The Echo-nomist

Imagine if Swiggy could lend money to its restaurants on the basis of orders delivered or Uber could lend money on the basis of the number of trips completed. Wouldn’t that be convenient? Well, now it’s possible for all of this to become reality, All thanks to Account Aggregator.

Let’s slow down a bit… What is Account Aggregator?

Account Aggregator or AA is a non-banking finance company, AA’s are data intermediaries and consent brokers who take customers’ financial data, with their consent, and share it with financial institutions who need this data for various purposes.

This way, the third party, viewing your financial record, will have a better understanding of the individual’s spending and saving habits, debt repayment etc.

In a revolutionary move, the Reserve Bank of India (RBI) licensed AAs. They were finally able to get 8 banks on-board- State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank and Federal Bank. It’s a pretty solid list of banks and it includes the big four of the Indian banking sector. The framework was long awaited since it has been under discussion since 2016.

Whenever we do something we leave a trail of data, like Hansel Gretel’s bread crumbs (except our trail is permanent). For example, facebook. Similarly, we have financial data. This includes your current assets (what you own), current liabilities (what you owe), your net worth, payment histories etc.. This data is more private. It needs to be secured and should only be shared with others upon consent.

The Digital Economy Promotion Agency (DEPA) assured everyone that AAs are merely trustees of our data (a person or firm that holds and administers financial data, in this case, for the benefit of a third party). They don’t get to peek into our data or even use it. However, with your consent they can pass on the data from financial information providers (FIPs) to financial information users (FIUs).

Suppose you’re applying for a loan. The lender can ask you to submit reams of documents including bank statements, ITR, financial statements, CIBIL credit score etc. to establish your credit worthiness. Collecting all of these documents can be tiresome.

With AA’s, the first step will be to create your business or personal account with the aggregator. Then link your accounts – like bank accounts etc. – that contain financial data. Then, you provide the aggregator with approval. The AA has to further seek permission from the financial data provider to access the data. Finally, the data is sent to FIUs, upon instruction. This simplifies the task for the customer, whose only job is to link everything to the AA account.

But how will they make sure that only the FIUs will be able to access their data??

The data held by AAs will be encrypted and can only be decrypted by FIUs.

Account aggregation will fill the gaps in information for lenders. Collateral based lending is preferred because information is either unavailable or not easily retrievable to grant risk-based loans. As AAs will become common and popular, it will benefit in transitioning to risk-based lending.

Risk-based lending is a big win for small businesses and entrepreneurs. Not every business or entrepreneur in need of  funds has a collateral to pledge. An authentic detailed view of financial transactions will spur risk based lending to SME and individuals. However, it also diluted the role of banks.

The primary function of banks is granting loans and accepting deposits. If AAs are popularised, their role could be brought down to simply providing financial data, while the users of financial data get to reap its benefits. Earlier, this data was closely guarded by banks and they had an advantage in granting loans. They were privy to an account holder’s financial information that would help them in assessing risk for secured as well as non secured loans.

Now banks might get insecure. They’ll have to partner along with large distributors for lending, otherwise they could be in some trouble. But eventually, it’s upon the customers to decide…

Change is coming

This change could be as big as the introduction of UPI. It lifted the digital payment ecosystem to unprecedented heights and received a boost during the pandemic. Could AA also change the ecosystem so drastically?

Undoubtedly, it has the potential to.

Companies can follow a flow-based lending model with the assistance of AAs. Such a model allows a company or individual to borrow money based on the projected future cash flows of a company. A financial institution grants a loan backed by the recipient’s past and future cash flows. By adopting such a model, Swiggy could lend to restaurants based on the orders completed by them; Uber can lend to drivers on the basis of the number of trips completed by them and so on. Leave it to the tech companies to crack this. Again, it’s not something banks are looking forward to. However, it could massively help companies and individuals meet short term credit requirements.

Remember the time when Telcos used to rule the digital world. They acted as gatekeepers to the internet. They protected their walled garden of digital services from intrusion by other tech or internet companies. Eventually tech companies evolved faster and proved to be smarter and Telcos have been reduced to (dumb) pipes to enable data flow. Almost all digital services whether it is OTT, Fintech, Content all pass through Telco without delivering much monetary benefit to Telcos, except for data usage charges. Telcos power the internet and are always innovating to provide more and more bandwidth to data hungry users and equipment. But they do not control access to the internet any more. 

Similarly Banks have long controlled access to financial services and data of their customers. Can UPI, Digital Wallets, Cryptocurrency and now Account Aggregators reduce banks to (dumb) accounts for flow of money, or can bank evolve to retain their primacy in financial world. We will get to know in few years…