ACCOUNT AGGREGATOR SERVICES IN INDIA

Abstract:

Account Aggregator Service, a regulated entity under the jurisdiction of the Reserve Bank of India (RBI), is revolutionizing the borrowing habits of the Indian consumer. This innovation has the potential to transform the landscape of investing and credit, empowering millions of consumers with increased access and control over their financial data. It also opens up new opportunities for lenders and fintech companies by broadening the prospective customer base and enhancing the efficiency of financial transactions. The article gives an overview of the AA Ecosystem in India.

Account Aggregators: Introduction and History

 The word Aggregator means ‘a website or program that collects related items of content and displays them or links to them’. In the banking context, the process of Account aggregation refers to gathering financial information from multiple accounts across various financial institutions and presenting it in a unified view. This aggregated data can include bank accounts, credit cards, investments, loans, and other financial assets and liabilities. Account aggregation services are typically offered by financial technology (FinTech) companies and apps.

Account Aggregator Services (AA Services) in India are a part of the country’s push towards a digital economy and financial inclusion. These services enable individuals and businesses to access and share their financial data seamlessly and securely across various financial institutions. Account Aggregators act as intermediaries that facilitate the exchange of financial information between financial institutions with the user’s consent. In India, these institutes are RBI-regulated entities (Holding NBFC AA licenses). RBI, IRDA, SEBI, and PFRDA came together to create the ecosystem for the AAs.

In a nutshell, Account Aggregators are:

• An interoperable data blind consent manager that cannot read or resell customer data.
• Empower consumers to selectively share and even revoke data once shared.
• Are RBI-regulated entities and have a fiduciary duty to consumers, sharing digitally signed and encrypted data.

Account Aggregators (AAs) are a relatively new concept in the Indian financial sector aimed at revolutionizing how individuals and businesses access and share their financial data with various institutions.

Here is a brief history of Account Aggregators in India:

2016-2018: The Genesis and Initial Development

• The idea of Account Aggregators was initially introduced by the Reserve Bank of India (RBI) in the “Report of the Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households,” commonly known as the Nachiket Mor Committee report, released in December 2013. This report emphasized the necessity for an account aggregator framework to rectify the prevailing disparities in the financial landscape. It specifically underlined the significance of streamlining the procedure for obtaining financial data with the goal of enhancing credit accessibility for disadvantaged and underprivileged populations.
• In 2016, the Reserve Bank of India (RBI) established a working group with the aim of offering recommendations related to the operational and regulatory framework for Account Aggregators. This working group subsequently submitted its report in the same year, providing a comprehensive outline of the fundamental principles and structure governing Account Aggregators. In 2017, the RBI took further steps by releasing a consultation paper to solicit public feedback on the concept of Account Aggregators and the potential regulatory framework surrounding them. Building upon these recommendations, the RBI went on to issue the “Master Directions on Issuance and Operation of Prepaid Payment Instruments in India” in October 2017. These guidelines set forth the regulatory framework for Account Aggregators, clearly defining their roles and responsibilities and establishing the operational guidelines for their functioning.
• In 2018, the RBI released a framework for Account Aggregators and invited applications for licenses.

2020: First Set of Account Aggregator Licenses

• In 2020, the RBI granted the first set of licenses to four entities to operate as Account Aggregators: CAMS Finserv, Cookiejar Technologies Pvt Ltd (Finvu), Finbox India Private Limited and NESL Asset Data Limited. These entities started collaborating with financial institutions, such as banks, mutual funds, insurance companies, and pension funds, to enable the seamless sharing of financial information with the consent of the users. The primary objective was to facilitate easy access to financial services, credit, and other financial products for individuals and businesses. These companies were tasked with developing and offering AA services to individuals and businesses to enable them to access and share their financial data with their consent.
• As the ecosystem developed further, an increasing number of entities showed interest in becoming Account Aggregators, resulting in the expansion of this sector. Users also embraced the Account Aggregator framework, appreciating the enhanced control it offered over their financial data.

2021 and Beyond: Wider Adoption

• On 2nd September 2021, the Account Aggregator (AA) framework was introduced in India by the Reserve Bank of India (RBI) with the application in eight major Indian banks. These banks include Axis Bank, Kotak Mahindra Bank, ICICI Bank, State Bank of India, IDFC First Bank, HDFC Bank, Federal Bank and IndusInd Bank.
• As of date there are 14 AAs with Operating NBFC-AA License and 3 with in-principle approval.
• As of date in total 85 FIPs are live on the AA interface, which includes 27 Banks, 31 RRBs, 18 insurers, 3 CRA (Central Record keeping Agencies), 2 depositories, 2 RTA (Registrar and Transfer agents), and government institutes like GST.
• Following is the chart depicting Cumulative Count of Accounts Linked by Account Holders from Aug 2021to October 2023

 

This model contains four parties:

