How price wars hurt account aggregators

Why did the two conglomerates give up the licence? While they did not respond to a clarification sought by Mint, it is possible they did not find a solid business case.

The account aggregator guidelines were first released by RBI in September 2016 and the framework launched in 2021 with an important role in mind. The aggregators would be a node thus far missing in India’s financial inclusion story. 

Millions of people and small businesses are excluded from accessing loans, insurance and other financial products because banks and insurance companies lack access to customer data. There is a sea of financial data about us and our spending behaviour. But they are often spread across multiple organizations. In the case of loans, this makes the whole process—starting from data sharing to underwriting to disbursement—tedious and time consuming. In many cases, it leads to customer drop-offs, also resulting in loss of business for a bank.

The account aggregator’s role is to fetch or pull customer data from one financial institution (known as the financial information provider, or FIP) and pass it on to another financial institution (known as the financial information user, or FIU), after getting the customer’s consent. The FIPs could be the banks, asset management companies, depositories and insurance companies. The FIUs could also be banks, brokers, alternative investment funds and insurance companies, among others. In short, the account aggregator links the two sides and is supposed to ensure the relevant data flow in a structured way.

Despite two conglomerates pulling out, today, there are 14 companies that have received operating licences from RBI. Three applicants have received in-principle licences. Some aggregator firms appear to have scaled. Pune-based account aggregator firm, Finvu, claims to process 150,000-350,000 new consents (customer consent to share data) a day.

On paper, the ecosystem has over 80 FIPs, including the top 10 public sector banks and the top 10 private banks. Sahamati, a non-profit organization that puts in place standards and codes of conduct for the account aggregator ecosystem, states that till September this year, 102 million customer consents have been received.

Nonetheless, things aren’t that rosy. The fundamental question—one that may have dissuaded the two conglomerates in 2019-20—stays. Is there a business model?

The model

Let’s delve deeper into the business model of account aggregators as it stands today.

Aggregators are paid by the FIUs for the service they provide. On an average, FIUs paid aggregators between ₹10 and ₹30 per data pull when the framework started in 2021. As more aggregator licences came about, competition grew. Market forces forced down the price aggregators could command—currently, it is trending at below ₹5, according to some aggregators. In case of high volumes, FIUs bargain even harder and the service charges can drop to as low as 75 paisa per data pull.

NeSL Asset Data Ltd (NADL), an account aggregator company, currently charges ₹2 per data pull, as per a tariff plan published on its website.

“The large number of licensed account aggregators in the ecosystem has made the current business atmosphere extremely competitive with undercutting of pricing becoming a norm," a spokesperson from NADL said. “Hence, it is imperative that the usage of account aggregator as the default option in digital financial transactions be popularized on a large scale. While lower pricing has been beneficial for the end customer, it has made the account aggregator environment a challenging one to do business in. However, with a monthly usage growth rate of 15% to 20%, the industry is moving towards sustainability in the long term. The regulator is also playing its part in this endeavour with its ‘RBI Kehta Hai’ series currently airing in digital media," the spokesperson added.

It also doesn’t help that the market itself is small. As per Sahamati’s projections, data pulls through account aggregators could total 500 crore in 2027. The revenue pie is linked to this data.

“If the rate is ₹1 per data pull, the revenue pie will be ₹500 crore. If it is 50 paise, it will be ₹250 crore, Tejinder Pal Singh Manchanda, the chief executive officer (CEO) of CAMS Financial Information Services Ltd, an account aggregator company, explained.

What is the expense structure of account aggregators like?

Excluding resource cost, account aggregators spend on application programming interfaces (APIs) that enable different applications to communicate with each other and SMS for one time passwords. When a customer gives fresh consent, it takes several API calls with the cumulative cost going a little over ₹5 per consent.

The unit-level economics, therefore, are firmly against the aggregators. Most companies lose money for every data pull request.

“This is not a sustainable business," Finvu founder Manoj Alandkar told Mint.

Alandkar and other business heads of account aggregator companies also point to other bottlenecks—the difficulty of doing business with large financial institutions.

Inactive FIPs

The account aggregator ecosystem, like we have mentioned earlier, comprises an FIP and the FIU, apart from the aggregator. A fourth participant is the technology services provider (TSP). The success of this ecosystem, to a large extent, depends on FIPs actively participating in the data sharing process. In other words, success depends on large entities, such as top banks, and their willingness to share the data of their customers with another financial institution. ‘Willingness’ is the important word here.

While on paper, there are over 80 FIPs, many aren’t active.

“Bank of Maharashtra and Kotak Mahindra Bank, for instance, are in the FIP list. However, their failure rate is 99.99% (the number of times an account aggregator tried to fetch data as asked by an FIU after getting customer consent but failed)," a top official at an account aggregator company said. He didn’t want to be identified.

“We have been live on account aggregator (platforms) since February 2022. Account aggregator continues to be a promising model for multiple use cases, including lending and personal finance management," Sanjay Seshamani, senior executive vice president and national head, digital business—consumer bank, Kotak Mahindra Bank, told Mint in an emailed clarification.

