In an effort to augment India’s digital transformation in financial services and create a robust lending ecosystem, many big banks in India recently launched a first-of-its-kind Account Aggregator System(AA) or Account Aggregator Framework which is a data-sharing system. It is in many ways expected to be a game-changer for lenders and borrowers and is set to democratize lending by putting more power in the hands of consumers. Let us understand in detail what the AA system is, its impact, benefits, and drawbacks.
Introduction to An Account Aggregator System
Account Aggregators in India are licensed entities by the Reserve Bank of India (RBI). This unique system aims to consolidate users’ financial information in real-time with their consent and then provide this valuable information to financial institutions. It is built on the theme of Unified Payments Interface (UPI), which is expected to make bank borrowings easier and revolutionize banking in many ways.
Eight major banks, including State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, and Federal Bank, have joined the Account Aggregator network, all of who will give their customers the option to share their financial data with other firms through an API-based repository.
For example, when you apply for a personal loan, you can ask an account aggregator to collect details about your financial institution accounts or other belongings and assets and submit this information to the lender. The account aggregator collects this data directly from the financial institution and provides it to the lending bank and, this can establish your eligibility for the loan online or offline. It also helps financial institutions better understand potential or existing customers and tailor their services according to the information gathered.
Components of Account Aggregator system
The AA system essentially has three important components – Financial Information Provider (FIP), Financial Information User (FIU), and the Account Aggregators. FIU is the lending bank seeking access to customers’ or borrowers’ data to understand the borrower’s eligibility before lending money to them. On the other hand, FIP has the necessary data about the customer, which it provides to the FIU. The FIP can be a bank, a Non-Banking Financial Company (NBFC), mutual fund, insurance repository, pension fund repository, or even your wealth supervisor.
The account aggregators in India act as the intermediary by collecting data from FIPs that hold the customer’s financial data and share that with FIUs such as lending banks/agencies that provide financial services.
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The step-by-step process can be explained as follows –
- An individual opens an account with an account aggregator and creates a funnel for their financial information by linking their bank accounts containing all the data.
- When the customer is applying for a loan or some other financial product from a particular financial institution, they nod to this lender to access their financial data through the NBFC-AA.
- After consent is given, the account aggregator approaches the financial data providers to access the customer’s data.
- Once the account aggregator receives the data, lenders can assess it and evaluate the borrower’s eligibility and the risks in giving the loan.
Benefits of Account Aggregator system
Infosys Chairman Nandan Nilekani believes that the Account Aggregator(AA) framework can take off and democratize credit in India, just like UPI. During the launch of RBI’s Account Aggregator framework, Nilekani said, “Digital footprints when properly used, empowered by consumers using their data, enables a huge amount of credit to small businesses. It can lead to the democratization of credit.”
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Let’s look at some of the benefits of the AA system
Single Window System Using Consent Method
AA system provides customers access to various financial services from scores of institutions on a single portal. As this is purely on customers’ consent, they can choose what financial information to share with which bank/lender. The customer has full control over the data and can even set a time frame for which the data sharing will be open for the bank to pull from the system.
Streamlining of Data
Financial data is scattered all over financial institutions, which becomes cumbersome for customers or lenders to retrieve. With the AA system, a large amount of data is consolidated and brought to one place with the customer’s consent and provided to the specific bank or lender.
Enhance The Efficacy of The Credit Services
The consented financial data accessed by the AA system will allow lenders to make a thorough assessment of the borrower’s financial history and process more loan applications faster by following due processes and diligence.
No Paperwork or KYC
Once a customer’s financial institution is registered, they don’t need to provide documents or KYC details when applying for loans repeatedly. All the customer has to do is give consent to AA, who will pull all the details and provide them to the bank where the customer is applying for a loan.
Safe and Secure
The Account Aggregator framework comes with strict data sharing and privacy guidelines. The data shared by the AA system will have secure digital signatures. They will be fully encrypted from the bank to the institution a customer is seeking a loan or other financial product. An AA is data-blind as the data that flows through it is encrypted and can be processed only by the FIU who has sought the data.
Quick Access, No Questions
With the AA system, there is no manual data collecting, gathering, and updating, which is a big time-saver; this also improves coordination and reduces any confusion among banks or customers.
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How Account Aggregator System Can Affect Banking
The principle behind the Account Aggregator framework is hassle-free and authentic sharing of data by providing a single platform for exchanging financial information. Since this is done digitally, with consent, and sourced directly from banks and other financial entities, it guarantees authenticity.
