Last week was a landmark one for Indian financial services. The Account Aggregator (AA) system was launched with the express intent to bolster lending in India through digital means, while keeping user privacy and data intact. This system enables data collection with user consent, to be shared among financial institutions. By opening up information siloes, institutions are poised to better understand potential customer preferences and offer products and solutions accordingly. At a virtual event, RBI deputy governor M Rajeshwar Rao officially unveiled the Account Aggregator (AA) ecosystem, stating that the system will facilitate the sharing of financial data in a ‘secure, transparent and efficient manner’, eventually expanding the scope of delivery of financial products and services beyond what we’re normally accustomed to.

How does it work?

Let’s assume you’re a small business owner in a Tier 2 Indian town seeking a loan. It is customary to go to a bank to apply for a formal loan. The bank or a Financial Information Provider (FIP) has a finite kind of data about customers like you – most likely your banking records, proof of employment, proof of residence and possible credit history. Sometimes, this isn’t enough to enable an extension of a line of credit. AAs, through an open system, enable the entry of various data sources that build on your customer profile and share this information with other Financial Information Users (FIU). Suddenly, the financial institution in question has a varied data sketch of you, enabling them to make a more informed, expansive data-driven decision. AAs act as a conduit to collect information from FIPs and share them with FIUs.

FIPs are commonly banks, mutual fund houses, GST platform and the national income tax portal. FIUs are banks, NBFCs, pension funds, insurance agencies, robo advisers, wealth managers and asset management agencies. Only after the user provides consent do these two kinds of information portals begin to share data with each other.

Building consent in the architecture:

This AA platform particularly emphasizes on individual consent and has made provisions within the framework to ensure user data is always protected and encrypted – a feature that is garnering praise from policy makers, lawmakers, industry, and users.

To date, India doesn’t have a data protection bill. However, Indian think tank for software products iSPIRT suggested a novel approach with the Data Empowerment and Protection Architecture (DEPA), granting users autonomy over the use of their personal data. AAs are not allowed to even see the data, let alone use it. Consent is expressly needed to extract and use this data. This feature paves the way for a healthy discourse on consent-based software architecture for other applications in the future.

In addition to DEPA, the OCEN framework – a collection of APIs for small borrowers, lenders and loan service providers will make the AA ecosystem more successful.

The Future of AI in AAs:

With the introduction of AAs, India’s lending ecosystem has progressed to a new paradigm altogether. Already, eight major Indian banks - State Bank of India, ICICI Bank, HDFC, IDFC First Bank, Kotak Mahindra Bank, IndusInd Bank and Federal Bank – are part of the AA network. Payment provider PhonePe and fintech Fi too have joined this ecosystem, signalling the way for more data-rich financial companies to join this collaborative. The future of credit looks promising, as the access to a line of credit just became more democratized.

This development was poised to thrive on the power of AI. Sahamati, the not-for-profit collective to drive the AA, organized hackathons until early August. Teams of coders were encouraged to consume mock APIs and dummy data in order to simulate the functioning of the AA framework. Using these tools, teams could build applications that can leverage financial data to deliver value to users, such as Personal finance management (PFM) apps, price comparison and cost saving recommendation engines, robo-advisors for investment advice and data ingestion & underwriting tools for lending or insurance. In addition, Sahamati allows Data Analytics Technical Service Providers to enhance the suite of solutions to the AA framework. While the FIP-FIU service providers are providing FIP-FIU modules, there are a host of other services that too require the full use of the data received from the Account Aggregator digital public rails. These include underwriting models, SME scorecards, early warning monitors for lending and wealth management and a Lead Management System.

This initiative is being viewed as a great leveller for financial services in India. AI is already widely used to solve a host of challenges in banking and lending, so its efficacy isn’t in question. However, solution providers and policy makers have always wondered how to bridge the great tech divide and enable the flow of these services to the ones who need them the most. The newly-launched AA ecosystem could be the ideal first step to that.