BANGALORE - The Indian central bank's long-pending bid to make financial data more easily accessible to lenders kicked off earlier this month as eight major banks joined a network of digital intermediaries called Account Aggregators (AAs).
Conceived in 2016, AAs are licensed by the central bank and allow a lending bank or fintech company to digitally "see" all the financial data of a borrower, with just a few clicks.
Most countries have credit bureaus that provide credit-related information like bank balances and pending loans, but India's AA technology aims to triangulate much more personal financial data, including tax, insurance, pension and eventually, electricity and phone bills.
With banks on board now, AAs will first give a boost to India's lending ecosystem. Financial institutions will now be able to reach a whole host of first-time borrowers.
Today when a borrower goes to the bank for a loan in India, he has to be armed with copies of statements from his other banks and the sales tax department to demonstrate his net worth or his company's healthy cash flow. The borrower could also be a small enterprise.
Now, if the borrower uses an AA through a mobile phone application, the lending bank could place an online request for the borrower's relevant financial data directly from other banks and the tax authorities. They can access it once the borrower gives digital consent through the AA.
Like a search engine, an AA pulls all the relevant financial information about the borrower and places it in front of the lending bank, fintech or non-banking institution, so that the lender can assess the credit worthiness of the borrower.
This job is currently done by credit bureaus, like CIBIL in India, which analyse a person's loan details and offer a credit score.
But Mr Navin Surya, chairman of the Fintech Convergence Council, explained that AAs could share even more financial information - if the individual consents to it.
He described AAs as "a pipeline" through which financial data flows from the information provider to the requester. Technically, the individual - called the data principal - would have control over what data to share, when and to whom.
The proponents say AAs will enable unprecedented financial inclusion, especially benefitting small enterprises and people who have never taken formal loans before.
Even though 80 per cent of India's population has a bank account, only 8.1 per cent have borrowed from financial institutions or used a credit card, according to the World Bank's Global Financial Inclusion report in 2017.
"If you're first to credit, you won't have a credit score and no way to demonstrate your ability to repay. AAs allow banks and fintech companies to access your sales tax information, bank account deposits and cash flows in a secure way to judge your creditworthiness," said Mr Surya.
Today, lending is the first use of AAs. The central bank has allowed only banks and non-banking financial institutions like fintech companies to provide data.
Mr Srikanth Rajagopalan, chief executive of Perfios Account Aggregation Services, explained that "automation in lending today is limited by friction in fetching data and validating its authenticity". Perfios is one of the licensed AAs.
The first adopters of AAs would help make financial data more standardised, digital and machine readable.
"The more granular, authentic, digital and real-time data, the faster we can innovate for the client requesting the information," Mr Rajagopalan said.
He said that as at earlier this month, around 10,000 customer bank accounts have been linked, and 14,000 requests for data placed in the AA ecosystem.
When the goods and services tax network, insurance companies, mutual funds, pension funds and utilities like electricity and telecom companies are also allowed to share their customer data, aggregation would expand and scale up, Mr Rajagopalan added.
Digital lending apps that give small-ticket loans to people without collateral are excited. Instead of depending on phone and personal data, they can now access a wider range of authenticated financial data to assess an applicant's loan eligibility.
"Customer verification is at the very centre of the digital lending process. With AAs… we expect to catalyse our business, serve our customers with shorter turnaround times, and overall ensure a safer financial environment," said Mr Raghuvir Gakhar, chief executive of lending app CashBean.
AA builds on the architecture of the United Payment Interface (UPI) that since 2016 allows instant money transfer between any two bank accounts on a mobile phone platform.
UPI accelerated digital transactions in a cash-loving country. Digital payments have since jumped threefold amid the Covid-19 pandemic.
As at July, UPI processed a record 3.24 billion transactions worth 6.06 trillion rupees (S$110 billion).
"If the UPI technology exchanges money, AAs exchange information," said Mr Shashidhar K.J., an associate fellow specialising in financial technology at Observer Research Foundation.
AAs push forward the dominant approach to data in India, where the government and software industry evolve technological frameworks that encourage individuals to use their personal data for services rather than focus on prevention of harm like in the European Union.
Unlike credit bureaus, the aggregators do not store or read the data they transfer, but Mr Shashidhar was concerned that AAs and UPIs had a "very nominal way of getting consent", getting "a virtual Yes/No from the customer rather than providing information to decide if you should share your financial data or not".
India still does not have a data protection law, without which there are no consequences and penalties for data theft, misuse or loss.
"If AAs have to scale up without looking over our shoulder, India urgently needs a privacy law," said Mr Rajagopalan.