“However, the framework still needs to fine tune and mature on structural efficiency parameters and we are working with stakeholders to scale and improve the account aggregator ecosystem. We firmly believe that the ecosystem has the potential to simplify aspects of financial services for both customers and institutions," he added.

Some large banks oblige but don’t share the entire dataset that is required by the FIU to make a lending decision, for instance. The data is supposed to be shared in a ‘structured’ and predefined format, one that contains a list of transactions with details like transaction type and mode. However, many banks don’t stick to a format and it becomes difficult for account aggregators to understand money transactions.

“When an account aggregator tries to pull one-year customer data from the State Bank of India, the PSU doesn’t give 12-month data. It only agrees to give six-month data," the executive quoted above said. “There are further restrictions. SBI agrees to give six-month data or 150 data points, whichever is earlier. Today, users do several UPI transactions in a day—the 150-mark gets covered in just 5-10 days of data. A loan underwriting, based on that data, is never going to happen because this data set may not even include any salary deposit data," he explained.

Both Bank of Maharashtra and SBI didn’t respond to Mint’s queries.

“In a lending use-case, there is no use of debit/credit data unless there is no clear narration such as ‘the customer paid an X amount to BookMyShow or to a café, etc. So, the industry goes back to square one and FIUs end up asking the customer to share their data over email, the traditional method of availing loans," the official said.

Bank’s defence

What makes banks, when they are on the FIP side, so unwilling? One answer is that they don’t have an incentive. When they share data, the business is likely to be bagged by a rival company on the FIU side.

“This is going the payments bank way, where the initiative has the right intent but the execution is flawed because the incentive is not balanced. If the account aggregator process actually lowers the cost of loan processing, why not pass the incentive with the FIPs?" questioned Shankar Sundarrajan, partner—financial services, IBM Consulting. The company helps banks and NBFCs integrate account aggregator APIs.

“I don’t think the account aggregator model has taken off. Everybody is on it and is using it. But, is the data meaningful to make underwriting decisions? The answer is no," he added.

A payments bank is a category of banks that can’t advance loans or issue credit cards.

Banks also complain that the same customer’s data is being pulled multiple times. “This is because the same customer is going to multiple platforms (FIUs) for a loan and giving data pull consent multiple times," a banker said. He didn’t want to be identified.

“There can be so many API calls on the bank’s system that the core banking bandwidth could get choked. When a wealth management fintech wants to know what’s happening with the investor (i.e. customer) and they keep pinging a bank on a recurring basis, imagine what happens to their core banking? It’s a pain to integrate and for what outcome?" he asked.

Survival hack

Considering that the business model is broken at the moment, what are account aggregator companies doing to survive?

Remember, we mentioned a fourth participant in the ecosystem—the TSP or an entity that provides tech services. While the core account aggregator model is loss making, the TSP part appears promising. All account aggregator companies, barring one or two, have separate account aggregator TSP entities.

A TSP plays three roles—encrypt the data for FIPs, decrypt the data for FIUs, and lastly, make sense of the data. The last leg comes after FIUs obtain the data and wants the TSP to analyze it.

“Account aggregators get the raw data. TSPs analyze that data and make it meaningful for consumption," said V.R. Govindarajan, chairman, Perfios, a financial data analytics company. Perfios has an account aggregator licence, as well as a TSP arm.

“For the analysis part, TSPs can command a premium—making anywhere between ₹20-50 per statement analysis," Wriju Ray, chief business officer of Mumbai-based IDFy, said. The company, into identity verification services, has applied for an account aggregator licence.

What’s coming

Companies with aggregator licence wants RBI to restrict further licences—more companies in a small market implies brutal pricing wars.

“Account aggregators have complained to the regulator. There are way too many licences and the prices are already commoditized," an executive quoted earlier said.

The industry, meanwhile, has started consolidating. The small could be gobbled up by the big. Earlier this year, KFintech, a company that provides SaaS-based solutions to asset managers, bought 25.6% stake in OneMoney, one of the first companies to bag the account aggregator licence. Setu, which has both an account aggregator licence and TSP, was acquired by fintech unicorn 8.

Nonetheless, some experts remain hopeful. Shalini Warrier, executive director at Federal Bank, is one of them. She sees account aggregators going the credit bureau way.

“When credit bureau first came to India, there was trepidation in people’s minds. Banks who were participating were worried that they were giving away information but were not getting any value. The first few years will always be difficult," she said. “Also, banks are trying to do a lot of research and understand the right use-cases (for account aggregator). In a couple of years, the use-cases will also explode," she added.

Sahamati’s chief executive officer B.G. Mahesh said that a cross-sectoral data-sharing network at this scale is unheard of. “What everybody is failing to understand is the large untapped market in both lending and investing. The credit gap in the MSME (micro small and medium enterprise) sector is around ₹25 trillion," he said. “Now imagine if a significant portion of this is fulfilled via the account aggregator flow."