Financial Inclusion - The Promise
“Financial inclusion” entered the BFSI zeitgeist in the early 2000s with the likes of Kofi Annan and the World Bank underscoring its importance. The idea of creating equal access for financial services in a fair and secure manner quickly captured the collective focus of the governments of the world, the UN, the World Economic Forum, the Bill and Melinda Gates Foundation, etc.
Depending on the context, financial inclusion can mean different things. It may mean a way of giving back to the community or contributing to the world by offering cheaper loans. At other times, it might mean serving an underserved market - capturing the fortune at the bottom of the pyramid. However, it almost always entails formalising the informal lending economy, i.e. weeding out loan sharks.
In financial inclusion utopia, even the most marginalised can gain access to loans, credit lines, and insurance in an instantaneous, safe and secure manner. In this world, a young woman entrepreneur can pitch her idea to a bank (without visiting a branch), complete on-boarding and obtain funds the very same day. Multiply this with tens of thousands of individuals and a whole community and country can be uplifted.
Costs Incurred in the Lending Process
Consider the simplified lending process:
- Originating and evaluating a lead
- Qualifying the lead thru KYC
- Risk assessment and underwriting
- Disbursal of funds and collection
Each step in this process costs time and money and adds to the final TAT and cost of the financial product (say a loan or a credit card). Further, money spent in origination, KYC and underwriting will be sunk cost if the customer doesn’t take the product. A lender’s total budget for origination, KYC, and risk assessment for leads that converted and those that didn’t are borne by the customer. A Rs. 100,000 loan might carry 16% interest and an additional 2% fee to cover for the above.
Of this, KYC can be a big chunk. A Financial Institution (FI) may spend between Rs. 50 per KYC to Rs. 500 per KYC.
Reducing this cost lessens the cost of the loan, this benefits the customer and thus the bank. It is in this context that Video KYC is an important step forward in bringing banks and the customer “closer”.
Video KYC in the KYC Landscape
The high cost of KYC is partly because the regulatory scenario in India was heavily skewed towards mandating IPVs (in-person visits) by an agent of the Regulated Entity (RE) - banks, NBFCs, wallets, etc. (This is not mandated in small loans, i.e <Rs.60,000, offered by digital apps and this has contributed to the heavy growth in that segment.) These agents are officially known as RE officers or officials.
RBI released an Amendment to the Master Directive on KYC on 9th January 2020 that changed this. It added another option for completing KYCs through Video-based Customer Identification Process (V-CIP) or what has commonly come to be known as “Video KYC” or “V-KYC” in the financial community. Video-KYC seeks to make it easier for REs of the RBI to leverage video call technology to onboard customers. This is arguably the most significant development in the KYC world since the infamous Aadhaar ruling by the Supreme Court, albeit REs and FIs actually welcomed this one.
If we look at the regulatory framework, we see that the KYC component is where a lot of onboarding workflows differ for banks and non-banks. Non-banks tend to balance cost and compliance by preferring the Digital KYC of OVD routes. With Video KYC, there is more breathing room in the number of KYC alternatives.
|KYCs recognised by RBI||Remote
(NBFCs - loans <60K)
(Banks, wallets, loans> 60K)
(Biometric-based – Only Banks)
|No||Yes||Only banks and telecoms have access|
|Digital KYC||Yes: IPV required||Yes||Requires in-person visit -- expensive|
|Paper-based KYC (OSV)||Yes||Yes||Prone to identity and document frauds|
|Aadhaar verification (XML or OTP)||Yes: XML allowed||OTP -
restricted to min of KYCs
|Mobile should be linked to Aadhaar|
|Video Call based KYC
(Aadhaar verification - XML or OTP)
|Yes||Yes: can meet remotely||Mobile should be linked to Aadhaar|
|Most Viable Option||Aadhaar XML, Remote OSV||Video KYC|
Benefits of Video KYC
Why is V-KYC such a big deal? The short answer is - cost saving. But there’s much more to it. The advantages for V-KYC are clear to see while comparing how it with IPVs along key parameters that factor into choosing a KYC solution.
|Parameter||Without V-KYC||With V-KYC|
|Cost||KYC costs between Rs.50 and Rs.500 for both parties||KYC costs become a 10th of IPVs for both parties|
|Efficiency||Not more than 3 KYCs/day||RE officials can complete upto 200 KYCs/day|
|Reliability||Significant scope for fraud and mistakes||AI enabled fraud prevention and error checks|
|Turn Around Time||Lengthy and unpredictable, susceptible to dropoffs||2-5 minute process, eliminates dropoffs|
|Scalability||Limited by geographical access||Not constrained by geographical separation|
For FIs, Video KYC drastically reduces costs, while enabling more customers to be onboarded faster, wherever they may be. For consumers, Video KYC offers a more flexible option while reducing the costs that are passed on to them during the onboarding process.
When Marshall McLuhan wrote, “The medium is the message” he was not talking about video calls making it easier for women entrepreneurs to start businesses. Yet a new medium does mean more to change things than the message it carries. By shifting to Video-KYCs, both the RE and the customer save time, reduce costs and get more work done without leaving their homes or offices.
What to look for in a Video KYC solution
So, what makes for a good Video KYC solution? What should a RE consider while choosing a V-KYC solution?
