Last year in September, India’s latest financial data-sharing system went live with the unveiling of the Account Aggregators network. This launch marked a major milestone in our nation’s journey towards enabling financial inclusion for all its citizens. As the government press note said, the network “could revolutionise investing and credit, giving millions of consumers greater access and control over their financial records.”
Under this framework, India now has a set of Account Aggregators, a new type of RBI-licensed and regulated entities. Individuals like you and me can choose any of the Account Aggregators to securely share information from any bank or a financial institution that we have an account with, to any other bank or financial institution, provided both parties have joined the AA network.
In other words, AA are a type of data intermediaries that facilitate sharing of financial information in a real-time data-blind manner between regulated entities. Specifically, they enable data flow between Financial Information Providers (FIPs) and Financial Information Users (FIUs). FIPs hold the customer data, and FIUs consume data to offer better service and underwrite loans.
The system currently enables sharing only of banking transaction data (for example, bank statements from a current or savings account) with other entities. Gradually, it will make all financial data available for sharing, including tax data, pensions data, securities data (mutual funds and brokerage), and insurance data. The long term vision is to expand the AA network beyond financial services to even include healthcare and telecom data.
Democratising Credit
Before account aggregators came into the picture, entities used a process called screen scraping, where third party applications collect screen data and translate it to display on another application. Additionally, sensitive information was exposed through the screen scraping process. AA was the natural solution to it in the form of user consent driven architecture, as no data can be shared by any AA without the consent of the individual involved.
The AA ecosystem makes it a regulated and legitimate process with all regulated entities involved. The system solves the problem of a customer’s data scattered across banks and financial institutions and enables it to be accessible at a single place, with explicit customer consent. The AAs themselves are data-blind, meaning they cannot view or process the data of individual users.
From a banking perspective, the Account Aggregator system has the potential to make lending and wealth management a lot faster, cheaper and more efficient. As the government note stated, the AA framework is the first step towards bringing open banking in India. It will also expand the potential pool of customers for lenders and fintech companies.
Also, the AA network will help curb financial fraud – as information will be shared securely and digitally among regulated entities. Previously, this information sharing involved paper-based workflows as individuals had to get their bank statements printed, stamped, and sometimes even notarized to prove the authenticity.
Further, we expect the AA framework to catalyse the growth of micro and small businesses in India by opening up a new pool of potential borrowers who typically lack credit history, and otherwise find it difficult to avail formal credit from banks. Most SMEs seeking loans are left out of the formal sector simply because of their inability to prove their creditworthiness. This is because of a lack of detailed and audited financial statements and investments and adherence to regulatory procedures and compliances Framework
Even for those micro or small businesses who qualify for a bank loan, availing one is a complicated and long-drawn process due to two critical factors concerning the formal sector’s credit assessment process. The framework would be of particular benefit to first-time entrepreneurs or micro business owners.
Challenges
User consent and data security remain two key concerns under the AA framework. Given that a substantial number of potential users and individual beneficiaries may not fully understand the implications of their consent, we believe that all stakeholders including the RBI need to undertake a sustained awareness campaign to ensure that the user consent is informed, and not just a tick in the box.
Further, the framework allows for sharing of all sensitive personal and financial data with an unbounded set of entities for no specific purpose. Some researchers have questioned the need for such sweeping mandates, especially when there is no guarantee of providing any specific financial services. The self-regulation of AAs is also a cause of concern.
Also, with AAs being classified as NBFC-AA by the RBI, they are the only NBFC (among eleven other types of NBFCs) that are not directly tied to any financial service and only facilitates the flow of financial information. Therefore, they may also fall beyond any RBI regulation. Some experts have proposed setting up an independent industry body that regulates AAs and ensures strict security while sharing confidential financial data of borrowers.
Way forward
In general, the AA framework is likely to be advantageous to all stakeholders in the formal financial system. For the BFSI and fintech industries, the framework has opened up whole new opportunities to innovate to facilitate safer and easier credit.
Emerging technologies like AI and ML could now be applied to data shared by AAs in order to make credit access more inclusive and disbursals much faster, saving both time and costRevolutionises for all stakeholders. Moreover, it could completely overhaul the credit-seeking process, especially in remote areas, where proximity to physical bank branches is still distant. Fintechs, too, can hugely contribute to development of new and robust business models around the Account Aggregator ecosystem in India.
The AA system holds perhaps the biggest advantages and opportunities for end consumers, both individuals and businesses. It will not only remove unnecessary hassles and privacy risks in sharing confidential financial data, but also improve the availability of instant loans and other financial products at much better terms – which as we noted earlier, will be a huge boost for micro and small businesses with no credit history.
However, there is equally an urgent need to educate ordinary consumers about the AA system and the system of informed consent. We believe both the government as well as RBI must focus on expanding their digital literacy programmes to all parts of the country. To maximise the AA framework’s potential, it is imperative for end consumers to become informed and more empowered users of their own data.
