To help accelerate the transformation of financial services in India through digital services and to build a robust lending environment, several major banks in India have recently introduced a unique Account Aggregator (AA) technology for sharing data. It’s believed to change the game for lenders and borrowers and will help to make lending more accessible in a way that puts more control into the consumer’s hands. Let’s look at the AA system it’s impact, advantages, and disadvantages.
Introduction to the Account Aggregator system
Account Aggregators are authorized entities through the Reserve Bank of India (RBI) and this unique system seeks to combine financial information of users in real time with their permission and provide these vital details to institutions that deal with financial transactions. It is based on the idea of Unified Payments Interface (UPI) that is expected to facilitate bank lending and transform banking in a variety of 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 AA network. All of whom will provide their customers the choice of sharing their personal financial details with other businesses via an API-dependent repository. For example, if you request instant personal loan it is possible to have an account aggregator take information on all of your bank accounts or any other assets and possessions and then provide the details to the lending institution. The account aggregator gathers these details direct from the institution, and forwards details to the bank that lends the loan. This will determine your eligibility to receive the loan. This also assists institutions in understanding the needs of their customers, whether they are existing or new. They can then modify their offerings based on the data gathered.
The AA system has three key components: Financial Information Provider (FIP) as well as Financial Information User (FIU) and the Account Aggregators. FIU can be described as the lender bank that is seeking access to their customer’s or borrower’s personal information to assess the creditworthiness of the borrower before lending money to them, FIP on the other side has the essential information about the client that is provided information to FIU. The FIP could be a bank or a Non-Banking Financial company (NBFC) or mutual fund insurance repository, pension fund repository or your personal wealth administrator. Aggregators act as the intermediary, collecting information from FIPs which hold the personal financial information of customers and sharing that information with FIUs, such as lending banks or agencies that offer financial services.
The step-by-step procedure can be described as follows: the steps –
- A person opens a bank account through an account aggregator. They create a funnel to store their financial data by connecting their accounts with banks, which contain all the information
- If the client is applying to obtain a loan, or other financial service from an institution of a certain type then he/she will give the go ahead to the lender who will be able to access their financial information through NBFC-AA.
- If consent is granted After consent is granted, the account aggregator contacts the providers of financial data for permission to gain access to the customer’s information.
- When the information is received by the account aggregator lenders are able to review the data and determine the suitability of the borrower, as well as the conditions of the loan.
Benefits of the Account Aggregator system
Infosys President Nandan Nilekani believes that the Account Aggregator (AA) framework could increase the amount of credit available and make it more accessible in India similar to UPI. At the time of the launch of RBI’s AA framework, Nilekani stated, “Digital footprints when properly utilized, and facilitated by consumers with their own data can provide a large amount of credit available to small-scale businesses. It could result in the increasing accessibility in credit.”
Let’s take a look at the advantages of the the AA system
System with a single window that uses Consent method
The AA system allows customers access to numerous financial services offered by a variety of institutions via one platform. Because this is only based with the consent of the customers, they have the ability to decide which financial data to share with the particular lender/bank. The customer is in complete control over their data and is able to set the time period for when the sharing of their data will be available for the bank to withdraw out of the system.
A vast amount of financial information is scattered throughout banks, making it hard for lenders and customers to access. Through AA, large amounts of data are consolidated and put in one location with the permission of the client and then provided to the lender or bank.
Improve the efficiency of financial services
The financial information that is accessible through the system of the American Banker will permit lenders to perform an exhaustive review of the borrower’s financial background and to process loan applications more quickly, adhering to due process and diligence.
No documents and KYC
When a client’s financial institution is registered, they don’t have to submit documents or KYC information repeatedly in order to apply for loan online or offline. All the applicants must do is provide permission for AA who will collect all the information and send it to the bank the client is applying for the loan.
Secure and safe
The AA framework has strict privacy and data sharing guidelines. The information shared by an AA framework will come with secure digital signatures and will be completely secured from the institution to which the bank from which a client is looking for to obtain a loan or other financial product. A AA is completely blind to data as the data flowing through it is secured and is only processed by the FIU who is seeking the information.
Quick access, no questions
With the AA system there’s no manual data collection or updating this is a huge time saver. It also helps in coordination and eliminates confusion between banks or customers.
The Account Aggregator system can impact the banking
The basic idea behind AA framework is the hassle-free and authentic sharing of information through one platform for sharing financial data. Since it is conducted digitally with consent and obtained straight from banks or financial institutions It guarantees the authenticity.
