Thursday, May 19, 2022

Account Aggregator, the future of financial data sharing

Synopsis: The account Aggregator framework launched last week can be the next UPI like a revolution for financial data in India. How can it regulate financial data collection models in the country?

On September 2, this year the Account Aggregator ecosystem went live. It is said to be a big revolution for opening up access to financial data of individual and business customers.

Reserve Bank of India defines an Account Aggregator as a non-banking financial company involved in the business of providing the service of retrieving or collecting financial information pertaining to its customer. It is done under a contract. It also involves organising and presenting the information to the customer or any other financial information user as may be specified by the bank.

Within the first week, eight major banks have joined this network. They are- State Bank of India, Axis Bank, ICICI Bank, IDFC Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, and Federal Bank. Four NBFCs- Finvu, OneMoney, CAMS Finserv and NESL have received operational licenses. Also, PhonePe, Perfsios, and Yodlee have received in-principle approval from the Reserve Bank of India.

What is the Account Aggregator network?

The Account Aggregator (AA) network was established via an inter-regulatory decision by the Reserve Bank of India and other regulators namely, Securities and Exchange Board of India, Insurance Regulatory and Development Authority (IRDAI), and Pension Fund Regulatory and Development Authority (PFRDA) via an initiative by the Financial Stability and Development Council (FSDC). The licence for AAs is issued by the Reserve Bank of India. The financial sector of the country will have many Account Aggregators. Thus, preventing it from being a monopoly.

How does the Account Aggregator framework work?

The Account Aggregator platform allows data of individuals to be collected after taking their consent. Then, the customer specified information is shared securely through APIs with the financial institutions based on the consent.

This data, in turn, gives these institutions a better understanding of the customers, and the services they want so that they can weave their services accordingly. It also lets easy data transfer between banks and financial service providers.

The network sees participation from financial institutions like banks, NBFCs, NBFC-AAs, and third party services among others. These entities have different roles to play here.

Banks work as financial data providers, lenders act as financial data seekers, NBFC-AAs act as medium of communication between banks and lenders, and lastly, third party service providers work with Account Aggregators.

With the background provided, let us understand how the process works.

1. A person or business opens an account with an Account Aggregator. They link their bank accounts, insurance policies and other such information to this new account as well. In this way, they are creating a funnel for their financial data.

2. When the customer is looking for a loan or for a financial product that needs to have their financial information, this will make their credit score more accessible.

The user can give consent to any lender to get access to their financial data through NBFC-AAs.

3. When consent is provided, account aggregators ask for permission from financial data providers to access customer’s data.

4. When data is sent to Account Aggregator, lenders can easily evaluate the financial profile, risk associated, and other such information about the customer. They can then lend the loan accordingly.

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Why was Account Aggregator needed?

Before AA saw the light of the world, entries used a process called screen scraping. Here, the third party applications used to collect screen data and translate it to display on another application.

According to some experts, there was no uniformity in this process. If banks would bring certain changes to their applications, another set of problems would follow. In short, there were a lot of inefficiencies in the process.

On top of that, being watched through the screen scraping process was sensitive enough.

So, this mechanism was much needed as it overcomes those problems and has a consent driven architecture at the same time.

The Account Aggregator ecosystem makes it a regulated and legal system with different required institutions involved to process the request.

Benefits of Account Aggregator system

Account Aggregator architecture solves the problem of scattered data. As mentioned before, all the financial data was not collected in a uniform process. Rather it was scattered in a data blind manner.

Experts believe that it will bring a revolutionary change just like UPI.  SMEs can easily avail loans without reaching out physically to financial institutions. Banks will also be able to create new models. In this way, all the involved parties will be in a win-win situation.

Not just this, small size loans for MSMEs and micro-insurance can also be sanctioned easily. In case of MSMEs, they face a huge credit gap as their creditworthiness is doubted. With this, financial data can be easily accessed and thus their creditworthiness becomes more clear. MSMEs cannot get formal credit as their financial records are not transparent. AA framework helps in regulating and simplifying the process of accessing their financial history.

It is a win-win situation for both lenders and MSMEs.

Business models around this ecosystem

According to industry experts, Financial Information Providers have to see the value in the data being shared. This is very important for developing a sustainable business model for the account aggregator ecosystem in the country.

Along with them, even customers and financial information users have to recognise the value in the ecosystem. No business model is viable only in monetary terms. It also has to add value in the lives of the parties involved. Thus the fact that account aggregators bring a uniformity in the process of data sharing should be highlighted.

According to industry experts, the two major areas of focus right now are-

1. Customer awareness and education regarding benefits of Account Aggregator

2. Participation of the entire ecosystem like NBFCs, NBFC-AAs, banks, third party services.

Logically, these two are very prominent. UPI was also successful because the customers or users saw the ease of transactions it provided. Also, all the major financial institutions were ready to adapt and participate accordingly.

The role of Reserve Bank of India

The Reserve Bank of India has made it compulsory for the banks, NBFCs, insurance firms and other financial institutions to share customer data in a prescribed format with the account aggregators.

Reserve Bank of India Deputy Governor, M Rajeshwar Rao says, “AAs enable secure, consented data flows while protecting user privacy. In conjunction with other platforms like the Unified Payment Interface, Account Aggregator creates in India the most cutting-edge digital financial infrastructure in the world.”

Also, the Reserve Bank of India has made it clear that this data cannot be monetised and the data flowing through the account aggregator platform have to be deleted after a specified period of time. Not only this, the data is also encrypted to make sure that it cannot be hacked or get leaked to avoid exploitation.

Data Privacy laws

This architecture requires user data to be collected. So, user consent and data privacy are very important to be maintained. This is why currently only specific financial institutions are allowed to access the account aggregator ecosystem. According to industry experts, even the non-licensed entities should be allowed if it truly is an open banking system. Therefore a certain data privacy framework should be implemented by the Reserve Bank of India.

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