Access to credit has always been a big problem in India. Although banks and non-bank financial companies (NBFCs) have increased their presence in Tier 2/3 markets and beyond over the decade, it has only recently become possible to percolate access to products financial services to consumers with little or no credit history. In the absence of reliable data, lenders assume higher risk and therefore resort to higher interest rates and higher processing fees and charges, making it difficult to meet the need for credit among low-income segments. To help make available reliable data for Reserve Bank of India (RBI) valuation and underwriting, investments and promotion under Account Aggregator (AA) to democratize credit by bridging the gap between financial service providers and the millions of Indian borrowers, is a positive step forward.
Through AA data channels, account aggregators can transform the ingrained lending practices of financial institutions by opening up access to borrowers’ financial information for a nominal fee. The biggest banks and fintechs in India have already started offering loans leveraging the account aggregation framework, thereby speeding up loan disbursements and lowering 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 alternative data. In this context, customers are the true owners of their data. So they try to avail various financial products and services. the request for consent to access their data comes from Financial Information Users (FIUs) such as lenders, wealth managers, etc., for data hosted at Financial Information Providers (FIPs), which are generally banks, asset management companies, insurers, etc. The Account Aggregator (AA) acts as a consent manager for financial data, which maintains the record of consent given by customers and functions as a platform for transparent sharing of data. After consent requests are received, the consent data shared by FIP is encrypted and sent to CRF. This data is then deciphered by the CRF for agreed use cases (with the client) such as cash flow based lending, credit risk monitoring, personalized wealth management, loyalty management, And much more.
As the consent control is in the hands of the customers, they know the purpose (use case), the duration – the data is accessible for how many years and the age of the data – whether it is one-month or six-month bank statement data, which they have agreed to share with the FIU. This reduces friction in data collection and threats of data misuse, and simplifies data sharing procedures. Additionally, users may revoke consent at a later date at their convenience by contacting the AA directly.
Account aggregators as enablers to streamline complex lending processes
Several factors govern the availability of credit for a borrower, and having a credit history is one of the most important. It can be difficult for new borrowers with little or no credit history to obtain affordable and easy loans from banks and NBFCs. Additionally, those with fluctuating incomes, such as independent contractors or business owners whose sales are volatile or seasonal, have fewer and more expensive financing options. The frequent demand by lending institutions to pledge collateral to obtain credit facilities is an additional deterrent to those seeking loans.
The account aggregator, at a minimum, makes it possible to share reliable and quality information on a customer’s banking behavior, cash flows and systemic payment behavior. By observing alternative data points and behaviors, financial institutions can assess assets and financial behavior, and make a better assessment for extending lines of credit. Across the credit and lending ecosystem, cash flow-based lending can gain a significant boost through the adoption of the account aggregation framework.
Read also : Key Forces Disrupting the Onboarding Process in the BFSI Industry
Fostering innovation in financial services
AA Framework strikes 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 competitive advantage.
AA data reduces information asymmetry. For example, large banks can come back to their existing customers with better deals since they have access to customer financial data. In a way, information asymmetry stifles competition and innovation in the fintech industry. Because AA data is system-generated and available in real time, it can accelerate data-driven innovation at a significantly lower cost. Fintechs can step into the dominance of incumbent banks to deliver cutting-edge products to underbanked communities and bring better deals to existing customers. Digital lending has already made headway, and insurance and wealth management are following suit.
However, while these are early steps for the AA ecosystem, the regulator and government push has led to a rapid take-off, well supported by early adopters among fintechs. In the current phase, better UX to educate and onboard customers on AA platforms will help unlock opportunity before network effects kick in.
By Amit Das, CEO and Co-Founder of Think360.ai