Unlocking the Potential of Account Aggregators in India's Financial Landscape

?In recent years, India has been taking significant strides towards becoming one of the most progressive digital economies in the world. The government’s initiatives, such as Digital India, have pushed the country towards adopting digital payments and online transactions, making financial services more accessible to the masses. However, with increased digital adoption comes the challenge of managing financial data across various institutions.

In the not-so-distant past, managing personal finances in India was a labyrinthine task involving juggling multiple accounts across various financial institutions. Thankfully, the emergence of Account Aggregators (AAs) has revolutionized this landscape, offering individuals and businesses a unified, secure platform to access their financial data. Let's explore what Account Aggregators are, how they work, and the transformative impact they have on the financial ecosystem.

1 - What are Account Aggregators?

Account Aggregators serve as intermediaries, bridging the gap between users and financial institutions. Their primary role is to gather and consolidate data from multiple financial sources, presenting it in a user-friendly format. This consolidation operates within the framework of Open Banking, emphasizing standardized APIs for sharing financial data.

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2 - The Account Aggregator Framework

Introduced by the Reserve Bank of India (RBI) in 2021, the Account Aggregator Framework empowers these intermediaries to facilitate the exchange of financial information. Users grant consent for Account Aggregators to collect their financial data from various entities known as Financial Information Providers (FIPs). This data is then shared with entities seeking the information, known as Financial Information Users (FIUs).

For example, a use case of AA is when an individual in India applies for a loan, the lending bank (FIU) can seamlessly access the financial statements held by the user's bank (FIP). This framework places control over financial data firmly in the hands of users while ensuring its security. By removing barriers to data access, the AA ecosystem enables lenders to handle more loan applications efficiently. The data's digital signature by the financial information provider (FIP), such as the borrower's bank, enhances its reliability.

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3 - Stakeholders of Account Aggregators (AA) in India

India's AA framework involves a diverse set of stakeholders, each contributing to the seamless sharing of financial data. Here's an overview of these stakeholders, ensuring no repetition:

a.???? Financial Information Providers (FIP):

• FIPs encompass banks, mutual fund houses, insurance providers, income tax/GST platforms, and other financial institutions.
• They serve as custodians of customer financial data, including transaction history and spending patterns.
• FIPs share this data with Financial Information Users (FIUs) through AAs based on customer consent.

b.???? Financial Information Users (FIU):

• Financial Information Users(FIU) are customer service providers such as lending institutions, insurance companies, or wealth management firms who request and obtain digitally signed data from Financial Information Providers(FIP) through Account Aggregators.
• They use customer data obtained through AAs to make well-informed decisions and expedite approvals.

c.???? Account Aggregators (AA):

• Account Aggregators(AA) are RBI-licensed Non-Banking Financial Companies(NBFC) that serve as a data channel between Financial Information Providers(FIP) and Financial Information Users(FIU).
• AAs enable individuals to control their financial data without accessing or storing customer information.

d.???? Technical Service Providers (TSP):

• Technology Service Providers (TSP) collaborate with FIUs and FIPs to deliver AA products and services. They develop the foundation modules that connect FIP and FIU modules to the Account Aggregators in the ecosystem.
• TSPs can also help fintech products in various areas like underwriting models, SME Scorecards, product design of apps, and more. Additionally, TSPs can offer a single-window onboarding experience to AA ecosystem participants by becoming?intermediate-certified entities.
• Examples of TSPs include FSS, Setu, Perfios, and TransUnion.

e.???? Certification Authority:

• The non-profit organization Sahamati (Digisahamati Foundation) plays a crucial role in strengthening the Account Aggregator ecosystem in India.
• It oversees strict adherence to AA standards established by the RBI.

4 - Use Cases of Account Aggregators

?Empowering Customers

Account Aggregators empower customers by giving them greater control over their financial data and simplifying their financial journey. Some key benefits for customers include:

• Comprehensive Financial Overview: Customers gain a holistic view of their financial relationships with various institutions, including banks, NBFCs, mutual funds, and insurance providers, all through a single platform.
• Freedom from Repeated KYC and Paperwork: AAs eliminate the hassle of repetitive KYC processes and paperwork submission. Customers must only provide consent to the AA, which securely retrieves and shares their data with requesting Financial Information Users (FIUs).
• Data Security and Privacy: ?AAs prioritize data security by encrypting information from source to destination. Account Aggregators prioritize data security and privacy. They employ robust encryption and authentication mechanisms to ensure that sensitive financial information is protected. Additionally, they operate within the regulatory frameworks and guidelines set by the respective financial authorities in their jurisdiction.
• Streamlined User Journey: AAs Account Aggregators can simplify and streamline processes that require access to financial information. For instance, loan applications, insurance underwriting, or investment account opening can be made more efficient by eliminating the need for manual document submission and verification. Account Aggregators can facilitate seamless and secure financial data sharing, reducing paperwork and enhancing the user experience.

Streamlining Financial Operations

One of the standout use cases of Account Aggregators is their ability to streamline financial operations for various stakeholders, particularly financial institutions. AAs have played a pivotal role in helping financial institutions achieve:

• Faster Credit Approvals: Financial institutions can access real-time financial data through AAs, enabling quicker credit approvals. This not only expedites the lending process but also benefits consumers in urgent need of financial assistance.
• Reduced Risk of Fraud: The Account Aggregator ecosystem is pivotal in reducing fraud. By minimizing the number of log-ins and points of contact with multiple service providers, AAs enhance data security and mitigate the risks associated with fraud and phishing attempts.
• Improved Customer Experience: AAs create a seamless and user-friendly experience for customers. Customers can manage their finances efficiently and conveniently with a single platform for accessing their financial data.

