In 2021, India unveiled the Account Aggregator (AA) network, a system for sharing financial data that has the potential to revolutionise lending and investing by granting millions of consumers greater access to and control over their financial records as well as increasing the potential market for lenders and fintech firms. Account Aggregator is a type of RBI regulated framework that helps an individual securely and digitally access and share information from one financial institution they have an account with to any other regulated financial institution in the AA network. It is to be noted that the data cannot be shared without the consent of the individual. The AA system could much rather be termed as consent managers given how they do not aggregate financial data in one platform, but instead, manage consent of the user(s) for accessing data for financial services.
The data collection, collation and sharing of data is through open application programming interface (API) connections.
Two terms important to understand here are, Financial Information Providers (FIP) and Financial Information Users (FIU). FIP’s refers to any regulated financial firm that provides banking, lending, asset management, insurance, and other financial services and products and FIU’s refers to an organisation that has been registered and is under the supervision of one of the financial sector regulators (including the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI), Insurance Regulatory and Development Authority of India (IRDAI), and Pension Fund Regulatory and Development Authority, which cover banking, lending, financial planning and investments, insurance, and pensions) (PFRDA), etc.
Traditionally, if someone needs to apply for a personal loan, they would need to provide documents such as bank statements, income tax returns and salary slips. However, under the AA network, The account aggregator applications will gather data from various FIPs and send it to FIUs using a consent-based approach. The user no longer needs to visit multiple websites, download information required by financial service providers like lenders and financial planners, share confidential login information, or physically provide hard copies of documents from various entities (FIPs).
Recently, we saw India’s Account Aggregator (AA) ecosystem having 1.1 billion AA-enabled accounts and 2.05 million users voluntarily sharing their financial data with banks and financial institutions to avail of loans and get better and quicker deals on other financial products. According to Sahamati (a non-profit collective of the AA framework), all major public sector and private sector banks in the country have joined the AA network. SEBI recently joined the platform as well.
With the evolution of the AA network in India, we can see the easing in domestic integration of MSME’s in the financial systems. The role of MSME’s in India’s economy is critical. However, with financial barriers like lags, delays, paperwork, etc, there is a lack of accessibility in accessing financial services. Moreover, the flow of credit to MSME’s is also critical to their growth in India.
With the coming of AAs, financial inclusion can be done by shifting from asset-backed lending to cash-flow based lending. Account aggregation goes beyond the conventional, assets-based approach used by credit rating agencies which rates on the basis of assets in hand. Now, the shift is towards cash flow-based inputs such as income from multiple sources, expenses, invoices, receipts, and tax returns. Through this, MSME’s which were earlier not properly recognized for financial services, can now be properly facilitated for accessing credit.
Under Budget 2023-24, the National Financial Information Registry (NFIR) was announced. One of the aims of the registry is to make credit more easily available to those who are currently considered undeserved by making it easier for lenders, including fintech companies, to assess creditworthiness. This framework, once connected to the account aggregator network, would significantly improve the state of MSME’s in India. The creation of a registry as mentioned in the union budget would facilitate and strengthen cash flow-based lending and increased credit flow and facilitate economic inclusion.
The account aggregator system, once evolved and recognized, has the potential to be the next UPI for financial services in India.