not offer interest rates above 3-4 percent. On the other hand, PSBs usually charge 9-11 percent interest on loans.
Although a significant portion of the population may have switched to UPI using AePS in recent years, the program is still relevant for a large part of the nation.