By Kamal Misra, Senior Director and Head of Banking, Capgemini Invent India
The Indian banking sector has witnessed a striking transformation in recent years thanks to technological advancements and regulatory reforms. The concept of “open banking”, which emphasizes data sharing and collaboration among financial institutions, has gained significant traction worldwide. In India, the implementation of the Account Aggregator (AA) framework has emerged as a crucial catalyst to boost the open-banking ecosystem. Moreover, this dynamic environment has paved the way for neobanks in India to leverage the AA system’s opportunities by creating innovative products and services.
In India, where nearly 130 million people remain unbanked, the advent of the AA framework promises to push the envelope in favor of digital lending and open banking. The AA framework, introduced by the Reserve Bank of India (RBI) and the Government of India, principally aims to empower consumers by enabling them to share their financial data securely and electronically with regulated financial institutions. The AA framework’s underlying tenets and operating principles can be harnessed effectively to revolutionize credit availability and the accessibility of innovative services for customers.
A brief overview
India is no stranger to the notion of data exchange, be it personal or financial, through its diverse and deep-rooted community and joint-family systems. The hinterlands of India have vividly mimicked the concept of open-data exchange since time immemorial in informal and unregulated settings. Be it village marketplaces, trade fairs or family weddings, data flows are rampant amidst convivial dispositions, suitably aided by blends of barters, bargains and bonhomie. Data in all its forms—personal information, behaviors, choices, influences, financial statuses and much more—regularly scales boundaries and traverses with ease within this amicable socio-cultural setup.
Switching over to the urban echelons, the AA framework is designed to streamline the sharing of financial data among various financial institutions, including banks, non-bank financial companies (NBFCs) and other regulated entities. This sharing is facilitated by account aggregators, licensed entities that act as intermediaries between financial information providers (FIPs) and financial information users (FIUs).
Under the AA framework, consumers can consolidate their financial information across multiple institutions, such as banks, insurance companies and mutual funds, into a single dashboard. They can then share this data with FIUs, which can use it to tailor financial products and services, such as loans, insurance and investment advice. All the while, the system banks on consumer consent as the sole qualifying criterion to access their data, in the absence of which there is no flux.
Spearheading digital-lending transformation through the AA framework
The AA framework is poised to drive digital lending in India by increasing access to credit, enhancing credit assessments and reducing the time and costs of lending. Here are some use cases illustrating how this framework can propel digital lending:
Expanding access to credit: The AA framework enables consumers, especially those without traditional credit histories, to share their financial data, such as incomes and expenditures, with lenders. This data can help lenders better assess creditworthiness, thus expanding access to credit for underserved segments, such as small and medium-sized enterprises (SMEs) and low-income individuals.
For instance, the AA framework allows a small-business owner to share his or her transaction histories from multiple banks with a digital lender, which can then use the data to extend a loan. This could help bridge the credit gap in India, where SMEs face a projected credit shortfall of about $25 trillion, according to various estimates.
Enhancing credit assessments: The AA framework can improve credit assessments by providing lenders with comprehensive views of borrowers’ financial health. Lenders can leverage this data to make more informed lending decisions, reducing default rates and boosting profitability.
A leading Indian fintech (financial-technology firm) specializing in online mortgages utilizes the AA framework to access borrowers’ financial data, allowing it to assess credit risks more accurately and offer tailored loan products. Research think tanks claim to have found that lenders using data from the AA framework can reduce their default rates by up to 50 percent, translating to an approximately 15-percent improvement in their returns on assets.
Reducing the time and costs of lending: By enabling seamless data sharing, the AA framework can significantly reduce the time and costs of lending. Digital lenders can use the AA framework to automate loan underwriting, helping them to disburse loans faster and more cost-effectively.
A leading Indian fintech, which provides digital loans, leverages the AA framework to streamline loan processing and reduce the time taken to approve and disburse loans. Research indicates that digital lenders using the AA framework can virtually halve their existing loan-processing times, enabling them to serve more customers and increase their market shares.
Fostering open banking through the AA framework
The AA framework also has the potential to foster open banking in India by promoting competition, innovation and customer centricity. Here are some ways in which the AA framework can drive open banking:
Promoting competition: By enabling data sharing, the AA framework can level the playing field for both incumbents and new entrants in the financial sector. It can help non-traditional financial institutions, such as fintech companies and digital lenders, compete with traditional banks by offering consumers more tailored and innovative products and services.
