Account aggregators: a game-changer for financial inclusion in India?

When a customer approaches a bank for a loan in India, they are invariably expected to provide a record of previous transactions and a statement of assets in support of their application. As the customer’s data is often spread across various entities, they can spend considerable time and resources to obtain the information and file it with the bank.

However, that expectation may soon change. In India, it is now possible to easily share this fragmented financial data with the help of the right technology, without the fear of data misuse.

The unique framework for financial data sharing, which is part of the country’s open banking initiative, has led to the creation of a new financial intermediary: account aggregators.

Data transfer

A new type of account manager, account aggregators work by accessing and transmitting customers’ financial data, facilitating consensual information flow from the data providers to the new users, such as a bank.

Customer consent is obtained through a client application programming interface. With this, customers can consent to sharing specific information about past financial transactions.

The protocols involved allow secure portability of data between financial information providers and the new users. The mobile or desktop application installed by the customer links them to duly-approved accounts and facilitate an account aggregator to transfer the data.

Acting only as a conduit, account aggregators can’t see the customer data, given the sensitivity of data privacy and the possibility for abuse of customer data. It is a fully encrypted process ,which does not allow intermediary to read, analyse or store the customer data. The data decryption only happens on the end-user’s device.

There are several additional protocols to ensure sanctity of the customer data. First, the customer data will be retained by the authorised financial information user only for the period for which it requires the data to process the customer application.

The consent given to an account aggregator for data sharing can be withdrawn by customers at any time. The data shared follows a standardised format. The data transmitted is also limited to financial investments, such as bank accounts and mutual funds, and exclude, for the time being, customer expenditure data, such as utility bill payments.

Second, the business would be exclusively driven by fees earned from providing the service to customers. Therefore, any opportunity to offer value-added services by accessing customer data is outside the purview of the current framework.

Finally, only regulated financial intermediaries are eligible to be part of the account aggregator ecosystem, so as to prevent any abuse of customer data. Intermediaries that want to receive customer data also need to sign up as a provider, as it ensures reciprocity and faster growth of the ecosystem.

With the participation of a range of financial intermediaries, banks, non-banking financial firms and insurance providers, the ecosystem is expected to reduce information asymmetry and lead to the standardisation of data flow between customers and creditors. Consequently, the cost of loan origination and underwriting can be considerably lower for the lenders.

On the other hand, the advent of this technology leaves customers with more control of their own financial data enhances their sovereignty as a result. The aggregation of fragmented customer data into a single record and its sharing is expected to significantly improve the access to financial products and the service experience.

Challenges and concerns

However, several hurdles remain. Financial illiteracy is widespread in India, so ensuring customers understand the meaning of consent would be a big challenge.

While the role of consent is paramount in the account aggregator framework, when there is a threat of a denial of service to customers by an financial information users, giving consent leaves no choice for customers.

Another concern is the lack of access to to digital infrastructure, particularly among poorer households in India. Limited digital inclusion would hamper the mission to significantly expand financial inclusion through the framework.

This framework is unique to India, as there are no clear parallels elsewhere in the world. While the UK has allowed a framework known as the registered account information service provider, it is limited to information related to banking, whereas the service in India can aggregate data from a larger set of sources.

As account aggregators could play a significant role in enhancing the financial inclusion of households at the bottom of the pyramid, this framework holds key lessons for other low-income countries. They may be able to leapfrog their financial inclusion initiatives and democratise access to financial services through a well-adapted consent framework that leverages the widespread penetration of affordable smartphones.

Joshy Jacob is an associate professor in finance and accounting at the Indian Institute of Management Ahmedabad and Balagopal Gopalakrishnan is assistant professor at the Indian Institute of Management Kozhikode.