Digital Identity & Verification Framework
Digital identity is a core pillar of modern banking and fintech. Electronic customer verification enables instant onboarding, reduces fraud, and ensures regulatory compliance. It supports online account opening, secure digital payments, and customer trust.
Banks use digital IDs to meet KYC and Anti-Money Laundering requirements efficiently and to extend services to unbanked populations. Strong digital identity frameworks drive financial inclusion, cybersecurity, and seamless customer experience.
Aadhaar Authentication and Seeding
Aadhaar is India’s national digital identity system operated by UIDAI. It assigns a unique 12-digit number to each resident, linked to biometrics (fingerprints, iris) and basic demographics. Launched in 2009, it covers over 1.3 billion people, making it the world’s largest biometric ID system. Aadhaar ensures universality, uniqueness, and online verifiability. It serves as proof of identity (not citizenship) and enables real-time digital authentication for e-governance and fintech services.
In banking, Aadhaar is widely used for KYC and account linking (“seeding”). Aadhaar authentication via biometrics or OTP allows instant identity verification during account opening and transactions, enabling paperless e-KYC. Linking Aadhaar with bank accounts supports Direct Benefit Transfers (DBT) of subsidies and welfare payments.
The JAM Trinity (Jan Dhan–Aadhaar–Mobile) uses this linkage to reduce leakages and promote financial inclusion. By January 2023, over 761 million Aadhaar numbers were linked to bank accounts for DBT. Aadhaar seeding ensures timely and transparent subsidy delivery and helps banks prevent duplicate or fake accounts. Aadhaar authentication operates at massive scale, including face recognition, which recorded 152.5 million uses in March 2025.
Legal Safeguards and Privacy Considerations
Aadhaar use in banking is regulated by strong legal safeguards. In 2018, the Supreme Court upheld Aadhaar but restricted mandatory use by private entities. The Aadhaar (Amendment) Act, 2019 made Aadhaar voluntary for bank accounts and SIMs, prohibiting denial of service for non-use unless mandated by law. The law introduced higher penalties for misuse and required strict privacy and security standards. Privacy features include Virtual ID (VID), Aadhaar Data Vaults, data encryption, and biometric lock/unlock options. UIDAI does not access bank account or transaction data; banks only verify Aadhaar mapping for DBT. These safeguards aim to balance ease of verification with user consent and data protection.
e-KYC (Electronic KYC)
Electronic Know Your Customer (e-KYC) is the digital verification of a customer’s identity and address, mainly using Aadhaar in India. With customer consent, banks can fetch verified KYC data (name, address, date of birth, photo) directly from UIDAI, eliminating physical documents.
The RBI’s KYC Master Directions permit Aadhaar e-KYC as a valid method, subject to voluntary consent and compliance with the Aadhaar Act. RBI recognizes two Aadhaar-based modes: online authentication and offline verification. If Aadhaar is not used or feasible, banks must accept alternative Officially Valid Documents (OVDs) such as PAN or passport.
RBI also introduced Video KYC (V-CIP) in January 2020, enabling fully digital, remote KYC through video-based verification. Overall, e-KYC reduces onboarding time and cost while requiring strong data security and informed consent.
Offline Aadhaar XML vs. Online OTP-Based Methods
There are two main Aadhaar-based e-KYC methods:
- Online e-KYC (OTP/Biometric Authentication): Customers authenticate using Aadhaar number or Virtual ID via OTP or biometrics. UIDAI shares verified KYC data instantly with the bank. This method is fast, accurate, and paperless but requires internet connectivity and authorized integration with UIDAI. Usage is limited to notified and regulated entities due to privacy concerns.
- Offline Aadhaar KYC (XML/QR Code): Customers download a digitally signed, encrypted Aadhaar XML file or use a secure QR code. It contains demographic data (and optional photo) without revealing the Aadhaar number or biometrics. Verification is done locally by the institution, and UIDAI is not notified. This method is more privacy-preserving and works without live internet, though it requires extra steps by the customer.
