Access to credit has historically been a big problem in India. Although banks and Non-Banking Financial Companies (NBFCs) have increased their presence in Tier 2/3 and beyond markets over the decade, it has only recently become feasible to percolate access to financial products to consumers with limited or no credit history. In the absence of reliable data, lenders presume greater risk and hence, resort to higher interest rates and higher processing fees & charges, making it difficult to service the need for credit amongst the lower income segments. To help make reliable data available for assessment and underwriting, the Reserve Bank of India (RBI)’s investments in and promotion of the Account Aggregator (AA) framework to democratize credit by bridging the gap between financial service providers and India’s millions of borrowers, is a positive step forward.
Through AA data pipes, account aggregators can transform the entrenched financial institutions’ lending practices by opening access to borrowers’ financial information for a minimal fee. The biggest banks, and fintech in India, have already started offering loans leveraging the account aggregator framework, thereby accelerating loan disbursements, and reducing the cost of credit.
How do Account Aggregators Work?
The Account Aggregator (AA) framework is heralded as a game-changer for opening up access to data, ranging from financial to alternate data. In this framework, customers are the true owner of their data. As they try to avail various financial products and services. the consent request for accessing their data is originated by the Financial Information Users (FIU) like lenders, wealth managers, etc., for data housed with Financial Information Providers (FIP), which are typically banks, asset management companies, insurers, etc. The Account Aggregator (AA) plays the role of a consent manager for financial data, who maintains the record of consent given by the customers and works as an enabling platform for seamless data sharing. After receiving the consent requests, the consent data shared by FIP is encrypted and sent to FIU. This data is then decrypted by FIU for agreed-upon (With the customer) use cases such as cash flow-based lending, credit risk monitoring, personalized wealth management, loyalty management, and much more.
As the consent control lies in the customers’ hands, they know the purpose (use case), duration – data is accessible for how many years, and vintage of the data – whether it is a one-month or six months bank statement data, that they have agreed to share with the FIU. This reduces friction in data collection, and threats of data hijacking, and simplifies data sharing procedures. Additionally, users can revoke the consent at a future date at their convenience by directly approaching the AA.
Account Aggregators as Facilitators for Streamlining Complex Loan Processes
Several factors govern credit availability to a borrower, and having a credit history is one of the most important ones. It can be difficult for first-time borrowers with scant to no credit history to obtain affordable and easy loans from banks and NBFCs. Additionally, those with fluctuating income, such as independent contractors or business owners with volatile or seasonal sales, have fewer and more expensive financing possibilities. The frequent demand from credit institutions to pledge collateral to obtain credit facilities serves as an additional deterrent for those seeking loans.
Account Aggregator, at the minimum, helps share trustworthy and quality information about a customer’s bank behaviour, cash flows, and systemic payment behaviour. By observing alternate data points and behaviours, financial institutions can assess the assets and financial behaviour, and make a better assessment for extending credit lines. Across the credit and lending ecosystem, cash flow-based lending can get a significant push through the adoption of the Account Aggregator framework.
Enabling Innovation in Financial Services
AA Framework hits at the heart of the customer data landscape and is rightly touted as the UPI moment of the open data ecosystem; It has the potential to disrupt customer journeys where real-time data-driven decision-making can create a competitive edge.
AA data reduces information asymmetry. For instance, larger banks can go back to their existing customers with better offers since they have access to customers’ financial data. In a way, information asymmetry stifles competition and innovation in the fintech industry. Since AA data is system generated and real-time available, it can accelerate data-backed innovation at a significantly lower cost. Fintechs can enter the dominion of incumbent banks to offer cutting-edge products to underbanked communities and bring better offers to existing customers. Digital lending has seen advances already, and insurance and wealth management are following suit.
However, while these are early stages for the AA ecosystem, the regulator and government push has led to a rapid takeoff, well supported by early adopters amongst fintech. In the current phase, better UX for educating and onboarding customers on AA platforms will help unlock the opportunity before the network effects kick in.
By Amit Das, CEO and Co-founder of Think360.ai