Business transformation exists at the intersection of enriched customer experience and greater operational control. Nevertheless, while Digital, the motive force behind transition in the 21st century, has made noticeable inroads into the Indian BFSI landscape, significant challenges still persist on both sides of the banking desk. But in the New India that is surging ahead, is it fanciful to imagine a reality where data is democratized, trust is distributed, and the need for confidentiality does not necessarily stymie financial services growth? With the rollout of the Account Aggregator (AA) Framework well underway, such a future might be much nearer than we think!
As a concept, the Account Aggregator Framework has its origin in the recommendations of the Justice B.N Srikrishna committee on framing data protection norms, set up by the Ministry of Electronics and IT and the subsequent Personal Data Protection Bill 2019 (PDP Bill) defining the rights of the citizens over their personal data and the regulations for entities accessing them. The Framework creates Account Aggregators, a new class of RBI-approved NBFCs, as a custodian of consent for sharing financial data and came into existence through an inter-regulatory collaboration by the RBI, SEBI, IRDAI, PFRDA, and FSDC. The AAs are mandated to extract, aggregate and transfer, but not read or store encrypted financial data of the BFSI service customers. Besides, the system also provides for Financial Information Providers (FIPs), acting as the source and Financial Information Users (FIUs) representing the point of consumption for the digitally consented personal and business data channelized through the AAs.
The arrangement is in tune with the vision of a digitally progressive India that acknowledges the true worth of data and the implications of its unrestricted availability to the interest of the institutions and the individuals alike. In one fell swoop, it targets to address a plethora of data-access problems that have hamstrung banking operations hitherto in the subcontinent, undermining service innovation at scale. It ranges from inherently paper-based processes that are iterative, time-consuming, and fragmented, decentralized verification task loads requiring repeated collaboration with third parties to a lack of communication between stakeholders. Undeniably the shift of banking towards an AA-driven reality is posed to redefine the experience of the Indian consumers, simplifying service delivery with a degree of control unimaginable before. Nevertheless, do the BFSI players also stand to reap an equal if not a greater dividend by deliberately undertaking the AA journey?
Apparently, yes! In fact, the case to be onboard the AA ecosystem has been compelling enough for at least eight Indian banking majors, plugging into the shared financial data pool as early as September 2021. It includes the behemoths across the public and private sectors. While the numbers are only expected to go north in the days ahead, here is an account of what AA means for the future of financial data sharing and the institutional benefits such realities are likely to translate into:
A recent consumer survey has revealed a rather curious trend, with 71% of the banking insiders believing that enriched experience elsewhere has made the subscribers aspirational, expecting more from their BFSI service providers. While the digitalization or appification of financial services in India has phenomenally expanded credit growth, operationally, the processes still remain mostly hybrid, requiring complex documentation through manual interventions. In a young and credit-hungry country like India, TransUnion found that 70% of the applications are discontinued prematurely for being too cumbersome, adding to the toll of lost opportunities for the lenders.
In respite, the AA Framework promises to make the straight-through processing of loan applications possible. The loan applicant simply needs to register with the available AA players in the market, creating a handle in the format mobilenumber@AAname and linking the relevant bank accounts with it. Now, instead of manually uploading documents like bank statements, the applicant can share the handle and the consent for the lender to access the bank accounts.
However, this approach to customer data sharing is by no means a carte blanche. Instead, it attempts to put a lid on all apprehensions around the misuse of personal financial information through unfretted access and opaque data-sharing policies. The AA philosophy effectively puts the financial services consumer in charge, clearly laying down the type, scope, and most importantly, the time horizon for which personal financial information will be available in the ecosystem as part of a signable consent artifact. The provision bears unmistakable reminiscence to the Right to erasure clause under Article 17 of the European General Data Protection Regulation (GDPR). The lender, acting as the FIU, can use the APIs to pull the applicant's encrypted financial datasets from the designated FIP, strictly adhering to the norms enclosed by the consent artifact. With the AA acting as the orchestrator, it streamlines the journey and saves time and administrative overheads in the process.
