AEPS (Aadhaar Enabled Payment System)

Example

Imagine Sita, a farmer living in a remote village, wants to withdraw ₹2,000 from her bank account. She visits a nearby AEPS agent, provides her Aadhaar number and bank name, and authenticates the transaction with her fingerprint. Once the system verifies her identity and processes the withdrawal, the agent hands her the cash.

Key Components

• Aadhaar Number: A unique 12-digit identification number linked to the bank account.

• Biometric Authentication: Usually a fingerprint, ensuring that only the rightful account holder can complete transactions.

• Banking Correspondent/Micro-ATM: Local agents or shops equipped with devices to process AEPS transactions.

• NPCI Switching Platform: The system that routes and settles transactions between banks.

• Bank Account Linkage: Aadhaar must be seeded to the bank account for transactions to be successful.

Benefits

• No Card or PIN Needed: Transactions require only Aadhaar number and fingerprint, ideal for users without cards or limited digital literacy.

• Financial Inclusion: Expands banking services to rural and remote areas, supporting the unbanked and underbanked population.

• Secure Transactions: Biometric verification helps reduce the risk of fraud.

• Direct Benefit Transfers: Enables government subsidies and payments to be credited directly into beneficiaries’ accounts.

• Convenience: Banking services are accessible at local shops, reducing the need for travel and paperwork.

• Promotes Savings: Easy access to banking encourages opening accounts and cultivating saving habits.

Challenges

• Authentication Failures: Approximately 34% of transactions fail due to biometric mismatches, connectivity problems, or insufficient funds.

• Declining Usage: AEPS transactions declined from 120 million in June 2022 to 95 million in June 2023, with the value dropping from ₹32,403 crore to ₹26,498 crore, as UPI and ATMs gained popularity.

• Infrastructure Gaps: Many rural regions still lack reliable internet and electricity to support micro-ATM operations.

• Security Concerns: Potential data breaches and misuse risks if not properly regulated.

• Agent Income Issues: High Goods and Services Tax (GST) and unfair tax deductions reduce incentives for rural agents.

Summary

AEPS is a strong and secure tool for financial inclusion in India. It helps underserved populations access banking easily through Aadhaar-based biometric authentication. However, it faces challenges like authentication failures, infrastructure limits, and declining adoption as digital payment options grow.