RBI mandates acceptance of offline Aadhaar KYC, ensuring customer choice. Online KYC offers speed and convenience, while offline KYC enhances privacy and inclusivity.
Impact of Aadhaar (Amendment) Act, 2019
The Aadhaar (Amendment) Act, 2019 significantly reshaped e-KYC:
- Voluntary Use: Aadhaar can be used voluntarily for KYC in banking and telecom; denial of service for non-use is prohibited unless mandated by law.
- Consent and Alternatives: Regulated entities can use Aadhaar authentication only if notified and must obtain explicit consent and offer alternate IDs.
- Offline KYC and Virtual ID: Legal recognition of offline Aadhaar verification and Virtual ID to mask the Aadhaar number.
- Stronger Privacy and Penalties: Higher civil penalties (up to ₹1 crore) and stricter action for misuse or data breaches.
Post-amendment, RBI expanded Aadhaar e-KYC access to regulated non-banks, boosting fully digital onboarding in fintech. The reforms restored Aadhaar-based e-KYC convenience while strengthening privacy, user choice, and legal safeguards.
Central KYC Records Registry (CKYCR)
The Central KYC Records Registry (CKYCR) is a centralized digital repository of customer KYC records for the financial sector. It was established under the Prevention of Money Laundering Act (PMLA) and became operational in 2016–17. The government designated CERSAI to manage CKYCR.
CERSAI is responsible for receiving, storing, securing, and retrieving KYC data of customers of regulated entities (REs). When a bank or financial institution completes a customer’s KYC, it uploads the record to CKYCR. The goal is to avoid repeated KYC across institutions by enabling reuse of KYC data with customer consent.
CKYCR standardizes KYC information across sectors, ensuring uniform data fields such as identity details, address, photograph, and additional regulatory information (e.g. FATCA details). Over time, CKYCR aims to allow seamless KYC reuse across banking, insurance, mutual funds, and other financial services.
Workflow and KYC Identifier (CKYCN)
When a financial institution uploads a customer’s KYC data to CKYCR, the registry checks for duplication. If the customer is new, CKYCR generates a unique 14-digit KYC Identifier, known as the KYC Identification Number (KIN). This number is shared with the institution and the customer.
For future transactions, the customer can provide the KIN to any other financial entity, which can retrieve the existing KYC record instead of repeating the process. The registry stores identity and address proofs, photographs, and related details. Any updates, such as change of address, must also be uploaded to keep records current.
The workflow is: customer submits KYC to one institution → data is uploaded to CKYCR → KIN is generated → other institutions access KYC using the KIN. This reduces duplication, cost, and processing time.
CKYCR currently covers individual customers (residents and NRIs) and is expected to extend to legal entities. Regulators such as RBI, SEBI, IRDAI, and PFRDA have mandated integration with CKYCR for entities they supervise. Overall, CKYCR functions as a single KYC hub, improving efficiency, interoperability, and security in customer due diligence across the financial system.
DigiLocker
DigiLocker is a government-backed digital document wallet under the Digital India initiative, operated by the Ministry of Electronics and IT. It allows citizens to store, access, and share official documents electronically through a secure cloud platform. Each user gets a locker linked to Aadhaar and mobile number.
Government departments and authorized issuers can directly push digitally signed documents such as Aadhaar, PAN, driving license, vehicle RC, and educational certificates into DigiLocker. These e-documents are legally equivalent to physical originals under the IT Act. Users can also upload scanned documents. Access is via web or mobile app using OTP/PIN authentication. Digitally signed documents can be instantly verified for authenticity. By the mid-2020s, DigiLocker had integrated hundreds of issuers and stored billions of documents.
Integration with Banking (PAN, Driving License, etc.)
DigiLocker is widely used in banking for electronic KYC and document sharing. RBI amended its KYC Master Directions in January 2020 to recognize DigiLocker e-documents as officially valid documents. Banks can accept PAN, passport, Aadhaar (offline XML), driving license, and other DigiLocker documents as “electronic originals.”
