Account Aggregator Ecosystem: A new era of Physical Collateral to Financial Collaterals
As most of the services are going digital, banking has reached to our fingertips. From bill payment to money transfer, the rise of mobile phone technology and digital infrastructure has changed the behavior of customers. The increased penetration of technology and widespread use of smart phone technology has motivated people to transact online rather than sitting in long queues. The advancement in the software tools, computer hardware and telecommunication have shifted the focus of banks towards the computerization- from data processing to information services.
The boom in FinTech innovations and increased internet penetration has brought drastic changes in customer expectations, bringing banking to the palm of a customer. The rows upon rows of filling cabinets are going paperless by digital backup systems, brining company’s secure documents to digital platforms without compromising privacy and secrecy of customer’s data. Similarly, the change in the work style to data storage, the innovations that are happening at phenomenal rate in information technology were like futuristic fantasies to many before they became new realities.
The rise of neo-banking is gaining popularity as neo-banks provide next level of convenience to its customers. They have streamlined cumbersome banking procedures like account opening, money transfer, bill payment, etc. Similarly, developments like CKYC registry and the account aggregator (AA) ecosystem have allowed customers to digitally share their financial identity with institutions of their choice, eliminating the need for physical verification of documents. It wouldn’t be wrong to say that the AA Ecosystem aspires to be a report of a person’s financial health, where users can view their savings, investments, status of loans, credit history, tax history, pensions, insurance details, all on a single platform, in encrypted format.
Account Aggregators Framework
In order to get rid of the juggle financial information providers, to collect data, RBI’s wholly-owned subsidiary, Reserve Bank of India Technology Private Limited, came up with the concept of data aggregation of assets and liabilities of a user on single platform called Account Aggregator Ecosystem. The design of account aggregator ecosystem is data blind, on electronic conduct and wholly controlled by the owner of the data. It is web based tool that allows consumers to consolidate information across accounts and across financial institutions.
The regulator of Indian banks, Reserve Bank of India, introduced the Account Aggregator (AA) framework in September, 2021, to make financial data easily accessible via data intermediaries (Account Aggregators). An account aggregator is a non-banking financial company (NBFC), licensed by RBI (NBFC-AA license), which involved in providing services like retrieving or collecting financial information pertaining to financial assets of a customer. The account aggregators perform thesefunction under a contract, in exchange of fee or may be free. Account aggregators will help individuals and small businesses in procuring loans from banks in a hassle-free manner by digitally sharing financial data across institutions. No data sharing is allowed between AA and a lending bank without customer’s consent. The data sharing is voluntary. Number of companies have been granted NBFC-AA license by RBI (CAMSFinServ, NESL Asset Data Limited, YodleeFinsoft Private Limited, etc.) and many are in queue to receive principal approval (CRIF Connect Private Limited, PhonePe Technology Private Limited, NSDL E-Governance Account Aggregator Limited, ATPL, DIPL, etc.).
AAs enables seamless encrypted data transfer between Financial Information Providers (FIPs) and Financial Information Users (FIUs), without storing, processing or selling data. The account aggregator framework will help establish trustworthiness and repayment ability of such borrowers through well-defined data source to build lenders trust. As a result, lenders can be more liberal with loan amounts granted to genuine borrowers: new-to-credit who have no credit history or already onboard borrowers who have a good credit history. A bank/NBFC who wants to access the data via account aggregator frame is required to join the network. Eight major banks (SBI, HDFC, ICICI, Axis Bank, IDFC-First Bank, Kotak Mahindra Bank, IndusInd Bank and Federal Bank) have joined the AA Framework.
Structure of Account Aggregator Framework
Account Aggregator Framework has a three-tier structure: Financial Information Provider (FIP), Financial Information User (FIU) and Account Aggregator (AA).
