Account Aggregators For The Win
The recent announcement that SEBI will be joining the Account Aggregator (AA) framework - the Indian version of Open Banking - is an unequivocal validation that the AAs are here to stay and only adds credence to a bustling AA ecosystem emerging, known as Sahamati - as the think tank behind India Stack , iSPIRT , has coined it. Since it’s inception around 2yrs ago, with a vision of spurring innovation around financial inclusion solutions by democratizing information access, Rs. ~30 - 40K Cr of funds have been unleashed to borrowers while the ecosystem of participating Financial Information Providers and Users, (FIPs, FIUs), has grown to over 150+ Banks, NBFCs and other BFSI players. This is just the tip of the iceberg, and our expectation is that this will continue to unfold.
How does an AA work?
In layman’s terms, an AA essentially acts as an intermediary data layer between a lender ( i.e., Bank, NBFC, FinTech etc. ), and a borrower ( i.e., Individual, MSME/small business, Enterprise etc. ). Here is how it works: Generally, when a borrower applies for a loan, they are beholden to whichever financial institution will entertain their case based on the, often limited, data available. Imagine a world where a borrower gives consent to an AA to disclose all their cashflows/income, deposits, assets and liabilities to a lender. This helps the lender feel good about giving the best loan possible based on borrower transparency. On the flip side, it can also be seen as a way for the borrower to get the most competitive loan conditions from the lender because by democratizing their data to the AA intermediary, which in theory will have many lenders subscribing to it, the borrower will have many lenders competing to give a loan.
Accelerating Financial Inclusion
As the (Sahamati) AA ecosystem grows, I believe India will be edging closer and closer towards the tectonic shift from collateral based lending towards information based lending. This will level the playing field from both sides of the equation, but a special positive repercussion, from an SDG lens, will be a significant increase towards financial inclusion of ‘Bharat’. Why? Because loan worthiness should not just be informed by OECD centric templates – especially where grassroots behaviors and patterns are unique and hyper local in context. Once fully in flow, the wide aperture of data from AAs will account for a more realistic picture of loan worthiness – thereby truly catalyzing entrepreneurship in Tier 2/3/4 locales. So what could a fully formed AA ecosystem look like? At first glance there are the usual suspect stakeholders such as Banks, NBFCs but very quickly, the value of the AA increases as we add entities such as the following:
An interesting angle is that by adding all these data elements to the AA framework, it can also be seen as an interesting jiujutsu move by the government to empower movement away from the informal economy towards the digital/formal economy – which ultimately is good for the country. For example, for ( informal money ) businesses not paying GST, or not disclosing assets or other portfolio incomes and collateral, this will be an opportunity to re-think their operational strategies - ?not because of the proverbial ‘stick’ – but more importantly because of the ‘carrot’. And this I will posit, is the genius of how India organically will evolve in many more areas beyond financial inclusion – through incentive and grassroots driven willpower.
Impact on Industry
CIBIL’s case for staying relevant: Beyond re-payment history
One interesting question that arises is what will happen to the all-important credit bureaus because typically there has been a significant reliance on credit information from CIBIL/Transunion when adjudicating loan worthiness of a borrower, and naturally so, because after all loan repayment information is key! If you ask them, CIBIL’s mission is to create trust in the marketplace and their core business value proposition will only increase as they harness the improved breadth and depth of available data as a result of having access to AA’s. Yes, you read it correct – even CIBIL is a stakeholder of the AA framework and that relationship will only deepen. Their publicly stated position is clear: they want to improve their algorithm on the fly by accessing rich data (beyond just repayment), in real time, so as to provide the most informed credit scores. Of course, one may also wonder if CIBIL has a choice, and if this is just the beginning of the end of their ‘run’ as we know it – as data becomes democratized, there is nothing stopping other entities from building their own data moats over time. In the long term, question remains on what this will do to the defensibility of CIBIL as a trusted source of understanding credit worthiness – and the jury will be out on that one.
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?Adjacencies emerging
When originally conceived, even though data aggregation for lending was the primary use case, there are a variety of adjacent use cases which will emerge, with significant value to be created. For example, the Wealth Management space is one sector that could embrace the AA and use to it’s benefit by introducing automated AI-based advisory products ( which will require rich data access ) to the emerging mid tier / mass market professional segment. Like this, there will be many other adjacencies opening up, many which we may not even be able to imagine.
