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In June 2021, the European Commission proposed the idea of an EU Digital Identity Wallet as part of the revision to the Electronic Identification, Authentication and Trust Services Regulation, known as eID, which will complement the EU Digital Identity. Although digital ID in Europe has only been proposed in the past year, a significant number of countries in Asia have long adopted digital identity as part of their national infrastructure. Indeed, the largest digital ID and wallet scheme so far is India’s widely successful Aadhaar system with more than 1.3bn unique ID numbers issued to Indian residents as of February 2022.
This regulatory analysis will examine India’s Aadhaar system and the EU’s proposed eID system. It will then compare these two systems and identify what this potentially means for firms in both these jurisdictions.
Aadhaar
The Aadhaar system was initially launched in 2006 with the first ID number being generated in 2015. The system is regulated by the Unique Identification Authority of India (UIDAI), a statutory body whose main task is to issue Unique Identification numbers (UID), named as "Aadhaar", to all residents of India. The UID had to be “(a) robust enough to eliminate duplicate and fake identities, and (b) verifiable and authenticable in an easy, cost-effective way”.
Aadhaar is a unique 12-digit ID number assigned to any resident in India that applies for it. This 12-digit number contains demographic and biometric information about the number holder including their name, date of birth (verified) or age (declared), gender, address, mobile number (optional) and email ID (optional), ten fingerprints, two iris scans and a facial photograph. Almost any verified information required for ID verification processes can be accessed by the simple provision of an applicant’s and/or customer's Aadhaar number. Similar systems are already in place in other countries, such as Malaysia’s MYKAD or Singapore’s NRIC, both of which contain similar types of personal information. Looking a bit deeper, however, several key advantages of Aadhaar become clear.
By accepting information such as declared age and utility bills, Aadhaar numbers were able to overcome the difficulties of accurately identifying a population where a significant proportion of people were undocumented. The use of different types of biometric information also ensures that everyone, regardless of disability, is able to be conclusively identified. The effect of having a secure and simple way of ID verification has seen India’s bank account ownership rate increase from 50 percent in 2014 to nearly 80 percent in 2017, allowing hundreds of millions of Indians to access financial and payments services for the first time.
Aadhaar numbers are issued to every resident rather than only citizens of India and are legally mandated to be free of cost under Section 3 of the Aadhaar (Targeted Delivery of Financial and OtherSubsidies, Benefits and Services) Act, 2016. This is key as other national ID systems, such MYKAD, are usually limited to a country’s citizens only. Issuing an Aadhaar number to every resident rather than only citizens ensures that any firm or authority operating in India would be able to use a single ID verification process for all of its applicants and/or clients.
Aadhaar also allows users to use its services both over email and even via SMS. This is in contrast to Singapore’s SingPass, which is only available through a smartphone app. Although this is hardly a problem for a significantly developed country like Singapore, internet and smartphone access in rural India is still a challenge and SMS connectivity ensures Aadhaar users can access and use their digital ID regardless of what mode of connectivity they have.
Aadhaar users can also sign up for India’s DigiLocker, a digital document wallet where any government documents tied to them will be automatically deposited digitally, allowing Indian residents to access authenticated digital copies of everything from vaccine certificates to exam results and bank statements. This service allows users to quickly and securely transfer certified documents instantly.
eID
As examined in a previous VIXIO regulatory analysis, the EU’s eID will offer citizens and businesses access to a European digital identity app, or “wallet”. This wallet will be linked to identification documents such as a driving licence, diplomas or bank account details. These wallets may be provided by public authorities or by private entities, provided they are recognised by a member state.
The European Commission proposes to do this by harmonising member states’ approaches to security, technical standards, certification processes for remote electronic signing and further harmonisation of certain practices related to remote identification and national supervision. eID will also move from being an optional to a mandatory proposal for member states to implement. The commission in its proposal also intends for eID to be in place in all member states as soon as possible. To achieve this, the commission has asked member states to establish a common toolbox by September 2022 to build technical architecture, standards and guidelines for best practices, and encouraged them to start the relevant preparatory work immediately.
