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Account aggregator is quite the buzzword nowadays. In fact, industry experts have gone as far as to say that the account aggregator framework may be the next UPI in India.
What is Account Aggregator or AA?
An account aggregator (AA) does the simple task of compiling various accounts of customers such as bank accounts, business accounts, investment accounts, insurance accounts, and credit card accounts.
AAs collect, consolidate and share customer banking information (with their consent) using APIs in real-time in a data-blind manner with the financial institutions. The financial institutions then analyze the details gathered to understand customers’ profiles to offer better lending options and other banking services as a whole.
In India, the RBI governs the functions of the AA to safely share your financial and other confidential details to the financial information user in the AA network without having to worry about the data being tampered with.
How Does a Account Aggregator Work?
Before we jump on to an illustrative scenario, let us first understand the critical components of the AA process. The AA procedure consists of three key players.
Key Players in the Account Aggregation Process
Now, let’s take an example of a customer who wants a car loan from the financial institute (in our model, the FIU).
- The customer will create his account on the AA website and link all his bank accounts.
- When a customer approaches the FIU to obtain a car loan, the FIU will ask the AA to provide information about the customer.
- The AA will then use an API-based application to gather the customer’s information after he consents to access which data the AA will use from the FIPs and to which entities AA will disclose his data in a tamper-proof manner.
- The FIPs will give access to customer data. The FIP will then collect it through AA and analyze the data to understand the customer’s creditworthiness and offer a customized car loan that will suit the most to the customer.
Opportunities for FinTech Companies
The core purpose of having AAs in the banking system is to have a secure way of data sharing to offer a hassle-free user experience while ensuring easy accessibility of certain banking services to all, including small businesses. The opportunities that the AA framework brings in the open banking ecosystem focus on the four major segments:
Lending Services
The AAs will be disrupting the traditional lending market by allowing every individual and small and medium-sized business to avail of short-term credits of small amounts. For some individuals with no credit history, borrowing had been a significant obstacle to obtaining short-term finance. The AAs will bring parity in the lending and borrowing system by size and duration of the borrowing.
Wealth Management
The wealth management service providers such as brokers and mutual funds will be better positioned to offer quick solutions for personal wealth management strategies as customers’ real-time details can be accessed through the AA platform.
Insurance
The AAs will be the crucial information providers for the insurers as they will have access to customers’ spending patterns, their healthcare details, and other premium responsibilities. It will help them curate the insurance policy suitable to their needs and spending behavior.
Direct and Indirect Tax Filing
The bank statement is a pivotal statement for filing income tax or GST returns. The introduction of the AA framework will automatically allow direct and indirect tax portals to fetch bank statement details, which will reduce a lot of time in the preparation, collection, and verification of taxpayers’ details.
Issues in Building a Robust AA Ecosystem
Alright, we talked about everything positive about the AAs. Still, there are challenges that we need to address, issues that should not be overlooked, and concerns that are already being discussed by the concerned authorities. So, what are they?
Safety and Security
The security of the shared data is the biggest concern since AA was considered in 2016. Although the data transmission occurs safely without the users’ data being tampered with, there lie some inherent risks for every piece of information shared online.
The cyber frauds and anti-money laundering issues are yet to be addressed as a detailed Standard Operating Procedure (SOP) are awaited.
Data Privacy
Since the data is shared among various FIUs, the issues related to data privacy need to be addressed well before its misuse. The concept of electronic consent is therefore brought to ensure the data is accessed and shared only once the customer approves it to be shared.
IT Infrastructure
Without a robust IT infrastructure, the existence of AAs will be a question. The overall IT infrastructure will ensure smooth API implementations, audit of licenses, privacy frameworks, and other IT designing requirements are built carefully.
Customer Willingness
The success of the AA framework will be decided as more and more users start accepting it positively. The issue of customers’ resistance to adopting such a system is also one of the significant concerns.
API Aggregators
Open banking has API aggregators in the center of it. The API aggregators are the API of the different APIs. It is essential to know that two APIs can never be the same as each API is unique and has its own standard usability.
Irrespective of what BaaS product you want to create, the API aggregators offer a standard and unique API that will ease your integration with banks and other financial institutions.
For example, Cashfree Payments has built a single platform of multiple open and partnership APIs that will allow you to integrate with other banks to build your banking products or services.
What Does an API Aggregator Do?
- They provide aggregation services under a single platform that connects multiple APIs and helps you reduce your workload to keep individual connections with the banks or third-party service providers (TPPs).
- API aggregators act as an agent between the banks and the BaaS players or TPPs building BaaS products and services.
- You can create your product or service by picking an API aggregator’s unique API that will connect you with multiple stakeholders you will need to integrate with during the process of product development.
- Small banks can expand their reach to the TPPs and fintech companies to build a community of partners and collaborators.
Thus, banks need API aggregators since they are well-connected with the developers and know what they need. Similarly, developers will also require API aggregators as they are in the center of open banking without which their product development could be incomplete.
So, that takes us to the end of the re-bundling of banking products into the latest banking functions. Although there might be new additions year after year, these products will remain at the core of modern banking functions.
In the next module, we will be discussing various stakeholders you will come across while building your BaaS product.
Till then, Happy Banking!
