Better streamlining and encouraging technological innovation can make Account Aggregator a true MSME messiah

Access to capital is a key challenge for MSMEs in India. As per a report by Omidyar Network and BCG, roughly 40% MSME lending happens through informal sector. In fact, an analysis of the RBI report and report by the expert committee for MSMEs published by ADB indicates that the overall credit gap for MSMEs in India is estimated to be INR 20 trillion – INR 25 trillion. This is what the Account Aggregator, the RBI master direction for NBFC, wants to address.

In this framework, on consent from the account owner, data from multiple financial institutions are aggregated, and delivered to prospective lender ensuring better and faster decision making. First-of-its kind in the world, the Account Aggregator (AA) system makes it easier for both the lender and the borrower on multiple fronts - (i) easier to digitally submit financial data of the borrower, (ii) easier to rely on the data that is submitted, (iii) easier to integrate the data into the software of the lender. The outcome is faster loan processing, less cost of borrowing and less cost of lending and thus changing the lending scenario for MSMEs.

Financial information is sensitive and is private to the owner and authorized personnel only. Hence, data security and privacy are crucial to be solved and AA system design ensures just that. The technology supported in this framework ensures the data that is been shared is not only fully encrypted, but also ensures that it can only be decrypted by the intended destination. The intended destination in this case is the lender, for whom the data sharing request is raised. Though the encryption happens at the side of the financial institution that is the custodian of the data, they are unaware of the final destination of the data. This is a key part of the data privacy that is desired.

A standard set of API specifications have been defined by ReBIT, which all participants are required to use, resulting in complete interoperability as well as avoiding the need for individually integrating with each institution. An industry alliance ‘Sahamati’ has emerged which is a non-profit member-driven industry alliance supporting the ecosystem and providing different technology and business services to the AA ecosystem like maintaining a central registry or directory of all ecosystem participants. This ensures that any participant - AA, FIP (banks/AMCs/Depositories/Insurance cos) or FIU (financial information users like lenders in this case) can easily look up another participant to which it needs to reach digitally.

In the early stages the ecosystem is accelerating fast and multiple technology companies are becoming account aggregators. Several innovations are happening over and above the base API specs, on both consumer lending side and business lending side. Some of the technology interventions that can speed up the pace of growth of this ecosystem to accelerate its adoption are:

A standard FIP plug-and-pay module: The setting up of this module can significantly reduce the time spent by banks for going live with the Account Aggregator, expanding the ecosystem faster. This will help every financial institution to on-board into the AA ecosystems as soon as possible.

Seamless integration of the data with loan origination systems:It will eliminate the cost of manually entering the borrower’s financial data in the lender’s own systems, thus reducing both cost and time needed for the loan application processing.

Scale of the AA systems: Crores of individuals and businesses will use the AA systems. There will be massive number of requests, consents, and responses. Large amount of data will flow through the system. It is important that participants architect their systems for high scalability, to keep up with growth.

Cross-version API interoperability: Hundreds of entities will participate in the AA ecosystem. The ecosystem itself is evolving, and as a result the APIs will go through changes. Establishing cross-version API interoperability will be crucial for the system to succeed at scale.

This digital mechanism of data collection and aggregation hold a huge promise to ease out the MSME credit issues in India, a problem that has remained unsolved, or at best partially solved, for decades.

The article has been written by Nabendu Das, Chief of Engineering, Tally Solutions