Globally, fraudulent activities continue to threaten banking revenue and credibility, with KPMG reporting that most of the victims can recover only 25% of the losses. The situation is no different in India, where a recent response to an RTI query revealed that FY21 witnessed banking frauds involving ₹ 1.38 lakh crore, of which only 1% have been recovered so far. The implications are dire for the Indian banking industry already smarting under a cumulative NPA burden that is projected to rise at least 8% by the closure of FY22.
However, while the AA Framework cannot indemnify the losses incurred, it surely offers a robust hedge against transactional, behavioral, or even metadata-driven fraud risks. The direct data flow, from FIP to FIUs, via AA eliminates the role of scanned bank statements and even downloaded PDF files from the equation that are prone to tampering. Even for the banks that currently employ human agents to scrutinize and validate the uploaded information, the AA-powered workflows simplify the process, saving costs and delighting the bonafide borrowers. Further, this guarantee of access to only authentic financial information can help the lender price the risk better and weed out bad borrowers early in the journey. Reliable credit insights play directly into improving customer satisfaction and ensuring a healthy loan book.
Banks store more than money. In the digital economy, banks are the repository of information, enough for complete customer profiling. Globally this brings the BFSI institutions into the focus of a heated debate on their role in facilitating the dubious use of data by third-party agencies, often outside banking. While the outcomes remain a story for another day, it is discomforting enough for the image of the institutions that run chiefly on trust and good faith. In fact, the Delhi High Court in 2019 reprimanded the apex bank from acting on a PIL seeking to stop banks from sharing the PAN and transactional data of the customers with the credit rating agencies without their overt consent.
While Caesar's wife must be above suspicion, the AA Framework, by eliminating the physical handling of financial data, renders digital lending more transparent, user-driven, and resilient to unsolicited profiling. Besides encrypted data transfer between the FIPs and FIUs, Account Aggregators incorporate digital ethics and conclusively address concerns around information privacy and security by emphasizing time-bound, use-case-wise access to data only after obtaining the requisite permissions.
The launch of the OCEN Framework of APIs by IndiaStack in 2020 has been envisioned to facilitate interaction between the lenders, loan service providers (LSPs), and AAs, improve consent-based access to data from multiple public and private sources, and write a new chapter in India's story of credit growth. With both the OCEN and the AA Frameworks in place, the stage is set for the financial services businesses to create feature-packed yet affordable products and expand their reach by helping LSPs host them as Embedded Finance in their environments. In this symbiotic relationship alongside the FIs, the LSPs stand to win with the significantly low cost of business acquisition, availability of reliable data, complete visibility into credit usage, and much greater control of the flow of payments. These factors will likely bring forth a climate conducive enough for the LSP to bloom into full-scale lenders.
Not only lending but the emergence of the AA ecosystem serves as an impetus for the evolution of other services like Portfolio Management and Advisory in India. With all the financial sector regulators already stakeholders within the AA Framework, it is now possible for the BFSI businesses, acting as either FIP or FIUs, to attach all the asset classes with a single approval, generating an end-to-end visibility of the customer's portfolio. While the banks and other FIs already offer Financial Management services for their customers, their active participation in the AA ecosystem will only improve the depth of their offerings. With the universal consent and availability of customer datasets that were inaccessible until now, it will be feasible for the BFSI players to capitalize on the upselling/cross-selling opportunities, unlocking new revenue streams.
The AA Framework is an idea whose time has come. More so in a country like India, with its immense economic potential, that is not shy to reach out and embrace positive shifts. Although still in its infancy, the AA ecosystem in India is treading towards attaining critical mass. With at least 22 million new loan applications originating within the Indian BFSI environment each month, the industry is undeniably primed for changes that ensure greater speed, accountability, convenience, and scale.
Today, holding on to conventions may risk staying on the slow lane of growth! Nevertheless, how should those willing to transform choose the right AA-enabled solution for the journey? Please read about it all in our next blog.