Unleashing the Potential of Credit Access:

Access to affordable credit is a hallmark use case of Account Aggregators, particularly for underserved segments like new-to-credit (NTC) customers and small businesses. Less than 15% of Indian MSMEs have access to formal credit, primarily due to limited or no credit history. AAs bridge this gap by enabling the sharing of alternative financial data with lenders.

• Alternative Financial Data: AAs enable businesses to share alternative financial data, such as tax returns, bank statements, and spending behavior, with lenders. This helps assess creditworthiness even in the absence of traditional credit records.
• Cash-Flow-Based Lending: AAs facilitate the transition from asset-based lending to cash-flow-based lending, enabling sachet-size loans based on cash-flow predictions, a boon for businesses with limited collateral.

Expanding Beyond Credit Access

Account Aggregators aren't confined to a single use case; their versatile framework can be adapted to various sectors:

• Insurance Sector: Integrating income tax data into the AA framework enhances the insurance sector, allowing income-based eligibility estimation for insurance proposals and simplifying the process.
• Bank-Account Verification: AA can replace existing bank-account verification methods with more efficient and secure alternatives.
• Loan Monitoring: Monitor borrowers’ financial health by analyzing cash flow across multiple bank accounts, minimizing defaults
• Wealth Management: AAs revolutionize wealth management by providing wealth managers with recurring access to client financial data, eliminating the need for manual data collection.
• Robo-Advisory: Real-time access to comprehensive financial data enables robo-advisors to offer personalized investment recommendations, portfolio assessments, and analytics.
• Income Tax/GST Filings: Entities offering income tax or GST filing services can simplify their processes by automatically collating, verifying, and validating financial documents on the AA framework.
• Neo-Banks: Neo-banks, a burgeoning sector in India, can harness AAs for smooth customer onboarding, real-time financial data updates, and centralized financial management.

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5 - Consent Attributes

Effective use of consent attributes is crucial in the Account Aggregator ecosystem. These attributes include:

• Validity: Provides a timeframe for valid consent, offering options for one-time consent or a defined period.
• Mode: Specifies the method or channel through which the consent is granted, whether through a physical document or other means.
• Purpose: Outlines the specific purpose or use case for which data access is authorized, providing information about the intended use of the financial data by the third-party application or service.
• Data Owner: Establishes accountability and ownership of the shared financial data of an individual or entity.
• Data Consumer: Ensures that data access is granted to trusted and authorized entities.
• Type of Fetch (One Time/Periodic): Specifies whether the third-party application or service can retrieve the data only once or if it has ongoing access at regular intervals, providing flexibility in defining the frequency of data retrieval.
• Details of Data: Provide specific information about the types of financial data that the user has consented to share, including account balances, transaction history, investment portfolio details, credit card statements, loan information, and any other relevant data elements.
• Data Retention by Consumer: Specifies the duration for which the third-party application or service is allowed to retain the user's financial data, ensuring that data is not retained longer than necessary and helping protect user privacy and data security.

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6 - Traction

The Economic Survey of India has reported that with 23 banks onboarding the AA platform, more than 1.1 billion bank accounts are currently eligible to share data on the AA system, and already around 3.8 million users have successfully shared data through this platform. In the last year, the cumulative number of accounts linked by account holders increased by 11 times as use-case scenarios of AAs found wider acceptance.

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As of December 31, 2022, 27 Financial Institutions have gone live as FIPs, including all 12 PSBs, 10 Private Sector Banks, 1 Small Finance Bank, and 4 Life Insurance Companies. 119 Financial Institutions have gone live as FIUs, of which there are 93 RBI Regulated, 12 SEBI Regulated, 12 IRDAI-regulated entities, and 2 PFRDA-regulated entities.

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7 - Conclusion

Account Aggregators in India hold immense potential to reshape the financial services industry, driving positive changes and increasing financial inclusion. They consolidate financial data, bridging the gap between individuals and services, enabling better credit assessment and access to loans for those without traditional credit histories, and uplifting the economy.

Furthermore, Account Aggregators foster innovation by creating an ecosystem for fintech companies and service providers to leverage user-permissioned financial data, leading to personalized solutions and improved user experiences. Data-driven financial services are being strengthened, empowering institutions to offer customized products, targeted marketing, and proactive financial advice, enhancing customer experiences and informed decision-making.

Collaboration and standardization among stakeholders are crucial for their future success. Financial institutions, fintech companies, regulators, and technology providers must work together to establish common standards and ensure secure data exchange, creating a consistent and reliable user experience. Prioritizing data privacy and security gives individuals greater control over their financial information, fostering trust and broader adoption of Account Aggregator services.

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In summary, the future of Account Aggregators in India is promising, with the potential to revolutionize financial services, drive financial inclusion, and enhance the customer experience. With ongoing collaboration, technological advancements, and a focus on data privacy, Account Aggregators will transform the Indian financial landscape for the better.

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I'm a member of the investment team at?Elev8 Venture Partners , a maiden fund aiming for a target fund size of $200 million, specializing in Series B and C stage investments. Our focus is on privately held Indian technology companies with annual revenues exceeding INR 50 crores. Notably, our fund is backed by?KB Investment , South Korea's largest financial institution.