1.    Consumer:A Consumer has his/ her bank account with a bank, Insurance policies with the insurer, investment portfolio with MF houses, and if a businessperson, must be filing GST. Through API (Application Programming Interface), which can be thought of as a contract interface between two applications, a consumer gives consent to share data through Account Aggregators.
2.    Account Aggregators (AA):These institutions act as FDAF ( Financial Data Access Fiduciary) or in simple language Consent Managers. They simply allow users to share the data with Financial Institutions/ Service Providers in exchange for Insurance, easy access to credit and other financial products, or even for simply tracking one’s investment portfolio.
3.    Financial Information Providers (FIP):Institutions like Banks, Mutual Fund houses, Insurance Providers, and Tax/ GST platforms are categorized in FIP in this model as these offices/ institutes provide consumer data through the AA pipeline.
4.    Financial Information Users (FIU):Institutes that provide personal finance management, flow-based credit, and wealth management services like Banks, and NBFC are users of these data. The inbuilt framework allows users/consumers to choose whom to share data with, what data they want to share, for what time period, and for what purpose and revoke. An FIU can also be an FIP or vice versa.

How it works:

User Consent: When a user wishes to share their financial information with a third-party application or service provider, they grant their consent to an Account Aggregator (AA). This consent can be granted through a digital platform or a mobile application.

Data Request: The third-party service provider, such as a FinTech app or lending platform, initiates a data request within the Account Aggregator ecosystem. They specify the specific financial data they require.

Data Retrieval: The Account Aggregator then retrieves the requested financial data from the user’s financial institutions, which can include banks, mutual funds, insurance companies, pension funds, etc. also known as FIP (Financial Information Providers)

Data Sharing: Subsequently, the financial data is securely transmitted from the Account Aggregator to the authorized third-party service provider. Secrecy in these data transfers is governed by guidelines of ReBIT (Reserve Bank Information Technology Pvt Ltd.)

Data Analysis: The FIU can utilize this data for in-depth analysis, enabling them to offer tailor-made financial services or products to the user. This may involve assessing creditworthiness for loans or recommending suitable investment opportunities.

Use Cases:

• Many Personal Finance Management (PFM) apps use account aggregation to provide users with insights into their spending habits and financial behaviors and also provide ways for better financial management. Also, advisors use aggregated data to offer personalized financial advice and planning services.
• Lenders can use aggregated financial data to assess a borrower’s creditworthiness more comprehensively and drastically reduce TAT (Turnaround time).

Benefits:

• Ease in data collection: Account aggregation services collect data from different sources such as banks, credit unions, credit card companies, and investment firms. This data can be accessed through APIs (Application Programming Interfaces) with user consent. This process saves time as till now loan application and processing journey is cumbersome as one has to share physically signed and scanned copies of bank statements, get notarized/ stamped declarations, which raises a huge chance of financial data theft.
• Simplified Financial Management: Once the data is collected, it is consolidated and presented to the user in a single interface. Users can view their overall financial picture, including account balances, transaction history, investment portfolios, and outstanding debts, all in one place. Users can track their finances more easily by having a centralized view of all their accounts.
• Budgeting and Planning: Aggregated data helps in budgeting, expense tracking, and financial planning.
• Holistic Analysis: It enables users to analyze their spending patterns, investment performance, and overall financial health comprehensively.
• Security and Privacy: Account aggregation services must adhere to strict security standards. They use encryption and other security measures to protect user data. Additionally, users must provide explicit consent for these services to access their financial information.

Challenges:

• Security Concerns: While security measures are in place, there are always concerns about data breaches and unauthorized access.
• Data Accuracy: Sometimes, there might be discrepancies or delays in updating the aggregated data, leading to inaccuracies.
• Regulatory Compliance: Companies offering account aggregation services need to comply with financial regulations and data protection laws.

Conclusion:

To summarize, account aggregation services have emerged as potent tools for both individuals and businesses seeking a comprehensive understanding of their financial accounts and transactions. These services securely gather and present data from diverse financial institutions in one centralized location, simplifying financial management and decision-making. Users can efficiently monitor their income, expenses, investments, and debts, ultimately improving their financial planning and budgeting. Additionally, account aggregation bolsters data security by minimizing the necessity of sharing sensitive login credentials with third-party applications. Nevertheless, it remains crucial for users to exercise caution, selecting reputable and secure aggregators while prioritizing data privacy and maintaining a vigilant stance regarding cyber security. When taking the necessary precautions, account aggregation can prove to be an invaluable asset in achieving financial goals and retaining control over one’s financial life. By offering a holistic perspective on their financial standing, account aggregation empowers both individuals and businesses to make well-informed financial decisions. Nonetheless, users must always prioritize security and privacy when utilizing such services, opting for reputable and trusted providers. This system streamlines financial transactions, reducing the time and effort required while providing a convenient and efficient means of sharing financial information without manual intervention.