Interoperable Authentication

P2P, P2M

When we speak about ‘authentication’, we are referring to the ‘knowledge layer’. Authentication means the confirmation - of the person as well as transaction. Interoperable, in this context, means standardised. Thus, interoperable authentication means the ability to confirm the transaction in a standardised manner.

Why:

As an economy grows, very often through the nudge provided by the DPI approach, a lot of new fintechs emerge in the market. They offer a variety of services like banks do - such as P2P/P2M payments, loans, bill payments etc. However, they have one stark difference - they are unregulated. This gives them the agility the banks lack to adapt to newer trends and technologies but the unpredictability and volatility of creating systemic risk. Restricting their growth means stumping entrepreneurship and the economy. But letting them run freely, means more money leaving the formal banking system and going into unregulated hands. The solution to preventing both these extremes lies in interoperable authentication.

What:

Through interoperable authentication, the central bank can set out a predefined manner in which transactions have to be validated to ensure that money never leaves the banking system. The payment transaction is processed only once the authentication is received in a standardised manner in the form of a PIN, One time password, biometrics, face authentication etc. The fintechs remain the front end of the user-transaction, but the authentication is collected by the payment switch directly on the backend and settled between the banks themselves.

This solves for both use cases - it prevents money from leaving the formal banking system (goal of the banks) and it prevents users from leaving the fintech application to authenticate themselves (goal of the fintechs).

How:

The authentication page is provided as a standard SDK (software development kit) by the payment switch operator. They publish the page that all fintechs have to use, effectively decoupling this layer from the acquiring application to securely capture sensitive info like PIN, OTP, Biometric data with crypto keys for end financial institution to decrypt and authorise the payment. This SDK is integrated within all fintechs themselves so that while authentication is done on their application, it is done without the oversight of the fintechs. This SDK is mandated and has to be used by every payment application (including the banks themselves).

This creates 3 distinct layers, and thus roles, to every payment transaction:

1. User layer: handled by fintechs who can create diverse, custom user interfaces to grow their market share

2. Authentication layer: handled by the payment switch to securely capture private PIN, OTP, Biometric data and verify each transaction

3. Settlement layer: handled by the banks themselves and settled between each other directly on the backend

Benefits:

1. Privacy and Security: Enhances trust by allowing individuals to have a standardised experience while authenticating sensitive information and payment transactions across different applications

2. Reduces systemic risk: by decoupling the verification process from the fintechs, it prevents misuse or leakage of secure pins, password and biometric data

3. Growth of formal economy: it allows the free economy to grow and thrive with the growth of fintechs while ensuring the money never leaves the formal, regulated sector