For example, the AA framework can empower fintechs floating digital-banking platforms to provide personalized banking services based on users’ financial data. This can drive competition in the banking sector, leading to better products and services for consumers.
Encouraging innovation: The AA framework can spur innovation in the financial sector by providing financial institutions with access to a wealth of financial data. This data can be used to develop new products and services, ranging from tailored investment advice to budgeting tools and financial-wellness applications (apps).
Enhancing customer centricity: By putting consumers in control of their financial data, the AA framework can drive a more customer-centric approach in the financial sector. Consumers can choose with which financial institutions to share their data, incentivizing the latter to offer better products and services to retain and attract customers.
This can lead to a shift from a product-centric to a customer-centric approach in the financial sector, where institutions focus on addressing individual customers’ unique needs and preferences.
Neobanks: leveraging open banking to innovate
Neobanks, also known as digital-only banks, have emerged as disruptors in India’s banking landscape. These innovative financial entities operate exclusively online, without physical branches, and leverage cutting-edge technologies to offer personalized and user-friendly banking experiences. With the advent of open banking, neobanks in India have found the ideal platform to showcase their capabilities and drive customer-centric innovations.
Neobanks excel at creating personalized financial solutions by leveraging the data shared through the AA network. By analyzing transaction patterns, spending habits and savings behaviors, neobanks can offer tailored recommendations, budgeting tools and automated financial-planning services. This not only helps customers make better financial decisions but also fosters a sense of trust and loyalty toward neobanks as they become integral parts of their financial journeys.
Some key neobanks in the country have already leveraged the AA framework to offer digital-first banking services tailored to specific customer segments, such as Millennials, gig workers and small businesses.
Moreover, neobanks in India are leveraging open banking to develop collaborative ecosystems. Through partnerships with other financial institutions and fintech companies, neobanks can provide a wide range of services beyond traditional banking products. For instance, a neobank can integrate insurance offerings, investment platforms and payment solutions within its digital ecosystem, giving customers a one-stop shop for their financial needs. This collaboration not only expands the neobank’s service portfolio but also enriches the customer experience by offering comprehensive financial solutions under a single umbrella.
Additionally, neobanks capitalize on open-banking APIs (application programming interfaces) to enable seamless integration with third-party applications and services. This allows customers to access and manage their financial data conveniently through various platforms, including personal-finance apps, budgeting tools and expense trackers. By providing this interoperability, neobanks enhance customer convenience and empower individuals to interact with their finances to suit their preferences and lifestyles.
Impending challenges and the way forward
While the AA framework has the potential to drive digital lending and open banking in India, several challenges must be addressed for it to realize its full potential:
Data privacy and security: Ensuring the privacy and security of consumer data is crucial to the success of the AA framework. Financial institutions and account aggregators must implement robust security measures, such as data encryption and multi-factor authentication, to safeguard consumer data and build trust in the system.
Financial literacy: To take advantage of the AA framework, consumers must be educated on the benefits of sharing their financial data and how to do so safely. Financial institutions, account aggregators and the government should collaborate to promote financial literacy and raise customers’ awareness and understanding of the AA framework.
Interoperability: The AA framework must be built on a foundation of interoperability to facilitate seamless data sharing among financial institutions. Standardization of data formats and protocols is essential to ensuring the compatibility of systems and smooth data exchange.
Furthermore, to foster the growth of neobanks, a supportive regulatory environment is essential. Regulators should nurture innovation while maintaining appropriate safeguards and consumer-protection measures. Collaboration between regulators, traditional banks and neobanks is vital to striking a balance between promoting competition and ensuring a level playing field.
The AA framework represents a significant step forward in India’s journey toward a more inclusive, competitive and customer-centric financial sector. By enabling secure and seamless data sharing, the AA framework has the potential to drive digital lending and open banking, thereby expanding access to credit, fostering innovation and enhancing customer centricity. However, addressing challenges such as data privacy, financial literacy and interoperability will be crucial to ensuring the framework’s success. As India continues to embrace the digital revolution, the AA framework offers a promising blueprint for a more equitable and efficient financial system that can bring prosperity to millions.