Changes to expect in fintech with digital KYC

By Shilpa Mankar Ahluwalia and Himanshu Malhotra, Shardul Amarchand Mangaldas & Co

Fintech players are now offering the Aadhaar-based know your customer (KYC) authentication services (Aadhaar e-KYC) made available by the Unique Identification Authority of India (UIDAI) to customers quickly and at a fraction of the cost of paper-based onboarding methods. However, in September 2018, the Supreme Court in Justice (Retd) KS Puttaswamy and Anr v Union of India, prohibited private bodies from undertaking Aadhaar KYC in the absence of legislative backing. In July 2019, the Aadhaar and other Laws (Amendment) Act, 2019 (act) introduced legislation enabling banks (and other entities that may be notified by the government) to obtain Aadhaar numbers to undertake Aadhaar e-KYC while onboarding customers.

Shilpa Mankar Ahluwalia
Shardul Amarchand Mangaldas & Co

Non-banking financial institutions (NBFC) are excluded and cannot therefore conduct Aadhaar e-KYC. The Finance Minister recently announced that NBFCs would be allowed to undertake Aadhaar e-KYC, but no formal notification has yet been issued. Following the Aadhaar judgment, the fintech sector in India has been struggling with KYC and customer onboarding costs.

The Prevention of Money-Laundering (Maintenance of Records) Rules, 2005 have been amended and are in force from 19 August 2019 to enable: (i) ‘Digital KYC’; and (ii) acceptance of e-documents stored in digital lockers as valid documents, for the purposes of KYC verification by all reporting entities, that is banks and financial institutions. The amendments make procedural changes to the way in which KYC can be undertaken and allow for a completely digitized mechanism to onboard customers.

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Shilpa Mankar Ahluwalia is a partner at Shardul Amarchand Mangaldas & Co and leads the firm’s Fintech practice. Himanshu Malhotra is an associate at the firm.


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