The commission states that this eID will allow EU citizens to access services across the bloc either online or through their smartphone, therefore, eliminating the need for physical documents or other private identification methods such as bank statements. eID users will also be able to tweak the exact data they share depending on the situation.
Aadhaar v eID
The motivations behind both the Aadhaar and eID schemes should be examined.
Aadhaar provides a national authoritative ID database that simplifies customer authentication. Verifying the identity of clients is a major challenge for payments operators. This problem is not limited to less developed countries alone. In the UK, for example, opening a bank account usually requires an applicant to submit several documents both to prove their identity and address, among other things. These manual checks are often laborious and time consuming, and may even be impossible for someone who is undocumented.
This is where Aadhaar and other digital ID databases in growth markets excel. By verifying a unique ID number, applicants and customers are able to instantly and conclusively provide all the necessary information that they need to get on the payments grid, therefore, eliminating the hurdles of manual know your customer (KYC) checks for a population that has for a long time remained unconnected from the formal economy. For example, someone in rural India wishing to open an e-wallet account would simply need to verify their Aadhaar number over SMS without any need to visit a bank branch or upload any documents.
Simplifying KYC checks is also a primary aim of eID, with the European Commission in its June 2021 impact assessment report estimating that it could save between €0.68bn and €1.36bn in costs linked to identification procedures (onboarding procedures, KYC procedures, etc.) for financial services. However, this is based on the commission’s assumption that takeup of the eID will be around 80 percent of eligible users by 2030. This figure would not be unreasonable in a country like India where no other standardised form of ID had existed before; however, it is difficult to see how customers in the EU will be motivated to migrate from their existing platforms given that the commission only plans to make eID acceptance mandatory for banks and other large platforms (Article 28) and even then only as an alternative to already existing KYC procedures.
Looking at the features of the digital wallets, it is difficult to see many differences. Both Aadhaar (and its associated Digilocker) and eID are linked to users’ digital IDs and both allow users to securely and selectively send authenticated documents to complete KYC checks and access government services. The one way they do differ is in access: Aadhaar users are able to access the ID verification portion of their digital ID through their smartphones, email, and even via SMS. This is critical for a region where connectivity can be a challenge. Although connectivity is not a significant issue for the EU, it remains to be seen whether access only through the web and a smartphone app will be a hindrance to widespread adoption of eID, especially among demographics where internet and smartphone literacy might not be as prevalent.
The varying approaches to implementing these systems may also cause friction for eID. Aadhaar was implemented from the ground up and on a federal (union) level; however, the commission has mandated that member states adapt their own systems to create eID. This coupled with the fact that eID will only apply to EEA states and not third countries such as Switzerland, presents yet another hurdle for the setting up and usability of eID.
What this means for payments firms
For firms in the EU, the emergence of eID may potentially create an opportunity for them to streamline their KYC processes; however, this is dependent on the uptake of this scheme among users and, at this early stage, it is still difficult to say whether or not or how long it will take for this scheme to be popular. Indeed, given the fact that the scheme is mostly geared towards government services and banking rather than a new singular ID scheme, it is still uncertain whether it will gain traction for solely payments-based services.
eID may, however, make it easier for Indian firms who are already operating in the EU market. Given the similarities in the features and verification requirements of Aadhaar and eID, firms experienced with the Indian market might find it easy to adapt to the eID system.
Conclusion
Although the features of Aadhaar and eID are similar, the different situations and motivations for both these schemes must be taken into consideration. Aadhaar is hugely popular with a wide reach, but it was designed to address very specific challenges in the Indian market. On the other hand, the road is more challenging for eID, given that it is only being marketed as an alternative to existing forms of identity. That being said, it may yet prove a great opportunity for firms already familiar with similar ID schemes to streamline and simplify their KYC processes.
