Somewhere in the precincts of the Mesopotamian civilisation, the first monetary transaction was executed in recorded human history, thus began the first Bank. It has been more than 5100 years and still banking has miles to go to make it more democratic and inclusive in its operations and nature.
Following banking, comes the processes of credit and lending and then the story of commerce, currency, accounting and wealth creation but it has mostly been fraught with a tilted game – a game which is tough to crack – how to democratise credit and optimise lending.
None have reimagined the democratisation of financial inclusion over the past decade of banking history as much as the way iSPIRT has since 2009-10 and that at an unprecedented scale for a billion people.
Which brings us to Sahamati.
Sahamati – a collective of Account Aggregator, pioneering the AA ecosystem will be an epoch moment for the digital lending and credit ecosystem which will incrementally accelerate the process of financial inclusion through secured, intelligent, efficient, cost economic and robust mechanisms that will launch the next wave of FinTech revolution in India.
Account Aggregators (AA) are built as digital public infrastructure which allows individuals to share their own financial data from one party to the other with their consent. Think of it as UPI for data sharing (loosely used metaphor) accelerated by regulatory innovation.
Just like UPI democratised payments, other banking products like loans, insurances and investments are waiting to be disrupted. Since most financial data of individuals have been locked within a bank, it has been challenging to build innovative financial products, unless the bank itself decides to build it.
The Account Aggregator framework is the first application of this approach for unlocking value from your personal financial data. The AA framework creates a well-defined and secure mode for users to share their personal financial data with other eligible entities.
At the heart of the AA framework is a robust consent system that allows users to pick and choose the type of data they share, and the entities who have access to this data.
Account Aggregators, Why now?
The potential of AA directly addresses three major challenges:
1. NTC or new to credit borrowers: Lending has always been a challenge for individuals with no credit history which effectively translates into loan rejections while demand goes up. By underwriting the past transaction history, a Line of Credit can now be offered.
2. Data Privacy of financial details was an issue with paper based or other online trails.
3. Granularity of Data isolated for borrowers across multiple assets and instruments, enabling better to assess the consolidated data.
And to solve this, IndiaStack has played an instrumental role leading the quantum leap into the most advanced technology architecture and endeavour for creating an inclusive, democratic architecture.
Genesis of ACCOUNT AGGREGATOR
Account Aggregator is a continuation and extension of IndiaStack’s core vision of Inclusive society which has been realised by the launch of radical products.
Envisioned in 2009, IndiaStack had four principles for driving the future of Digital India and Data Revolution have been:
4. Consent based
Journey of ACCOUNT AGGREGATOR
AA and UPI: The Analogy for Understanding AA
Despite the initial questions about the on-ground reality, the total number of basic bank accounts under Pradhan Mantri Jan Dhan Yojana (PMJDY) has reached 42 crore as of March, 2021, which provokes us to deep dive into this further.
The JAM trinity (Jan Dhan- AADHAR- Mobile) is the backbone of IndiaStack which formed the basis of UPI, and now the AA framework. UPI transformed the payment industry through it’s financial penetration, connecting hundreds of millions at the bottom of the pyramid. It has also reduced leakages in welfare schemes and enabled low-cost Direct Benefit Transfer (DBT).
Account Aggregators will redefine the credit and lending ecosystem through information availability, interoperability among Financial Information Providers (FIP) and Financial Information Users (FIU) in the same way UPI revolutionised the payments interoperability with banks and end users.
Here, we have simplified the concept of AA and explained its working vis-à-vis UPI. There is a difference in the archetype. But yes, they are essentially a consent based and democratic framework.
Components of Account Aggregator and UPI
Unified Payment Interface (UPI ):
1. Originator bank: Origination of money
2. UPI App
3.Destination bank: Remittance of Money
Account Aggregator has 3 major participants:
1. Financial Information Provider (FIP): Banks, Insurance and Mutual Funds, Pension Funds etc. which are a repository of Users Data.
2. Account Aggregator (AA): is an entity which collates, connects and disseminates the data between FIP and FIU.
3. Financial Information User (FIU): FIPs can be FIU and vice versa.
A holistic and 360 degree view of transactional history of an individual’s financial data can be analysed and sachet loans are the biggest beneficiary as Fintech and lenders can have a more holistic overview of an individual’s financial history.