Financial institutions can share the customer data in the system; various entities can access it with the customer’s consent. It will make the lending and borrowing process easier and quicker as the time to verify documents is saved. Banks and other financial institutions’ turnaround time for providing financial services will be quicker due to the easy access and exchange of different financial data from various entities.
Some don’t have access to credit because they don’t have any credit history. For microcredit, the cost of a transaction is quite high at the moment. AAs aims to solve both these problems by creating credit history and reducing the cost of transactions.
For customers and lenders, the AA system enables faster access to financial products and digital access to their data and provides many more financial options. It is also a big step towards an inter-linked financial ecosystem that will help employed millennials and youngsters get better with their money by having access to all the data in one platform.
In addition, if used well, this system can enable a huge amount of credit to small businesses and MSMEs by generating information on their credit and helping them become qualified to avail loans; this can include information on payments made to vendors, purchases made by consumers, different invoices, taxes, etc., which the lender can use to decide on giving loans. Many MSMEs face a credit gap and are largely outside the purview of formal credit. As transparent and accessible financial records are absent, the AA system can control, digitize, and simplify, providing access to financial data.
Issues with Account Aggregator System
- More banks should come forward and sign up for the system because if some banks are left out, then the financial information sought out will be incomplete and of no use to the lending financial institutions. If the integration with AA is not mandatory for banks, it will not fulfill the purpose. For example, small businesses that have accounts in banks that have not signed up with AA will not fully utilize the data service and, therefore, get excluded from its benefits.
- In this framework, fetching information through mobile numbers may not be a viable solution, since most current account business owners provide multiple mobile numbers of their employees who operate the account. A uniform number like the PAN number should ideally be used to pull the financial details
- There is currently little clarity on the extent of consented financial information shared with lenders. There needs to be more transparency and clarity on the same
- In the current system, the borrower can choose what information they would like to give the lender, leading to inaccurate results. The financial entity should release information on the number of accounts the borrower is maintaining and relevant information that will prove the borrower’s eligibility by the lender. It could otherwise lead to incomplete information.
- There is a risk of data mining by FIPs and FIUs and other ethical issues and the possibility of abuse of information-, if not managed and regulated properly.
The RBI Account Aggregator Framework was formed through an inter-regulatory decision by the Reserve Bank of India and other regulators, including Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA), and Pension Fund Regulatory and Development Authority (PFRDA) through an initiative of the Financial Stability and Development Council (FSDC). The Reserve Bank of India issues the license for AAs, and the financial sector is set to have many AAs. The RBI in 2016 had approved AA as a new class of NBFC, whose primary responsibility is to facilitate the transfer of users’ data with their explicit consent. The framework, which had been under discussion since then and was in the testing phase for some time, went live recently, with a few major banks joining the system.
According to M Rajeshwar Rao, Deputy Governor, Reserve Bank of India (RBI), Account aggregators in India can bolster the lending ecosystem in the country, which can make India data-rich and boost the digital economy. He said, “AAs enable secure, consented data flows while protecting user privacy. In conjunction with other platforms like the Unified Payment Interface, Account Aggregator creates in India the most cutting-edge digital financial infrastructure in the world.” As per RBI, the desired objective in the account aggregator ecosystem will be gained when a large number of customers and information providers (banks and financial institutions) are onboarded on the AA platforms, and they can get aggregated data in a structured manner desired by users in a completely safe and secured environment.
RBI has also mandated that data being exchanged cannot be monetized and deleted from the platform after a while. What is being assured is tamper-proof secure data quickly and cheaply and fast track of the loan evaluation process so that a customer can get a loan. Also, a customer may access a loan without physical collateral by sharing trusted information on a future invoice or cash flow directly from a government system like Goods and Services Tax (GST) or Government e-Marketplace (GeM).
The Account Aggregator System will be a game-changer in the lending space. It is a big step towards bringing open banking in the nation and empowering millions of customers to digitally access and share their financial data across institutions safely and effectively, without compromising privacy and consent. It can help generate credit information for individuals and small businesses, helping them become eligible for loans and transforming credit penetration and data availability for MSMEs. If efficiently used and controlled, the system can be extended to other services in the future, starting with financial services like insurance and pension funds. It can eventually be used to transform access to healthcare.
Suppose all the stakeholders put in enough effort. In that case, this revolutionary technology can create a robust lending ecosystem that can transform the country into a data-rich nation, enhance its digital economy, and enable small and medium businesses in India.
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