How The Account Aggregator Framework Can Streamline Digital Lending

The digital lending market in India is rapidly growing. It registered an impressive growth from about $9 Bn in 2012 to nearly $110 Bn in 2019. With the Account Aggregator (AA) ecosystem all set to support it, the digital lending market in the country is expected to get a further boost.

A fully operational account aggregator ecosystem will not only pave the way for an open banking system in the country but also provide consumers with faster access to a range of financial products.

To understand how the AA ecosystem will add momentum to the growth of the digital lending market in India, let’s look at the current dynamics of this ecosystem and how it facilitates faster, better lending decisions.

What Is The Account Aggregator Ecosystem?

According to the Reserve Bank of India (RBI), an account aggregator is a data-sharing protocol between financial institutions, which include banks, insurance companies, non-banking financial companies (NBFCs), pension funds, asset management companies, and fintechs among others. 

At present, the account aggregator ecosystem in India has 76 certified entities comprising eight account aggregators, 29 NBFCs, 24 banks, 6 registered investment advisors (RIAs), 3 insurance companies, 3 stock brokers, one alternative investment fund (AIF), insurance broker, and pension fund, each.

Account aggregators may be viewed as digital conduits that seek consumers’ consent to fetch their financial data from a financial information provider (FIP) and share it with a financial information user (FIU). This data-sharing will be especially beneficial for loans and credit facilities, as it will increase the parameters used to evaluate creditworthiness and speed up access to relevant consumer information.

How The Account Aggregator Ecosystem Works

To visualise how this ecosystem speeds up lending decisions, let’s consider a digital lending platform that is integrated with the account aggregator ecosystem and already serving customers. The digital lending platform receives a loan application. It sends a request to a certified account aggregator, such as FinVu or NADL to share data about the prospective borrower.

The account aggregator uses a consumer-facing interface, such as an app, to seek consent from the applicant to fetch data, which may include bank account, insurance, tax, credit score details, and more. It then passes this data on to a digital lending platform, which can now use its AI-driven engine to analyse additional applicant data such as wealth investments, trading accounts, and even insurance covers to make data-backed lending decisions.

Faster, Better & Data-Backed Lending Decisions

At present, most lenders assess the creditworthiness of an applicant based largely on the information provided by the borrower in a loan application and the accompanying bank account statements. The information provided may be manipulated or incorrect, which can affect analysis and the final lending decision.

When lenders can integrate with the account aggregator ecosystem, they can access additional financial data of the borrower in question, such as credit history, banking behaviour, repayment pattern, current liabilities, inflow-outflow, and social behaviour, among many others. This helps to:

Boost Safety & Lending Velocity

By removing the roadblocks to data access, the AA ecosystem allows lenders to handle more loan applications in less time. Since the data is digitally signed by the financial information provider (FIP), such as the borrower’s bank, it is more reliable.

Using this additional and reliable data, NBFCs can enhance AI-powered credit decisions to improve data analysis and credit risk assessment, allowing them to conduct digital KYC, NACH (National Automated Clearing House), and agreements and immediately start driving business through digital channels. They can supplement the data in hand not only to strengthen machine learning models for more accurate and data-backed credit decisions but also to enhance predictive capabilities to prevent delinquencies or repayment failures.

Going forward, the inclusion of GST data and income tax data repositories as financial information providers can further transform the system and bring more borrowers, especially MSMEs within the lending realm. This move can pave the way for greater MSME credit, which was at a dismal 13.6% as of March 2022.

Improve Customer Experience

By leveraging the AA ecosystem, lenders can receive borrower data in real-time, which removes the need for the borrower to upload documents. Lenders are also able to leverage this real-time data to the source, enrich, underwrite and manage portfolios at a reduced turn-around-time (TAT), offering a faster and more seamless user experience. 

Access to additional data from a reliable source allows lenders to gain better insights into any discrepancy or mismatch in the data points, which can be used to mitigate fraud attempts at an early stage and safeguard the interests of genuine consumers.

Cross-Sell & Personalise Financial Products

Consumers invest in different types of financial assets through various applications. The AA ecosystem can enable lenders to offer more personalised and customised loan products to their customers. It is estimated that loans worth around INR 3,000 Cr have already been processed through this ecosystem.

Faster access to accurate consumer data will give lenders a competitive advantage over other market participants.  Lenders will be able to identify good customers for cross-selling and up-selling of other offerings. Even from the borrower’s perspective, the more data sources there are, the better the chances of getting the loan application approved.

Conclusion

The AA ecosystem’s momentum is expected to transform the way lending is done in the country and make open banking a reality. At present, the AA ecosystem is evolving rapidly in the country. The entities in the ecosystem are being certified to ensure compliance with all of the central bank’s data security standards. Efforts are also being made to provide a level playing field to all the participating entities.

Similar to what UPI did to digital payments, an evolved and stable account aggregator ecosystem can revolutionise the digital lending market in India.