October 4, 2021 7:22:02 pm
Written by Veena Sivaramakrishnan, Zubin Mehta and Jasraj Narula
The Fintech industry has witnessed an unprecedented growth in India. Boston Consulting Group and FICCI estimate these companies to become three times as valuable in the next five years, reaching the $150-160 billion mark by 2025. Apart from growth maximisation, the objective of achieving greater financial inclusion remains central to this industry. According to the Reserve Bank of India (RBI), this can be achieved by developing and deploying cutting-edge technology that can bridge the gap between financial service providers and last-mile customers. Introduction of Account Aggregators (AA) by the RBI is poised to be a game-changer in this regard.
The need for AAs comes in at a crucial point when credit disbursement, especially to the credit-starved MSMEs or the underbanked individuals, needs to become simpler. It has been reported that only 10 per cent of small businesses in India have access to formal credit. For now, the ecosystem is fraught with fragmentation of financial data across different financial service providers. There is an urgent need for creating systems that enable effective utilisation of financial data to address the credit needs of borrowers and provision of comprehensive financial solutions to them.
This is where RBI’s framework for regulation of AA aims at making sharing and aggregation of financial data secure, transparent, and efficient by setting up an intermediary exclusively for such business. These intermediaries are AA, registered as NBFCs with the RBI. They work primarily towards collecting information related to financial assets of a customer from the financial institutions holding such information (e.g. banks, insurance companies, mutual funds, pension funds) and aggregating, consolidating and presenting it to either customers or regulated financial entities (banks, lenders, asset management companies etc.), subject to an explicit consent of the customer. Think of AA as a Zomato or Swiggy – delivering financial data from customers to lenders or among lending agencies over cloud.
The AA Framework provides that:
- The customer financial information cannot be used or disclosed by the AA or the regulated financial entities except for express customer consent;
- AA shall not request or store customer credentials;
- There shall be adequate safeguards built in the IT systems to ensure that the AA is protected against unauthorised access, alteration, destruction, disclosure or dissemination of records and data;
- Customers shall have the right to revoke their consent for data sharing at any given time; and
- An Account Aggregator shall not use or access any customer information other than for performing the business of account aggregator.
Advantages of AAs
AA can assist regulated financial entities in seamless decision making required for lending, loan monitoring, wealth management, personal finance management, etc., by eliminating paper trails and facilitating greater access to financial services and credit to earlier underserved and unserved segments (such as due to socio-cultural issues ) thereby reducing information asymmetry. This will provide much needed respite to underbanked individuals or the MSME sector that has historically been dependent on collateral-based borrowing for loans as small as Rs 5 lakh and struggles to keep its balance sheet updated, braving various oddities, the latest being supply chain disruptions on account of the pandemic that put a strain on working capital requirements. The traditional lending space that these MSMEs find themselves in involves the cumbersome process of sharing physical, signed and scanned copies of customer bank information, repetitive data authentication and proof of financial records. All of these could be replaced by AAs that in turn could provide simple, secure, automated, and digital financial information sharing system.
As the importance of AAs will gain traction, financial institutions will have to align their technology-based platforms with each other to provide for seamless movement of financial data. Towards this end, Reserve Bank Information Technology Pvt Ltd, a wholly owned subsidiary of the RBI, in consultation with RBI has come out with a set of technical standards which are recommended so as to ensure that the design of the NBFC-AA ecosystem is data-blind; based on electronic consent; generates non-repudiable audit trails and allows for interoperability & layered innovation.
To ensure an organic flow of customer financial information among regulated financial entities, a large number of customers and financial entities will need to be on board over the NBFC-AA platforms to utilise the potential of the NBFC-AA ecosystem and it will be equally important is that the regulated financial entities tap into unique opportunity.
Since AA Framework only permits flow of customer financial information among regulated financial entities, AAs have a huge potential to partner with payment aggregators (which were not previously regulated by RBI) and prepaid-payment instrument issuers for providing quick ‘neobanking’ products. These include one-click loans, card issue, account opening, insurance products, wealth management, etc. As neobanks work exclusively in a digital only space, access to consolidated customer financial information (based on express customer consent) could be an attractive avenue for AAs and Fintech companies to upscale their operations and capture the untapped potential of AAs in bringing about financial inclusion.
With efficient use of the AA we can be optimistic of seeing a shift of power over data accessibility and usage to the owners of data rather than to holders of data, providing the customers much needed balance between data privacy and the need of quick financial solutions.
– Veena Sivaramakrishnan, Partner, Zubin Mehta, Partner and Jasraj Narula, Associate at Shardul Amarchand Mangaldas & Co. Views expressed are those of the authors.
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