For small businesses, a big lending idea – account aggregators

Yadav’s monthly expenses total about ₹20,000-30,000. The rest he saves. Now, he needs a loan to expand his business but no bank finds him eligible. “Bankers demand two-acre land as a collateral for a loan of just about ₹2 lakh. I don’t have it," Yadav says.

Compare Yadav with a salaried professional earning the same amount. She might be inundated with sales calls for credit cards and loans. She doesn’t need it. Yadav does. And clearly, Yadav has a consistent cashflow. If banks could analyse his banking transaction data, he could easily get a working capital loan.

This is where financial ‘account aggregators’ have a role to play— a fairly new phenomenon, less than a year old.

Our personal financial data, which can provide crucial clues to lenders, currently reside in multiple databases. Apart from banks, non-banking financial institutions (NBFCs), mutual fund companies, stock brokers, and even insurance firms have rich user data. The account aggregators can make it simple and seamless for lenders to access and analyse this data.

Technically, they are Reserve Bank of India (RBI)-licensed NBFCs. Although they are called so, they are not the lenders. Account aggregators simply provide the platform for different stakeholders to interact with each other digitally. In the process, they play the role of a consent manager and ensure that the data distributed has the consent of the potential customer.

There are multiple use-cases. The help of account aggregators could be sought for wealth management, financial advisory, robo-advisory, insurance and pension fund services. However, as of today, the most important use case is credit inclusion through cashflow-based lending.

“The key first use of account aggregators is open credit enablement network (OCEN), which aims to solve for the $400 billion annual credit gap in the micro, small and medium enterprises (MSME) space in India. OCEN aims to leverage data through account aggregators, apart from other information sources, to lend short duration loans with small ticket sizes, allowing MSMEs to build a credit history with lenders," says Ramakrishnan Gopalan, vice president and head of products and solutions at Visa.

How many loans have account aggregators facilitated, thus far? We will come to this in a bit. First, let’s take a peek at the main actors.

Four actors

The Reserve Bank first issued the framework for account aggregators in September 2016. It was finally launched after five years—in September 2021.

Currently, there are six account aggregator platforms that are operational: CAMSFinServ, Cookiejar Technologies Private Ltd (Finvu), FinSec AA Solutions Private Ltd (OneMoney), NESL Asset Data Ltd, Perfios Account Aggregation Services Pvt Ltd (Anumati) and Yodlee Finsoft Private Ltd.

CRIF Connect Pvt. Ltd, NSDL E-Governance Account Aggregator Ltd, PhonePe Technology Services Private Ltd and Tally Account Aggregator Services Private Ltd, among eight others, have received in-principle approval from the RBI.

Here’s how the ecosystem works. There are four major participants. First is the financial information providers (FIPs) such as banks, NBFCs, insurance companies and stock brokers. Then, there are the financial information users (FIUs), which could also be the banks, NBFCs, fintech companies, and registered investment advisors. The third set of actors are the technology service providers that help FIPs and FIUs to integrate with account aggregators. Finally, there are the account aggregators who are responsible for fetching and consolidating the data from the FIPs.

Based on customer consent, they are permitted to present these data to the FIUs. The FIUs can then assess the credit worthiness of a loan applicant. The account aggregators are compensated for data delivery.

Currently, 50 entities have gone live as FIPs and FIUs. Over 100 are in different stages of implementation. Axis Bank, Federal Bank, HDFC Bank, ICICI Bank, Kotak Mahindra Bank, and Union Bank of India are among the larger banks in the ecosystem today.

This ecosystem, potentially, can cut down the processing time of getting a loan sanctioned, apart from making the lives of people like Yadav easier.

“In a regular scenario, there is significant effort involved, wherein the customers have to share their banking data with other banks using hard copies or PDF documents. However, with the account aggregator framework, it is very easy for customers to share information, either one time or on an ongoing basis, for a defined period of time. The framework also allows customers to revoke their consent at any point of time," says Sameer Shetty, president and head–digital business & transformation, Axis Bank.

The nine months

Ajay Kulkarni, the co-founder of The Go-To-Guy, a digital marketing agency, endorses what Shetty says. In December last year, he was looking for a business loan of ₹10 lakh. For business owners like him, time is of essence.

“It’s a painful process to apply to banks individually. Do I focus on documentation or business?" he asks.

Kulkarni’s experience even with fintech lenders hadn’t been smooth. “Even digital lenders ask for a lot of documentation and physical visits," he says.

He had a seamless experience for the first time because of the account aggregator framework. Kulkarni says he was “taken aback" by the convenience and ease through which he could share all his bank account data with Lendingkart, a non-deposit taking NBFC. Lendingkart is an FIU.

“At the click of a button, I could share my data and within two-three days, I had the loan amount in my bank account," he says.

Data from Sahamati, a not-for-profit company and an industry alliance for the account aggregator ecosystem, shows that 794,872 bank accounts have been linked with at least one account aggregator so far, while 733,054 consent requests have been processed.

Amit Das, founder and CEO of data analytics firm Think360.ai, says that about 8,000-10,000 customers have been using one of the account aggregators every day for the last three-four months.

