Some innovative policy initiatives undertaken to mitigate the problem of financial services in India are - no-frills account, branchless banking in the form of Business Correspondents (I have previously covered BCs here), liberalization of banking and ATM policies and the incorporation of National Payment Corporation of India (NPCI) which provides a national infrastructure for payments and settlements in the country. Technological advancements have been providing a solid base to leverage all the initiatives.

All these policies, however, are not able to match up to the impact that is expected by the administration. One of the main reason for that is the lack of identity documentation among the rural populace which makes it difficult for them to prove their identity to the banks. This bottleneck has limited the leverage that the banking innovations can provide in terms of access to the financial services. Another limitation is the small amount levels that are usually transacted by the population at low income levels, referred commonly as micropayments. This leads to high per transaction costs which inhibits the banking infrastructure development in the rural parts. 

The Unique Identification Number (UID), which identifies individuals uniquely on the basis of demographic information and biometrics will clearly give the means to the individuals to establish their identity to public and private agencies across the country. It provides a renewed approach towards financial inclusion by integrating various reforms addressing the core issue. This technology provides a very effective avenue in creating a payment system that works efficiently even with low amount transactions by stimulating higher volume of transactions. The implementation of UID will accelerate the process of financial inclusion by providing a micropayments platform, streamlining the allocation and delivery of the government benefits and providing an effective way of banking to whom who have been ignored till now.

It directly addresses the following issues which are the main culprits for the low levels of financial access in India today:

• KYC (Know Your Customer) Challenges - Banks follow customer identification procedures while opening new accounts to minify the risk of fraud and money laundering. UID with its authentication and KYR (Know Your Resident) standards will not only bring down the KYC costs for the banks but also reduce the documentation the poor are required to produce to open an account.
• Limited Accessibility & High Costs to Poor - Indian banks cater to only 5% of the villages. In this scenario, should an individual from a bankless village need to make a transation, he will need to pay the cost of this financial distance in terms of his travel expense and the loss of daily wages. UID's clear authentication will allow the banks to network with local BCs (Business Correspondents) through which customers will be able to make transactions. Technology for electronic transactions can be employed by the banks to remotely authenticate the customers thus reducing average cost per transaction. It will also decrease the customers' dependence on cash by allowing individual transactions with each other as well as with firms outside the village. Multiple local BCs will provide a choice to the customers.
• High costs to Banks - UID will mitigate the high customer acquisition costs, high transactions costs and other fixed costs that are faced in bringing financial services to the poor. This can be achieved through high volume low cost approach.