Just like last time, let’s start simple.
If you're a leader at a growing MSME this scenario might be familiar to you. Let's say you have a great business opportunity, but that requires that you organize credit urgently. Your bank has a scheme for issuing a loan to you – but even though you've been a current account customer for years, they still need to follow their policy and ask for a huge amount of physical paperwork and personal guarantees for credit disbursal. The list looks daunting: statements from your bank accounts, previous loan statements, insurance details, transactions histories, cash flow statements, GST returns... the list is endless, and by the time you can collate it all together, make multiple trips to the banks and institutions to get it ready, it is too late for the opportunity.
This is where the Account Aggregator framework comes in.
Quick and smooth access to capital has been a long-standing problem for the MSME sector - but we are close to addressing it with the Account Aggregator framework, recently launched by the RBI in conjunction with the Ministry of Finance.
What is the Account Aggregator Framework?
A customer’s financial data is usually fragmented – it is maintained in silos in the private databases of organizations who typically do not talk to each other. We’re talking about banks, lenders, insurance companies, government bodies, etc. This data is primarily controlled and used by the respective companies or organizations for their own benefit.
But imagine if there was no longer a monopoly on the use of this data – so that digital and financial services companies could share the control of personal and transaction data.
This consolidation of data could be put to use to derive significant economic value from the data. The Account Aggregator (AA) is envisioned as an institutional framework that will allow for consented data sharing digitally between borrowers and lenders for smoother credit access. It does the work of collating the information that a lender needs to determine the creditworthiness of a potential borrower, and brings in efficiency and transparency to the process. This would dramatically improve the ease of access to capital for MSMEs, especially in rural areas, as there would be no need for physical verifications and checks in multiple places.
Seen from a holistic perspective, it’s an important new addition to the Indian Digital Infrastructure framework as it reduces the transaction costs and potential for frauds for the financial institutions. This is because the AA provides a clearer view about multi-layered financial transactions across financial institutions. This innovation ensures that the consented access to personal data can be leveraged to make it easier to access financial instruments like enterprise loans, to unlock greater business opportunities.
How does the AA work?
The AA framework has been in the works for over five years, a step in the direction of putting India on the global map when it comes to digital innovation. Eight of India's major banks covering over 300 million consumers have already adopted the AA standards, with more to join.
To understand how the AA framework will operate, let us understand its players:
Consumer – It begins with you, the consumer, and your consent to use your financial data.
Financial Information Providers (FIP) – These could be banks to tax platforms to insurance players with whom you have transacted in the past. They will be the key sources of your data.
Financial Information Users (FIU) – These could be banks, NBFCs and new-age fintech firms; they would use the data to offer competitive financial products and services to you.
Finally, Account Aggregators (AA) – These are RBI-regulated entities that will allow people and businesses to share data that comes from FIPs with FIUs in real time. Account Aggregators do not store any data. They are just data blind pipes that assist in digital transfer of data, which the customer chooses to share, from one entity to another.
What this means for MSMEs
Only 10% of India’s 63 million MSMEs have access to formal credit – and I see the AA framework as a gamechanger in this scenario. MSMEs will be the biggest beneficiaries of the framework, that will disrupt the status quo in the ways of accessing credit. It will seamlessly consolidate latest financial information on businesses across different sources in real time. This will eliminate the need for borrowing from informal sources at the unnaturally high interest rates, or to let go of the business opportunities.
I see the creation of a consented data sharing national infrastructure having the potential to transform the financial fortunes of the country’s MSMEs. After seeing the tremendous success of building public digital infrastructure for identification with Aadhaar and digital payments with UPI, India has now added the ability to digitally access data. With this we will free up the flow of credit to small businesses and enable easier access to a variety of customized financial products for businesses across the socio-economic strata.
This is an iSpirt infographic that should be used with permission. Else, GMF should create a version of this.