Account Aggregators, have limitations on the actual data but can facilitate the consolidation of all your financial data in one place, allowing you to access services with a few clicks. At least four banks, including HDFC Bank Ltd., ICICI Bank Ltd., Axis Bank Ltd. and IndusInd Bank Ltd., have started testing account aggregators services for a select set of customers, before they open up these platforms.
Two Principles of Account Aggregation:
1. Data Blind principle so that AA does not violate the principle of Data Privacy.
2. Reciprocity principle between FIP and FIU as FIP are themselves FIU vice versa hence they have to grant access to other players too.
The above two principles maintain the sanctity of the data and free flow of information.
In India, AA is totally a different entity while in Europe where Banks acts as an AA that violates the above two principles that will violate DEPA framework as it lacks standardisation of Financial Information.
Role of Data Empowerment and Protection Architecture(DEPA) in AA
The concept of Account Aggregator has been built on the legal foundations of DEPA which empowers every Indian with control over their data.
It democratises access and enables secure portability of trusted data between service providers by creation of a standardized technology architecture implemented within the right institutional constructs.
DEPA’s technology architecture is an interoperable, secure, and privacy preserving framework for data sharing through
1. A technology standard for a machine readable Consent Artefact;
2. Open APIs for data sharing; and
3. A standard for Financial information.
Consent artefact is defined as a data structure in which the consent would be stored and it’s called a consent artefact.
Personal Data Protection( PDP) Bill 2019, defined consent artifact as the following:
“a machine-readable electronic document that specifies the parameters and scope of data share that a user consents to in any data sharing transaction.”
The consent artefact is designed to be Open, Revocable, Granular, Auditable, provide Notice, and maintain Security by design (ORGANS).
DEPA forms the final layer (more commonly known as the Consent Layer) of India Stack. The other layers of IndiaStack include Aadhaar (including authentication and eKYC), the Unified Payments Interface, DigiLocker, and eSign.
Opportunities. Where are the sunrise sectors?
Sahamati came with the following use cases:
1. Digital Lending
2. Robo Advisory
3. Personal Financial Management
4. Wealth Management
5. Reconciliation of Accounts
Over time, more innovative use cases will arise. Some that come to mind include:
6. Loan Monitoring
7. Early warning Alerts
8. Welfare schemes and Pension programs
9. New age Underwriting and verifications
Additionally, GST data is a part of AA. Consented Data would be pulled from GST Suvidha Provider (GSP) in the earlier phases and at a later stage through GST Network (GSTN) portal which will allow for Credit Line based on invoicing.
Integrating with an AA that has already integrated with a GSP, eliminates the need for Fintech’s to integrate with GSP’s themselves.
In the next 6 months, mutual funds will go live.
Potential challenges and limitations with AA:
1. FIPs such as Mutual funds, Stock Brokerage firms, Insurance players are yet to onboard the AA journey effectively delaying the 360 degree view of the Financial history of an individual. Major Insurance Player LIC – has no time horizon for going live on the AA framework.
2. Every aggregator has to partner with multiple banks, hence there are certain inherent disadvantages which do not make it auto scalable contrary to UPI.
3. Consent mechanisms with time will be diluted and follow a blind agreement akin to the behaviour exhibited during a typical terms and conditions user experience.
4. Multiple Account Aggregator (AA) increases the challenge for FIUs as well as FIPs as integration with individual partners is a resource consuming process and there may be a need for an Aggregator of Account aggregator.
5. As of July 2021 there is low adoption of AA across the Financial ecosystem. Only 2 Banks are Publicly live – while others are in various levels of testing phases to selective users. There however exists a lot of interest in this space, and several early adopters and Fintechs are at various stages of integration as we speak.
6. Penetration will take time and it is expected that only by Q1, 2022 – the top 10 Banks (by number of customers) will be live.
7. CASA (Current Accounts, Saving Accounts) data is available for CC, OD, RD which are the only data points accessible through the ecosystem at present which means only asset based data is available. Liability based data may be available when OCEN gains momentum.
Technology Solution Provider (TSP) : Enabler of the Ecosystem
Technology service providers (TSPs) are companies that are part of the Account Aggregator ecosystem that collaborates with FIUs and FIPs to deliver AA products and services.
TSPs develop the foundation modules that connect FIP and FIU modules to the account aggregators in the ecosystem. But TSP services are not limited to the development of FIP and FIU modules.