Financial institutions can share information of their customers in the system. The data can be accessed by various organizations, subject to the consent of the client. This makes the borrowing and lending process faster and easier because the time required to verify documents is reduced. The time it takes to offer financial services to banks as well as various financial institutions is more efficient because of the simple accessibility and transfer of diverse financial information from various organizations.
There are people who don’t have access to credit because they don’t have a credit record. The cost for microcredit of a transaction is high currently. The AAs are aiming to address both of these issues by creating credit history and decreasing the price of transactions.
For both lenders and customers, The AA system provides quicker access to financial products as well as electronic access to their personal data and offers a variety of options for financial services to select from. It’s also a major step towards a unified financial system that can help employed millennials and children to make better use of their money through having access to all information on one place.
Additionally, to that, this system, when implemented correctly, can provide an enormous amount of credit for MSMEs and small-sized businesses by providing information about their credit history and helping them get loans. This could include information about vendor payments as well as consumer purchases as well as other invoices, taxes and more, which could be utilized by the lender in making a decision about lending loans. Since many small and medium-sized enterprises have an insufficient credit score and are out of the reach of formal credit due to an absence of accessible and transparent financial information The AA system can manage, digitize, and make it easier to provide access to financial records.
Problems with the Account Aggregator System
* More banks must join and join the system since if certain banks aren’t included and financial information isn’t being sought will be insufficient and not useful to banks’ lending the money. If integration with AA is not required by banks it won’t fulfill its intended goal. For instance, small-sized businesses who have accounts with banks that are not registered with AA won’t be able to use the service of data and will be excluded from the benefits.
* In this context it is possible to access information via mobile numbers is not an effective solution as most business owners with current accounts provide numerous mobile numbers for their employees operating the account. A single number, like the PAN number is the best option to be used to access the financial information
The current situation is no information about the scope of financial information consented to will be disclosed to lenders. There must be more transparency and transparency on the subject.
* Under the current system the borrower has the option to decide what information he or she wants to disclose to the lender. This can result in inaccurate results. The financial institution should be able release information about the number of accounts that the borrower holds as well as other relevant information to establish the borrower’s eligibility to the lender. This could lead to inaccurate data.
* There is the risk of data mining carried out by FIUs, FIPs and FIPs along with other ethical issues, and also the risk of misuse of information when it is not controlled and controlled properly.
The role of the RBI
This framework created as a result of an inter-regulatory agreement between the Reserve Bank of India and other regulators like Securities and Exchange Board of India (SEBI), Insurance Regulatory and Development Authority (IRDA) as well as the Pension Fund Regulatory and Development Authority (PFRDA) through a project of the Financial Stability and Development Council (FSDC). The license for AAs is granted by the RBI and the financial industry is expected to be awash with AAs. They were approved by the RBI in 2016 approved AA as a brand-new category of NBFC with the primary function involves facilitating the transmission of personal data of users with their consent. This framework has been discussed since then and was in the test stage for a while it was launched recently with some large banks being added to the system.
In the words of M Rajeshwar Rao, Deputy Governor of the Reserve Bank of India (RBI) Account aggregators can help to improve the lending system in India and increase the amount of data available to India rich in data and help increase the value of digital technology. He stated “AAs provide data flows that are secure and consented while ensuring privacy for users. Along with other platforms, such as those of Unified Payment Interface, Account Aggregator provides India the most advanced financial technology anywhere in the world.” According to RBI its guidelines, the goal of the account aggregator platform is achieved by the time a lot of information providers and customers (banks and other financial institution) have joined the AA platforms and can access aggregated data in a way that is that is desired by customers in a safe and secure environment.
RBI has also ruled that the information exchanged by users cannot be sold for profit and must be deleted from the platform after a certain amount of time. What’s guaranteed is secure, tamper-proof data that can be accessed quickly and inexpensively, and speedy track of the loan assessment process to ensure that the customer is able to receive a loan. In addition, the customer might have access to loans without collateral by sharing secure information about a future invoice or cash flow directly through the government system, such as Goods and Services Tax (GST) or Government e-Marketplace (GeM).
Account aggregator systems are regarded as a game-changer in lending sector. It is thought to be a major step toward bringing open banking across the country and giving millions of customers the ability to share and access their financial information with institutions in a secure and efficient way without compromising privacy or consent. It could help create credit information for both individuals and small-sized businesses, enabling them to get loans and increasing credit access and the availability of data for MSMEs. The system, if properly utilized and managed, could be expanded to include other services soon starting with financial services such as pension and insurance funds and eventually, to improve the accessibility to healthcare.
If all stakeholders are willing to work together to make this technology work, it can build a strong lending ecosystem that will transform India into a data-rich country that can boost its economy through digitalization and facilitate the growth of medium and small-sized businesses in India