Financial Information Providers—An FIP are the institutions that hold data of a user, on his consent share that data, to a data user. The applicant consent is received through a web-based client application, where a customer have hold over sharing specific data and power to revoke that data after sharing. They are the key bearers of data. It may be a bank, a non-banking company, Asset Management Company, depository, insurance company, pension funds, etc. GSTIN and SEBI have also registered as data providers.
Financial Information Users (FIUs)—An FIU is a lending institute which upon the consent of the borrower, retrieve machine readable format of data from FIPs, and analyze the data for the lending decisions. The data shared is revocable. FIUs may be banks, NBFCs, etc. The data shared can be used only for the purposes declared in the data-sharing agreement. If a barrower is not satisfied with a lending institute or user, the borrower has full authority over data to revoke it. It is also pertinent to mention that an FIU cannot forward data or trade this data with other institute.
Account Aggregators—AA are RBI regulated entities that assist FIPs to share financial information in a digital format and FIUs to use that information in real-time, with the consent of the owner of the data. AAs are blind pipes of exchange between FIP and FIU. AAs do not store data.
Need of Account Aggregators
The credit history of an applicant determine whether a lender can grant a loan to applicant or can deny. Credit scores are built by credit history. The three digit score tell a lender about the repayment behavior of the borrower. A good score may motivate an appraising official to grant a financial instrument and a low score may refrain him from granting a loan. The new-to-credit applicant have no credit history or minimal credit history. Here an appraising official are in a real fix: neither he/she have enough credentials to grant loan nor he/she have enough reasons to reject an application. Similarly, existing borrowers face many challenges in before disbursement of loan. The challenges faced by borrowers are:
- Lengthy procedures.
- Emphasis on credit history.
- Collateral Requirement.
With the introduction of AA System, the credit worthiness of borrowers who have no credit history may be detected through various other data points on assets held by the borrower. In account aggregator system, the FIPs will provide financial information to FIUs on consent of the borrower, through channel called AA System in encrypted format; avoiding lengthy procedures and thus moving from physical collateral to informational collateral. By sharing information of assets, the potential borrowers who lack credit history will now be able to prove their credit worthiness and can avail credit without lengthy procedures or physical collaterals.
A Potential Game Changer
Several parameters govern the process of granting financial instruments to borrowers, having good credit history is one of them. The credit history is the measure of borrower’s ability to repay payment obligations. The credit bureaus have provided lenders the credit history of borrowers, where a good score encourages a lenders to grant loan and a low score is associated with greater risk, thus avoid lending. Therefore, in a situation of low credit score, a lender may feel more comfortable in granting lower amount, as it is easier to pay—a state of under finance. For the first time borrowers, with no financial records available, it is tougher to get credit.
In this situation, the lender will ask a borrower to prove creditworthiness by pledging physical collaterals in the form mortgages. To avail small credits, physical collaterals are deterrent. Insurance, bank deposits, mutual funds, pension funds, provident funds, income tax returns, e-commerce, etc. have potential to be taken up as financial collaterals but these instruments are restricted to the data base of the institutes they belong to. Therefore, RBI introduced AA system to cater the largely untapped pool of borrowers.
Account Aggregator Framework will eliminate the data monopoly of digital and financial companies by handing over greater control over data (personal and transaction) to the individual. AAs have potential to revolutionize the lending and enable the integration of more people into the formal credit system.
The Account Aggregator Ecosystem aims at disrupting the cumbersome paperwork to unlock the power of financial assets. If a person or MSME is dire need of credit, the lender bank will rely upon the lengthy bank statements/balance sheets, physical collaterals, as a proof. These documents need scores of signatures to be presented as repayment guarantees and there would be number of reconfirmations for these documents. And, even if a potential borrower is a new-to-credit, who have no credit history, the appraising official will hesitate in granting any financial obligation. AA Ecosystem has been designed to encourage appraising official or lending institution to extend credits to the new-to-credit (potential borrowers) who have good asset side but no credit history (repayment behavior). Thus, AA system will be a game changer in onboarding potential borrowers who were denied credits due to lack of credit history.