What is Aadhaar-enabled payment system? Why is it more popular than UPI in rural India?

The Aadhaar-Enabled Payment System is a financial tool that's changing the game for India's rural population. Since its launch in 2016, it has brought essential banking services, like deposits, withdrawals, and balance inquiries, to some of India's most remote corners. Fast forward to 2023, it is reported that about 88% of wage payments have been funneled through the AEPS, highlighting its widespread use across the country.

What is AEPS?

Often known as AEPS, this financial tool is being spearheaded by India's National Payments Corporation. This remarkable initiative hinges on the comprehensive Aadhaar structure within the country, aiming to offer secure and straightforward banking operations.

Having its roots back in 2012, AEPS was conceived with the idea of streamlining financial transactions using Aadhaar authentication. Essentially, it serves as a bridge, linking the Aadhaar database to the banking infrastructure. Registering is pretty straightforward. All a user needs is a bank account associated with their Aadhaar number. AEPS enables you to transfer funds with just the name of the bank, Aadhaar number, and fingerprint. There's no need for one-time passwords or even the hassle of remembering specific bank account details.

Beyond the simple fund transfers, AEPS is more than just a one-trick pony. It covers a whole gamut of banking services, including cash deposits, withdrawals, balance checks, and mini statements. It even offers Aadhaar to Aadhaar fund transfers and supports BHIM Aadhaar Pay. With AEPS, transactions can be conducted at point-of-sale devices or micro ATMs, eliminating the need for traditional bank visits or using debit cards. It's banking made easy and efficient, all thanks to AEPS.

Why AEPS trumps UPI in rural India

What's interesting is that in rural India, Aadhaar-Enabled Payment System seems to have outpaced the Universal Payment Interface (UPI). There are several key reasons for this. With AEPS, the rural population can conduct financial transactions using biometrics, an easy alternative for those not comfortable with mobile-based applications like UPI. This method has opened doors for the underbanked rural population to have a banking experience.

Another advantage is the minimal need for a steady internet connection. In contrast, UPI transactions need a reliable internet link, a requirement that's not always met in rural areas. The AEPS operates on an interoperability model, allowing customers to withdraw money from agents of any bank as long as their accounts are linked to their Aadhaar numbers. This service offers much-needed flexibility for rural dwellers.

Aadhaar-Enabled Payment System also boasts a higher success rate. As per the National Payments Corporation of India, the success rate of Direct Benefit Transfers (DBT) when Aadhaar is enabled stands at 99.55%, which is higher than the approximately 98% success rate of account-based payments.

AEPS bypasses issues related to account changes or lack of updates to account details by linking the transfer directly to the Aadhaar number of the beneficiary. This feature is crucial in a rural setting where updating account details in banks can be challenging.