The starting point for any RE is RBI’s mandatory regulatory guidelines on Video KYC. A good baseline to start from is that the V-KYC solution should have features to meet the regulatory requirements.
|Sl.no.||VCIP Regulation||What it means|
|1||“In case of offline verification of Aadhaar using an XML file or Aadhaar Secure QR Code,
it shall be ensured that the XML file or QR code generation date is not older than 3 days
from the date of carrying out V-CIP.”
|Check for Aadhaar XML - 3 days old, Signature validation|
|2||”REs other than banks: can only carry out Offline Verification of Aadhaar for identification
RE shall ensure to redact or blackout the Aadhaar number in terms of Section 16.”
|Aadhar number masking|
|3||”The PAN details shall be verified from the database of the issuing authority.”||PAN capture and auto-verification|
|5||“Live location of the customer (Geotagging) shall be captured to ensure
that customer is physically present in India”
|Video Geo Tagging|
|6||“The official of the RE shall ensure that photograph of the customer in the Aadhaar/PAN details matches
with the customer undertaking the V-CIP and the identification details in Aadhaar/PAN shall match
with the details provided by the customer.”
|Face Match and Aadhar/PAN digitisation|
|7||“The official of the RE shall ensure that the sequence and/or type of questions during video interactions
are varied in order to establish that the interactions are real-time and not pre-recorded.”
|Check for Aadhaar XML - 3 days old, Signature validation|
|8||“In case of offline verification of Aadhaar using XML file or Aadhaar Secure QR Code,
it shall be ensured that the XML file or QR code generation date is not older than 3 days from the date of carrying out V-CIP.”
|Green Channel & Manual Audit|
|9||“All accounts opened through V-CIP shall be made operational only after being subject to concurrent audit,
to ensure the integrity of process.”
|Fully encrypted call, internet speed check,
AI-based liveness check
|10||“RE shall ensure that the process is a seamless, real-time, secured, end-to-end encrypted audiovisual interaction
with the customer and the quality of the communication is adequate to allow identification of the customer beyond doubt.
RE shall carry out the liveliness check in order to guard against spoofing and such other fraudulent manipulations.”
|A call originating from domain of the FI|
|11||“The audiovisual interaction shall be triggered from the domain of the RE itself, and not from third party service provider.”||Proper maintenance of Logs along with call recordings|
|12||“The activity log along with the credentials of the official performing the V-CIP shall be preserved.
REs shall ensure that the video recording is stored in a safe and secure manner and bears the date and time stamp.”
|Check for Aadhaar XML - 3 days old, Signature validation|
2. Design Philosophy
The software team working on a video KYC process have to follow a clear design principle. For example, the HyperVerge Video KYC process is designed to achieve compliance and very high throughput, i.e. the process should be fast. Yet the customer shouldn’t feel rushed. The customer should spend 2-5 minutes, and the RE officials should spend less than 1 minute per KYC.
To achieve this, HyperVerge’s AI assisted Video KYC solution breaks up the process into 4 steps:
The customer starts the KYC process by entering their name, address, PAN and Aadhaar data. PAN data is authenticated right away. Aadhaar verification is completed next (depending on the client workflow). Then the customer “starts the video call.”
Depending on the workflow chosen and the current call volume, the customer’s video call request either gets added to a live call queue or is scheduled for a time in the future.
HyperVerge uses a “Smart Scheduler” that allocates customers to RE officials or agents based on their availability, waiting time and other factors, thus increasing throughput immensely. Running an AI-based module that predicts and plans for phases of high demand could be the difference between a frustrated customer who has been put on wait too long and a satisfied customer who has completed their Video KYC call seamlessly.
3. Video Call
Once the RE official is connected to the customer, HyperVerge uses AI to help the official do a faster, and more accurate job:
- When the customer holds up his PAN card to the camera, AI reads the data on the PAN card and runs the required checks.
- When the RE official takes an image of the customer, AI runs a liveness check and a face match with the face on the OVD.
HyperVerge plays to its strengths here since it has already proven itself at scale as far as AI applications are concerned with 280 million AI driven digital KYCs done in 2019. While the RE official has final authority to accept/reject a KYC application, AI assistance helps RE official be more accurate and efficient.
The RBI mandates a “randomisation” step to prevent spoofing via recorded videos or other means, however, they have left the nature of randomisation open to interpretation (for the time being). HyperVerge uses the most unambiguous and easiest to understand randomisation method - an OTP.
4. Audit and Post-processing
After the call ends, HyperVerge V-KYC stores a compressed version of the video call for retrieval later and integrates with existing concurrent audit processes when required.
As it happens, the video call itself may take up only 40 seconds. In reality, however, there are challenges that don’t allow a consistent 40-sec operation over multiple calls that an official handles. A Video KYC solution must be able to handle nuances for the current scenario as well as additional Officially Valid Documents (OVD) that will be allowed.
Future of KYC (and finance)
While Video KYC is an important step forward in the path to financial inclusion, it is just that, a mere step. The future of finance is heading towards a seamless experience similar to the course of commerce, networking and telecom. Things will become more presenceless, near real-time and demographically inclusive, all of which will be driven by Artificial Intelligence, IoT and other frontier tech.
Being cognizant of that is what has led institutions like RBI to take the global lead in setting finance on a path that opens up capital, securities, derivatives, and other instruments. The woman entrepreneur completing her KYC within a day might just be the start, we can expect her to raise funds and get insurance customised for her on that same day. A financially inclusive future in that sense is not just about the breadth but the depth of services that can be accessed seamlessly.
KYC being the first and foremost step in this transaction has taken an important step towards the consumer and we hope that leads you to us as your Video KYC solution partner.