They can help Fintech products in various areas – from use cases for the AA ecosystem, underwriting models, SME Scorecards, Early Warning monitors, Digital Lending & Onboarding, Digital Lending based on OCEN, product design of FIU apps and more.
Sahamati categorised TSPs based on the services they offer.
- AA Data Standard TSPs implement FIU-FIP modules.
- Data Analytics TSPs offer services in the areas of underwriting.
- Early warning signals
- Bank statement & GST analysis.
- Credit report analysis.
- User Experience TSPs design and build product user journeys.
Additionally, the underlying architecture of account aggregation solutions is industry-agnostic, and, in due course, the same architecture may be applied in the telecom, health and education sectors.
For the question of data, we need social, political, economical, technological response so that data empowerment and inclusive growth.
Following use cases when onboarded to the Account Aggregator ecosystem can incrementally innovate.
2. Wealth Management
3. Personal Finance Management:.
4. Robo Advisory
5. Reconciliation of Accounts
6. Loan Monitoring
Kudos being a digital lending platform, here our core focus would be on API- Based Digital Lending, Reconciliation and loan monitoring.
Sachetization of Loans: Introduction to On Demand Loan (ODL)
AA along with Open Credit Enablement Network (OCEN) and Public Credit Registry (PCR) will sachetize the lending.
Currently, the high cost of acquiring and analysing the data, example being bank statement analysis and fraud check is expensive. AA will change this as it protects the integrity of the data. Reducing collection cost because of better predictive analytics.
Now is the time for the General Line of Credit. Current Underwriting mechanism is rigid for Retail customers as it emphasises on particular Loan. When we underwrite the customer for a Home Loan, can we also help them with limits for Personal Loan. These options may be made available to customers to choose from and execute.
All lending products are currently created with a separate unit’s focus, it is time to think from the customer’s point of view. Interestingly, most of the data required in Retail / SME Loans is common, which can help in generating the credit line. Banks already do this service to Corporates. It is time to extend this to the broader ecosystem.
Eventually all this will lead to faster onboarding, better user experience and value added features.
As Data Science with Machine Learning Models already feeding on Data until they evolve and Artificial Intelligence becomes the norm , it is logical that Digital Technology platforms like Kudos may turn into a complete Financial Technology Service Provider.
Open Credit Enablement Network (OCEN):
Every entity in the fintech ecosystem is incentivised to take part in this new open credit economy enabled by OCEN. There is an opportunity here for lenders, service providers, aggregators and tech providers to all play their role in bridging India’s credit gap and giving our people and businesses the support they need.
Future: The Way ahead
As per the discussions with several AA’s, it’s discernible that for AA to be ubiquitous , a three year time horizon is expected.
OCEN will be the logical culmination in the credit and lending space with the Use of AA as it will encompass the whole gamut of FIPs and FIU along with a comprehensive set of rich data enabling underwriting.
There will be a possibility to switch a loan in a click. There can be a move from Uniform Lending rates to Individual pricing of risk.
Concept of On Demand Liquidity (ODL) is gaining traction albeit in the remittance domain where liquidity of remittances for different currencies is a major challenge. But it is relevant even in the current credit market.
With AA and OCEN, new products such as sachet On Demand Loan (ODL) are going to breathe in a fresh elixir of life for the Gig economy.
A special applause to iSPIRT and Sahamati, for manifesting conception into reality. Beginning has been made but it is still an arduous journey that goes long way to go as AA considers only Assets across Bank Accounts, Equity, Demat, MF & Insurance and not all are live and there will be gradual access.
Soon GST will be made available via AA’s. So many SME & Corporate use cases can be enriched.
However, there is no complete clarity on availability of Liabilities data, as AA is primarily assets related data.
But as per the current vision of RBI that will get addressed somewhat through the OCEN Framework and the planned Public Credit Registry (PCR). Gradually with all this and also DigiLocker which is part of the India Stack, the Fintech & Digital ecosystem is on a path for digital innovation & growth.
Adoption of Account Aggregator framework will be an augmentation and a step in that direction where the role of Authentic, instant and Secure Data will create an innovative platform for Bharat in even other sectors and alleviating the life especially, for individual Like Rajni- which is at the heart of IndiaStack Story.
At Kudos, we envision that the journey of our FinTech Partners should be seamless, fluid, Plug and Play, Democratised, Interoperable and leading to a minimum intervention based on best in class API experience.