Lendingkart, one of the early entrants on the account aggregator platform, registered compounded monthly growth rate of 53% through the platform. It has lent nearly ₹380 crore so far with an average ticket size of ₹5 lakh.

Meanwhile, B.G. Mahesh, co-founder and CEO of Sahamati, estimates that about ₹1,200 crore worth of loans have thus far been disbursed through all account aggregators combined.

OneMoney, the oldest account aggregator, has handled the highest amount of consent requests. A majority was lending-related. “Many of these loan-related consent requests have been in the range of ₹50,000 to ₹2 lakh," says A Krishna Prasad, founder and CEO, OneMoney. “This is just the beginning. The more FIP/FIUs come in, the wider the reach will be. Our UPI moment will come when SBI gets onboard," he adds.

According to data from Sahamati, SBI is in the ‘testing’ phase. “I am fairly sure that the bank will go live in July," Prasad says.

‘Get in line or leave’

A disruptive technology or solution hardly gets a warm welcome. Many were happy with the status quo. Some traditional banks are still tentative about joining the account aggregator ecosystem.

Why is that? They fear losing business to competitors. If a customer consents, a bank would have to share her data with other banks—this could lead to loss of business if a rival bank offers loan at a lower rate of interest. Some banks, therefore, don’t want to share data. Even when they join the platform, they are doing so reluctantly and not really promoting the new ecosystem, industry watchers say.

“Banks are miffed, undoubtedly. They raised the issue in an internal meeting with the central banker," a banking executive who didn’t want to be identified, says. In the same meeting, a government official remarked: “Get in line or leave the space for someone else".

In short, protesting banks were told to service MSME customers or let others do it by facilitating the sharing of data. Experts think the banks will eventually fall in line. “Can they really afford to lose out on such an advanced technology framework? Would customers now want to open an account with a bank that doesn’t have RTGS, NEFT and UPI? No. In the same way, going ahead, customers will want to be with a financial institution only if they are on an account aggregator," says Mahesh of Sahamati.

One can see parallels in credit information system CIBIL, which started off in 2004. Initially, banks were reluctant to share customer data. However, customers started questioning as to why some banks were not sharing their credit information with CIBIL. It evolved to become a mandatory industry practice. Meanwhile, SBI, HDFC Bank and ICICI Bank have acquired 9.54% stake each in Perfios Account Aggregation Services Private Limited.

The to-do list

While there is no doubt about the potential of account aggregator platforms, operational challenges remain.

Take the case of a private limited company with multiple promoters. Currently, consent from all signatories is needed before a loan is approved. “You don’t have a single identity like Aadhaar for such firms. At this point, consent by all is being taken, which is tedious," says Anuj Pandey, co-founder and chief risk officer of U Gro Capital, a small business lending platform. Besides, when it comes to secured lending, there are processes that involve physical engagement. “If a property has to be mortgaged, the agreement needs physical signatures by all parties. Account aggregators wouldn’t help in this case," adds Pandey.

Experts suggest that for superior credit evaluation, non-bank data entities such as the goods and service tax network (GSTN) and the income tax department have to come on board. GSTN may be onboarded soon. “The policy decision has already been taken. However, we do not know the timing to onboard the I-T department. But there is an informal nudge from some policymakers," says Prasad of OneMoney.

Further, new models of credit assessment and repayment need to be thought through. Swathi Murali, head—finance and ease of doing business at the Global Alliance for Mass Entrepreneurship, a think tank, shares a story. A security personnel supplier to major businesses, who did not wish to be identified, says he had to shut shop and become a cab driver just because he could not avail working capital loan to keep the business going during covid-19. He did have contracts from two-three corporates and also the past history but that wasn’t enough for banks.

“The banks need to create different proxies for credit assessment. For example, a tailor can pay more during the festive season, but less in other months. Similarly, an agro processing unit working with a perishable crop cannot be expected to pay monthly instalments during the non-harvest season, but can pay lump-sum loan repayments during the harvest months. We need such sector-based cashflow repayment models with the help of account aggregators," says Murali.

High hopes

Ultimately, customer is king. The more awareness there is, the larger the impact. But account aggregators cannot promote their apps directly as of now. It’s the FIPs’ job. Unless FIPs see value in routing the loan via account aggregator platforms, they may not popularize it.

Besides, simply downloading the app from an account aggregator company is not enough. The real job starts when customers interact within the app. “Customer experience holds supreme. If you need mass adoption of account aggregators, it is important that you build easy-to-use products like WhatsApp and UPI. Simple user experience can lead to big transformation," says Nikhil Kumar, the co-founder and chief evangelist at Setu, a technology solutions company.

Clearly, these are early days. But account aggregators have made impressive progress. Nandan Nilekani, co-founder and chairman of Infosys Ltd and the former chairman of the Unique Identification Authority of India (UIDAI), called it the “UPI moment for personal data". UPI did just about ₹100 crore worth of transactions (in value) in November 2016, a few months after it was launched. In May 2022, the value crossed ₹10 trillion. An UPI-like success, many hope, awaits account aggregators in about two years from now.