Recently, the Reserve Bank of India launched the Account Aggregator Framework aimed at making financial data more easily accessible.
Under it, a number of fin-tech entities have been granted the licence to operate as account aggregators.
Eight large banks have also agreed to share various financial data about their customers with account aggregators.
What is an Account Aggregator?
- According to the Reserve Bank of India, an Account Aggregator is a non-banking financial company engaged in the business of providing, under a contract, the service of retrieving or collecting financial information pertaining to its customer.
- It is also engaged in consolidating, organising and presenting such information to the customer or any other financial information user as may be specified by the bank.
- The Account Aggregator framework was created through an inter-regulatory decision by RBI and other regulators including Securities and Exchange Board of India, Insurance Regulatory and Development Authority, and Pension Fund Regulatory and Development Authority (PFRDA) through and initiative of the Financial Stability and Development Council (FSDC).
- The licence for Account Aggregator is issued by the RBI, and the financial sector will have many AAs.
- The Account Aggregator framework allows customers to avail various financial services from a host of providers on a single portal based on a consent method, under which the consumers can choose what financial data to share and with which entity.
How will an account aggregator work?
- The framework will allow financial data to be exchanged between the holders of data and its users.
- The RBI has allowed a number of companies like PhonePe to act as account aggregators to facilitate this process.
- Account aggregators will act as intermediaries who will collect data from one financial entity and exchange it with another.
- For example, a bank which is processing a loan application from a potential borrower may want to access a variety of financial data about the borrower.
- The lending bank can access details of the borrower’s savings, past loan repayment record, mutual fund holdings and insurance holdings through an account aggregator.
- The borrower, however, will have to grant consent for the sharing of his data with the lending bank.
What purpose does it serve?
- According to iSpirt, a think tank for the Indian software products industry, an Account Aggregator framework creates secure, digital access to personal data at a time when Covid-19 has led to restrictions on physical interaction.
- It reduces the fraud associated with physical data by introducing secure digital signatures and end-to-end encryption for data sharing.
- These capabilities in turn open up many possibilities. For instance, whereas physical collateral is usually required for an MSME loan, with secure data sharing via AA, ‘information collateral’ (or data on future MSME income) can be used to access a small formal loan.
Benefits of having Account Aggregator Framework:
- At the moment, the various financial data of an individual is scattered across the databases of several financial institutions.
- So, a person’s savings and loans data may be with a bank, his investments data may be with a mutual fund, while his insurance data may be with another financial entity.
- Under the account aggregator framework, all this data can be easily collated and shared through account aggregators with the consent of the individual.
- Proponents of the framework believe that the easier availability of data will have significant benefits for the economy.
- They believe the framework will help financial institutions make better assessment of the creditworthiness of individuals, and thus make better loan decisions.
- Even though mechanisms such as CIBIL already exist to assess the creditworthiness of individual borrowers, their scope is limited.
- An individual’s PAN number, for instance, captures only a limited number of transactions which are of value higher than a certain minimum threshold amount.
- It is said the framework will offer a wider array of data to financial firms, making them more willing to serve creditworthy populations that they earlier ignored.
- Account aggregators can also make life easier for creditworthy customers by allowing them to share their financial data digitally with ease, it is believed.
- The availability of wider financial data may also help financial institutions offer better products tailored to the needs of individual customers.
- The issue of the security of the financial data of individuals will be a looming concern going forward, given the risk of data theft.
- To protect the privacy of individuals, account aggregators are supposed to receive and share financial data in an encrypted form.
- However, RBI said that data transmitted through the AA is encrypted. AAs are not allowed to store, process and sell the customer’s data.
- No financial information accessed by the AA from an FIP should reside with the AA.
- It should not use the services of a third-party service provider for undertaking the business of account aggregation.
- User authentication credentials of customers relating to accounts with various FIPs shall not be accessed by the AA.
- The RBI has also said the data ownership will reside with individuals. More financial firms are expected to get on board the framework as offering access to their financial databases will help them gain access to the databases of other firms.
- Over time, financial institutions may also mandate access to data available through account aggregators as a condition for individuals to receive loans and other services.
The eventual success of the framework, however, will depend on multiple factors.
Some believe an individual’s PAN number may be a better way to access his financial data as it serves as a common link between multiple accounts maintained by an individual.
Further, the extent to which financial firms desire extensive, micro-level financial data from their customers and the enthusiasm among customers to share their data will also play a crucial role.