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News Analysis


Loopholes in Aadhaar-Enabled Payments

  • 06 Oct 2021
  • 3 min read

Why in News

A series of recent scams have exposed the vulnerabilities of the Aadhaar-enabled Payment System (AePS).

Key Points

  • Aadhaar-enabled Payment System (AePS):
    • AePS is a bank led model which allows online interoperable financial transactions at PoS (Point of Sale/Micro ATM) through the Business Correspondent (BC)/Bank Mitra of any bank using the Aadhaar authentication.
    • This system adds another layer of security to financial transactions as bank details would no longer be required to be furnished while carrying out these transactions.
    • It was taken up by the National Payments Corporation of India (NPCI) - a joint initiative of Reserve Bank of India (RBI) and Indian Banks’ Association (IBA).
  • Advantages Associated with AePS:
    • Decongesting Banks: Like other micro-ATM systems, it has helped to decongest banks. It can be particularly useful to migrant workers who have no ATM facility.
    • Deepening Social Security: It will help in deepening social services after the proliferation of cash transfer schemes from governments to vulnerable citizens.
    • Enabling Last-Mile Service: It will ease the payments which will be done at the doorstep instead of travelling long distances.
      • Interoperable system ensures that the customer is not tied to one bank’s BC.
    • Removing Middlemen: The middlemen who exploited the poor and illiterate would now be eliminated.
  • Existing Loopholes:
    • Fraudulent BC: Sometimes BC, leveraging the financial illiteracy of people, provides less money to the consumer but enters more money to be credited into the BC’s account.
      • Manytimes, BCs deny receipts to poor people, if they demand one at all.
      • A corrupt BC can even get away with asking a gullible customer to put her finger in the PoS machine under some pretext, without giving her any money.
    • No accounting of Fraudulent Transactions: AePS has no record of the fraudulent BC, it only shows the transaction records.
      • This makes poor people more vulnerable, who already are facing scarcity of funds.
    • Systemic Issues: Failure in transactions owing to biometric mismatches, poor connectivity or weaker systems of certain banking partners, also affect the AePS.

Way Forward

  • Providing financial literacy will help in reduction of cases of fraudulent BC.
  • Roaming BCs should perhaps be banned, at least in states with low literacy levels.
  • Better grievance redressal facilities must be made available to the victims of AePS fraud.

Source: IE

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