Flattening of the BFSI landscape
What does this mean to large PSB players like SBI , or private players like HDFC et al, ?who till date have enjoyed a monopoly based on a large branch network. The AA framework will undoubtedly re-define competitive market conditions and in the not too distant future, the monopoly a bank has on borrower mindshare, often based on physical proximity or long term relationships, will begin to diminish. This is because, as access to AAs get democratized, borrowers will not need to be in the same vicinity as lenders anymore; and there would be no reason why a FinTech in Pune would not be able to service a loan to a borrower all the way in Assam for example, and so forth.?Information will be used as power - more power to the user - who will have luxury of choice. ?
?What remains to be seen is how much credence will be put on a solidified ‘business case’ for these larger constituents to join because the conservative approaches will be pessimistically analysing the perceived value asymmetry (for example, incentive for an SBI with it’s large customer base potentially being exposed for the taking, to dive in head first vs. a small regional bank wanted to expand footprint, and potentially taking SBI’s hard earned data).?I don’t believe this approach in thinking will serve them in the long run because I do believe ultimately this will come down to customer value and choice, and it will be incumbent on larger players to rapidly adapt their business model and build the appropriate guardrails to protect their legacy, yet immersively participate else risk getting left behind – a classic “innovators dilemma” moment. Perhaps, the larger players might be interested in acquiring some of the innovative FinTechs with an AA license but of course, then, the question of conflicts of interest will arise – and this will be an interest movie that plays out. Yes, they have been and will continue to invest into API infrastructure, but now, the writing is on the wall, and they cannot do it fast enough. It is time for them not to - double down - but triple down,?and truly evaluate and action on becoming technology native companies immediately.
Technical Considerations
It is important to note that AAs can not, and will not, ever have access to borrowers’ data, due to encryption guidelines – so the question that arises is where there is a sustainable ‘unicorn’ business to be built around solely being an intermediary. The answer here is uncertain, because I envision a series of control points, such as the ability to build a moat based on maturity and ease of the developer platform and APIs – this should not be underestimated. In the same way we see customer journeys being re-invented, I envision ‘developer journeys’ to become a first class citizen – and so the onboarding ease, developer tooling, and collaboration mechanisms to spur a robust developer ecosystem – will be critical. ?Think of what makes API companies like Twilio, Stripe et al really defensible; Cisco has better communications infra then Twilio, but Twilio has better developer facing capabilities than Cisco. Same with Stripe, their financial underpinnings are based on 3rd party partnerships with Banks, but they’ve gained a control point by being the developers destination of choice – hence they’ve created a lock.
?So, in essence, maybe there isn’t really an opportunity per say to just be a functional AA ( by opportunity, I mean ‘unicorn’ level of growth and market cap) – but by becoming the platform of choice for developers, now that is an interesting arena. From this, monetization is possible through a variety of creative business models, and can be made agnostic to whether an AA has access to borrow/loan data or not. ?To enable this, monetization infrastructure and core API-led architecture capabilities will need to be up to the mark, follow the highest hygiene standards and be robust to accommodate wide scale usage across hybrid multi cloud environments. This is not an undertaking for the faint of heart, and the truly successful AAs will be ‘technology shops’ employing the best, highest paid, engineering talent. ?As a result, I think the most successful AAs will actually come from the FinTech space, and they will be based on grassroots developer native capabilities and evangelism.
Who should become an AA?
The open question is who can, or rather should, become an Account Aggregator, and does it even make sense for traditional players to try and become one? My opinion is that we are in a ‘panic’ phase where, because the license is relatively available to be gained from the RBI, we are seeing a wide variety of players in the finance sector become AAs, from payment shops like PhonePe , to FinTechs like Setu , and everything in between. ?One key consideration that must remain top of mind is the vetting of AAs joining the framework - and ensuring appropriate privacy, compliance and data encryption standards are in place while appropriate validation of (FIU) users of the data are held sacrosanct – any failures in this will potentially sink the ability to build trust and scale this system over time. This must not, and can not, be taken lightly.
Summary
The AA framework, built on a robust digital India Stack is here to stay, and has the potential to truly democratize the ability to lift ‘Bharat’ out of poverty evening the playing field between borrowers and lenders. There is no other country in the world who has done this, yet even be close to operationalizing it at such a national scale. This is yet another example of India leading the global BFSI industry once more, by defining a framework that is democratized, federated and above all – consent based. At the same time, the opportunities to disrupt in other sectors, beyond lending, through innovative new business models, is ripe – and will only add new fuel to the FinTech space. What is clear is that the digital transformation imperative - where the call to look, and behave, like a technology native company - regardless of size whether you are a large BFSI or a small regional player -?has never been louder.
Very insightful Sumit Sharma