During account opening or loan processing, customers can authenticate with DigiLocker and instantly share required documents, reducing paperwork and verification time. Digitally signed documents reduce forgery risk and improve accuracy. Common use cases include PAN verification, address updates, and KYC refresh. DigiLocker is also integrated with bank apps, the Account Aggregator framework, and accepted by regulators like SEBI and insurance authorities.
For users, DigiLocker provides free, anytime access to important documents with full control over sharing. Documents can be shared only with explicit consent, and all access is logged for transparency. Overall, DigiLocker enables paperless, secure, and fully digital banking and governance workflows.
Account Aggregator (AA) Framework
The Account Aggregator (AA) framework is an RBI-regulated system that enables individuals to securely share their financial data with service providers using explicit consent. An AA is a licensed NBFC-AA that acts only as a consent manager and data intermediary between data holders and data users. Introduced by RBI in 2016 and launched in 2021, AAs do not store, read, or monetize data; they only transfer encrypted data with user approval.
The framework is part of India’s Data Empowerment and Protection Architecture (DEPA) and is overseen by RBI along with SEBI, IRDAI, and PFRDA. By 2025, AA became a key pillar of India’s Digital Public Infrastructure, alongside Aadhaar and UPI, and was showcased globally for promoting innovation and financial inclusion.
How the AA Ecosystem Works (FIP, FIU, Consent Layer)?
The AA ecosystem involves three entities:
- Financial Information Providers (FIPs): Institutions that hold customer data, such as banks, NBFCs, mutual fund depositories, and insurers. They package and encrypt requested data (e.g., bank statements) and send it via AA.
- Financial Information Users (FIUs): Regulated entities that request data to offer services, such as lenders, wealth managers, or personal finance apps.
- Account Aggregator (AA): The consent broker that facilitates encrypted data transfer after user approval. It neither sees nor stores the data.
Users manage consent through an AA app, specifying what data is shared, for what purpose, and for how long. Consent can be revoked anytime. By mid-2025, over 112 million users and more than 100 institutions were active on the AA network, covering billions of financial accounts.
Use Cases: Lending, Wealth Management, Personal Finance
- Lending: AAs enable instant sharing of verified financial data for loan assessment, reducing paperwork, processing time, and fraud. They support cash-flow based lending, benefiting MSMEs and thin-file customers. From 2021–2024, AA-enabled data sharing supported loans worth over ₹42,000 crore.
- Wealth Management & Personal Finance: AAs allow aggregation of bank accounts, investments, insurance, and pensions into a single view. This enables better financial planning, portfolio advice, budgeting, and tax preparation without manual data collection.
- Other Use Cases: Insurance underwriting and payouts, account portability, small business financing, and unified financial dashboards. AAs enable interoperable, standardized data exchange across financial services.
Overall, the AA framework brings an Indian model of open banking with strong privacy safeguards, user control, and consent-driven data sharing, supporting innovation, efficiency, and financial inclusion.
International Comparisons
While India’s digital identity and KYC systems are advanced, global comparisons highlight different models:
European Union – eIDAS and Digital ID
The EU’s digital identity framework is governed by eIDAS, introduced in 2014 and updated in 2022. It enables cross-border recognition of national electronic IDs across member states and standardizes trust services such as digital signatures. Under eIDAS 2.0, the EU is launching a European Digital Identity Wallet, allowing citizens to store and share verified attributes (ID, diplomas, bank details) with user control and minimal data sharing. The model is federalized: each country issues its own e-ID, but all interoperate. This supports a seamless digital single market and legally valid electronic transactions across borders.
BankID in Nordic Countries
In Sweden and Norway, BankID is the dominant digital identity system. Operated by banks in partnership with governments, BankID is widely used for banking, government services, contracts, and digital signatures. Sweden’s BankID has near-universal adoption, driven by trust, ease of use, and integration across public and private services. It functions as both identity verification and authentication for daily digital access.