As a financial tool, account aggregation has gained popularity in recent years. The concept involves gathering financial information from multiple accounts in one place. This tool can help individuals and businesses improve their financial decision-making by providing a comprehensive view of their finances.
Account aggregator is an important step towards establishing open banking in the country. It gave millions of customers the ability to securely and effectively access and exchange their financial data across institutions online.
Lending and wealth management might be done much more quickly and efficiently using the account aggregator system.
Continue reading to know in detail about account aggregators:
What are Account Aggregators?
With the use of an NBFC-AA licence and an Account Aggregator (AA), an individual can safely and digitally access and share information. They can share information from one financial institution to any other regulated financial institution in the AA network. It is important to remember that without the individual's permission, data cannot be shared.
One can select from a wide variety of Account Aggregators. Account Aggregator has replaced step-by-step permission and control for the usage of your data for lengthy terms and conditions.
How does it work?
Along with the Account Aggregator (AA), the Financial Information Provider (FIP), and Financial Information User (FIU), are the three tiers of the system that play a major role in the working process.
AA -AAs provide for the secure, informed, and consented transfer of financial data from a variety of accounts. It includes bank deposits, stocks, mutual funds, and pension funds to any institution needing access to that data. The term "financial information" refers to 19 different categories of information, in addition to many others that deal with banking and investments.
FIU - Financial Information User, uses data from FIPs to offer customers a wide range of financial services. To know whether a borrower is eligible for a loan, a lending bank or asset management will request access to the borrower's data through an FIU.
FIP - The data fiduciary that stores client data is called FIP, or Financial Information Provider. Any bank, NBFC, mutual fund, insurance repository, or pension fund repository could be the repository. Banks serve in two capacities as FIPs and as FIUs.
Who would benefit from an Account Aggregator System?
MSMEs and first-time borrowers will be among the biggest gainers from the account aggregator framework. Previously they were unable to get formal loans because of the absence of well-organised and transparent financial records and credit histories.
Lenders from various sections will be able to grant credit based on verifiable data that includes GST invoices, bank statements, securities information, and other cash flow surrogates. They can do this with a reduced risk of tampering and fraud using the AA framework. Significant reductions in client acquisition costs may enable small customers to become financially independent.
A recurring consent can help FIUs to monitor a customer's financial situation and leverage in addition to lending money and assisting with debt relief. Additionally, it will promote operational efficiency by assisting FIP in cross-selling other products, including savings, asset management, and insurance.
Retail customers will also gain greatly as they will receive better lending and deposit rates. They would have access to products that are developed specifically for them and a comprehensive view of their financial accounts.
The role of account aggregators in simplifying complex loan procedures
A borrower's capacity to get credit is governed by a number of factors, with having a credit history being one of the most important ones. Finding affordable and simple loans from banks and NBFCs can be challenging for first-time borrowers with little or no credit history.
Those with variable income, such as independent freelancers or business owners with seasonal sales, also have fewer and more expensive financing options. A further barrier for those looking for loans is the frequent requirement of pledging collateral by credit institutions in order to secure credit facilities.
Account Aggregator assists in sharing reliable and high-quality data on a customer's bank behaviour, cash flows, and systemic payment behaviour. Financial firms can better evaluate whether to extend credit lines by analysing other data points and financial activity in addition to the assets.
The use of the account aggregator framework can significantly boost cash flow-based lending throughout the credit and lending ecosystem.
Making financial services more innovative
The AA Framework strikes at the core of the consumer data landscape and is justly hailed as the UPI moment of the open data ecosystem. It has the ability to disrupt customer journeys where real-time data-driven decision-making can give an advantage in the marketplace.
Information asymmetry decreases with account aggregator data. For instance, larger banks with access to customer financial information can re-engage with existing clients with improved offers. Information asymmetry prohibits competition and innovation in the fintech sector.
AA data can speed up data-backed innovation at a substantially cheaper cost because it is system generated and instantly accessible. Fintechs have the potential to overcome traditional banks and provide underbanked populations with high-quality products and better deals. There have already been advancements in digital lending, wealth management, and insurance.
Benefits of account aggregation
Comprehensive financial view
Account aggregation provides a comprehensive view of an individual's or business's financial status. This feature allows individuals and companies to see and understand their financial condition better.
Simplified financial management
By aggregating all financial accounts in one place, users can easily manage and monitor their finances. This simplifies financial management, making it easier to keep an eye on transactions, payments, and investments.
Better decision-making
With a comprehensive view of their finances, individuals and businesses can make better financial decisions. For instance, users can see the impact of their investments and expenses on their overall financial status. This enables individuals and businesses to make informed decisions about their financial future.
Time-saving
Account aggregation saves time, as it eliminates the need to log in to multiple accounts to access financial information. With aggregated data in one place, users can easily monitor their financial transactions without having to log in to multiple accounts.
Enhanced security
Account aggregation offers enhanced security features, such as data encryption and password protection. This ensures that financial information is secure and not accessible to unauthorised users.
Personalised financial advice
Some aggregation services offer personalised financial advice based on an individual's financial data. The advice can help users make better financial decisions and improve their financial habits.
Final thoughts
The FIUs assert that the account aggregator structure will increase accessibility and lower the price of credit risk assessment. Additionally, as more people join this ecosystem, new customer use cases will start to emerge. Beyond helping individuals, this strategy will also assist MSMEs looking for financing for business expansion.