To help accelerate the transformation of financial services in India through digital services and to build a robust lending environment, several major banks in India have recently introduced a unique Account Aggregator (AA) technology for sharing data. It’s believed to change the game for lenders and borrowers and will help to make lending more accessible in a way that puts more control into the consumer’s hands. Let’s look at the AA system it’s impact, advantages, and disadvantages.
Introduction to the Account Aggregator system
Account Aggregators are authorized entities through the Reserve Bank of India (RBI) and this unique system seeks to combine financial information of users in real time with their permission and provide these vital details to institutions that deal with financial transactions. It is based on the idea of Unified Payments Interface (UPI) that is expected to facilitate bank lending and transform banking in a variety of ways. Eight major banks, including State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, and Federal Bank have joined the AA network. All of whom will provide their customers the choice of sharing their personal financial details with other businesses via an API-dependent repository. For example, if you request instant personal loan it is possible to have an account aggregator take information on all of your bank accounts or any other assets and possessions and then provide the details to the lending institution. The account aggregator gathers these details direct from the institution, and forwards details to the bank that lends the loan. This will determine your eligibility to receive the loan. This also assists institutions in understanding the needs of their customers, whether they are existing or new. They can then modify their offerings based on the data gathered.
The AA system has three key components: Financial Information Provider (FIP) as well as Financial Information User (FIU) and the Account Aggregators. FIU can be described as the lender bank that is seeking access to their customer’s or borrower’s personal information to assess the creditworthiness of the borrower before lending money to them, FIP on the other side has the essential information about the client that is provided information to FIU. The FIP could be a bank or a Non-Banking Financial company (NBFC) or mutual fund insurance repository, pension fund repository or your personal wealth administrator. Aggregators act as the intermediary, collecting information from FIPs which hold the personal financial information of customers and sharing that information with FIUs, such as lending banks or agencies that offer financial services.
The step-by-step procedure can be described as follows: the steps –
- A person opens a bank account through an account aggregator. They create a funnel to store their financial data by connecting their accounts with banks, which contain all the information
- If the client is applying to obtain a loan, or other financial service from an institution of a certain type then he/she will give the go ahead to the lender who will be able to access their financial information through NBFC-AA.
- If consent is granted After consent is granted, the account aggregator contacts the providers of financial data for permission to gain access to the customer’s information.
- When the information is received by the account aggregator lenders are able to review the data and determine the suitability of the borrower, as well as the conditions of the loan.
Benefits of the Account Aggregator system
Infosys President Nandan Nilekani believes that the Account Aggregator (AA) framework could increase the amount of credit available and make it more accessible in India similar to UPI. At the time of the launch of RBI’s AA framework, Nilekani stated, “Digital footprints when properly utilized, and facilitated by consumers with their own data can provide a large amount of credit available to small-scale businesses. It could result in the increasing accessibility in credit.”
Conclusion
Account aggregator systems are regarded as a game-changer in lending sector. It is thought to be a major step toward bringing open banking across the country and giving millions of customers the ability to share and access their financial information with institutions in a secure and efficient way without compromising privacy or consent. It could help create credit information for both individuals and small-sized businesses, enabling them to get loans and increasing credit access and the availability of data for MSMEs. The system, if properly utilized and managed, could be expanded to include other services soon starting with financial services such as pension and insurance funds and eventually, to improve the accessibility to healthcare.
If all stakeholders are willing to work together to make this technology work, it can build a strong lending ecosystem that will transform India into a data-rich country that can boost its economy through digitalization and facilitate the growth of medium and small-sized businesses in India
