With many fintech companies offering easy credit, determining a loan applicant’s creditworthiness becomes increasingly difficult unless all data is available from all sources the person has taken out loans from.
Even though digital lending has eliminated the need for physical paperwork, consumers are more likely to abandon a loan application if asked to produce bank statements, even if this is done digitally. According to statistics, 70% of loan applications are abandoned along the way because they are too time-consuming. Additionally, scanned bank statements are more susceptible to tampering because data changes are harder to detect, even with a screen scraping program. It would still require a human agent to verify specific facts and eliminate cases of fraud, which will slow down the process and scare away good borrowers.
To address the issue, the Reserve Bank of India (RBI) has authorized the establishment of an Account Aggregation (AA) framework. It would collect data from all loan providers to assess the legitimacy of loan applicants, thus reducing the number of loan scams. Before discussing the benefits of the system for consumers, it is essential to understand how the AA framework works.
What is Account Aggregator (AA) and how does it work?
The Account Aggregator (AA), Financial Information User (FIU), and Financial Information Provider (FIP) are the three main components of the system. An AA is a new type of NBFC that the Reserve Bank of India (RBI) has certified to manage customer authorization for financial data sharing. The AA is established following an inter-regulatory agreement entered into by the RBI, the Securities and Exchange Board of India (SEBI), the Insurance Regulatory and Development Authority (IRDAI) and the Pension Fund Regulatory and Development Authority ( PFRDA) through the Financial Stability and Development Board (FSDC).
Financial information providers can digitally send consented data to financial information users (FIUs), including banks, lending agencies and NBFC financial information providers (FIPs). Institutions that oversee user data are known as FIP Financial Information Providers. These are primarily banks, mutual funds, pension funds, and some NBFCs that serve as the source of personal or business data that FIUs can obtain through account aggregation requests.
What are the benefits of the account aggregator network?
The account aggregation framework will help in the collection and consolidation of all disparate financial data, facilitating access to credit for individuals and businesses. The most crucial feature of this framework is the authorization of the parties involved. The network of account aggregators is meant to alleviate the current credit bottleneck of the Indian economy, which is caused by a lack of organized data exchange channels. Formal loans can be channeled through the network, allowing for higher consumption and investment.
Additionally, it can help financial institutions more effectively assess a borrower’s creditworthiness, make better lending decisions, and avoid bad debts and non-performing assets. This mechanism should also increase the number of borrowers for these financial institutions.
Users benefit from the framework as it will streamline the loan application process which was previously time consuming. As financial organizations gain access to their personal financial data, individuals can expect better tailored financial products.
Additionally, by integrating secure digital signatures and end-to-end data sharing, AA will help eliminate fraud typically associated with physical data sharing. Borrowers are fully aware of what they are agreeing to throughout the process and can revoke their consent at any time, ensuring that misuse of data is avoided on both sides.
Simultaneously, AA’s previous option was analyzing bank statements, which is both expensive and error-prone when done manually. Moreover, the most common type of fraud consists of individuals who simply fabricate bank statements in order to obtain a loan. These problems will disappear with AA because the data will come directly from the bank or financial organization.
Additionally, because account aggregators combine data from different sources, they ensure that a wider range of criteria is considered when signing up, reducing the risk of fraud. Early in the risk assessment process, bad borrowers are screened out and transaction costs are reduced. As a result, lenders can be more liberal with loan amounts granted to genuine borrowers.
The digital lending industry is poised for a transformation that promises speed and scale, with 22 million new loan applications per month. More importantly, account aggregators will drive much of the technological innovation and policy reform that will help lenders attract, analyze and approve more prime consumers.
Adopting the AA framework streamlines the process and reduces the cost of loans and asset management for consumers, thereby greatly reducing the risk of loan scams.
The opinions expressed above are those of the author.
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