In 2006, British Mathematician Clive Humby declared "Data is the new oil," a phrase echoed by The Economist in 2017. While the analogy holds, it's become somewhat worn from overuse. Fast forward to 2024: oil remains valuable, data is still crucial, but in the financial world, consent has become the golden ticket.
The Account Aggregator (AA) framework, introduced by the Reserve Bank of India (RBI) in 2016, embodies this shift. Account Aggregators are a new category of regulated entities (classified as a type of NBFC) and became operational in 2021. Their core function? Enabling secure and consent-driven transfer of financial data between those who hold financial data (“Financial Information Providers or FIPs”) and those who need to use this data (“Financial Information Users” or FIUs”), creating a seamless interaction between say a bank and lender
In addressing long-standing challenges in digital financial data sharing, Account Aggregators (AAs) have emerged as a transformative solution. Traditionally, the process involved cumbersome methods such as repetitive PDF or image uploads of bank statements, prone to errors and even fraud. Additionally, alternatives such as screen-scraping or “SMS scraping” posed security risks, privacy and other risks.
However, with AAs, these issues were effectively resolved. Users no longer need to share sensitive login details repeatedly, AA provided a smoother process with revocable consent, enhancing privacy and user control.
Financial institutions (FIs) benefit from standardised, fraud-proof data, reducing costs and potentially increasing revenue through improved user retention.
The extent of adoption this piece of the Digital Public Infrastructure (DPI) puzzle has witnessed is indicative of its significance -
Source: Sahamati
These graphs show the number of user accounts linked to Financial Information Users (FIUs) and Financial Information Providers (FIPs). This means greater consent and greater adoption to the AA ecosystem.
Explosive Growth and adoption of AA
The AA ecosystem has seen tremendous growth. According to Sahamati, the non-profit industry body that oversees the AA system - the number of live FIPs has increased from 29 to 146, and live FIUs have nearly tripled from 128 to 363. Notably, the number of entities functioning as both FIPs and FIUs has grown significantly from 29 to 88, reflecting a more interconnected financial landscape. This translates to a remarkable surge in successful data shares, skyrocketing from 3.3 million to 40.09 million.
The Account Aggregator framework is a testament to the evolving value of data in finance. By prioritising consent and security, AA paves the way for a more efficient, user-centric financial future.
Account Aggregators (AAs) offer a compelling vision: a secure platform for seamless financial data sharing between you and lenders or institutions.
But it's not all fun and games
As with all new infrastructure - challenges have come to light that may impede the rate of growth from here - let's take a look at the biggest ones.
Catch-22?
Banks and other Financial Information Providers (FIPs) have no real financial incentive to share your (or “their”) data. It can be a burden on their resources, which means many have not invested sufficiently in the technology to integrate with AAs. There is also a real imbalance in where the most valuable data sits - typically with CASA account providers who see a limited financial incentive to give away data to lenders trying to lend to their customers.
Are AA businesses flourishing?
For AA to reach its full potential, it is critical for AA licence holders to invest heavily in tech and create sustainable flourishing businesses. Some would say that is not possible given the unit economics involved.
Previously, loan underwriting services charged anywhere from ₹30-300 per transaction (the cost of pulling and analysing a borrower’s bank statement using PDF parsing) - making AA an attractive business to enter, if those rates could be maintained.
In the initial days, AAs charged anything ranging from ₹10 to ₹30 per data pull. However, the landscape changed rapidly as competition intensified. Prices plummeted, sometimes dipping below ₹5. This price war massively benefitted Financial Information Users (FIUs), but raised concerns about AA profitability, especially with even lower prices expected for high-volume requests. Can AAs stay afloat in this race to the bottom? Reflecting this, last year we even saw a number of AAs give up their licence.
Technical Interoperability Issues
The AA framework is designed to be interoperable, allowing users to connect any AA with any FIP and share data with any FIU. However, the reality is far from seamless. Many AAs are not yet supported by all FIPs and FIUs. This lack of interoperability stems from legal and contractual issues, with some players hesitant to establish data-sharing agreements for various reasons. Public sector banks, in particular, have been slow to integrate with all the AAs, often citing technical challenges in handling the increased data volume.
Performance Bottlenecks and Limited Scope
The current pull-based system, where AAs need to request data from FIPs and wait for a response, can lead to significant latency issues. This can be particularly frustrating for users who expect real-time access to their financial information. Implementing a push-based system, where FIPs proactively share data updates, could significantly improve performance.
Lending to SMEs and MSMEs
Finally, While the AA framework is comprehensive for retail or consumer lending, its application for business or Micro, Small and Medium Enterprises (MSME) lending remains limited. Only an estimated 10% of bank statements shared through AAs are expected to be used for MSME lending by 2027, compared to 38% for retail lending. This is because of a fundamental challenge in business lending - a resolution or board approval is needed for the operator of the bank account to give consent to access. Sole proprietors are therefore the main users today.
The potential of AAs to revolutionise financial data sharing is undeniable. However, ensuring their long-term viability requires a solution that addresses the current FIP disincentives and explores alternative pricing models. Only then can we achieve a win-win for everyone involved and unlock the true potential of this financial data sharing revolution.
I’d love to know your experience with the AA ecosystem! Tell us in the comments section!
