Vidhi Writes: How RBI is Helping Towards Financial Inclusion

The Reserve Bank of India’s account aggregator framework went live on 2nd September this year, and marks India’s foray into open banking. The account aggregator framework is a financial data sharing system through which consumers’ financial data can be shared in a consolidated manner, making data sharing easier and more accessible.

While the legal framework for account aggregators has been in place since 2016, the launch of the industry-wide account aggregator ecosystem is a milestone in the fintech and financial inclusion space, and some even say is the ‘UPI moment’ for digital credit and investments. The AA system brings with itself democratisation of financial data, and the potential to make finance more inclusive. This article is an attempt to calibrate the AA framework as it stands today with India’s financial inclusion objective.

By Shreya Garg, 11 Dec 2021

We provide an overview of the AA framework in India and ponder on why such a financial innovation for consumers and the financial system is needed. Along with the benefits, we also delve into the challenges that this system may face while serving consumers in general, and also low-income consumers. Towards this end, we offer some suggestions that may be considered to align the AA framework with the objective of making finance more inclusive.

Overview of the AA framework

As account aggregators are a critical element of the open banking regime, it is important to understand both the terms. Open banking regime is defined as “a consent-based data-sharing scheme mandated or supported by regulators toward the goal of creating competition and fostering innovation in financial services”.

AAs are a player in this regime, and in the Indian context, are non-banking financial companies (NBFCs) which provide services of retrieving and collecting financial information of a consumer from the holders of such information (called financial information providers or FIPs) to share it with users of such information (called financial information users or FIUs) who use it to provide services such as giving loans, loan monitoring, wealth management, personal finance management etc.

FIPs are regulated entities, such as banks, NBFCs, depositories and insurance companies and FIUs are similarly regulated entities. AAs share the data based on ‘explicit’ consent of the consumer, and are themselves data blind for the purposes of data security.

The RBI NBFC Account Aggregator Directions (hereinafter, AA Directions) have been in place since 2016, and lay down a framework for the registration and operation of AAs in India. Reserve Bank Information Technology Pvt Ltd (set up by the RBI to serve its IT and cyber security needs) released API technical standards and specifications in 2019 to ensure that the AA ecosystem facilitates consent-driven, seamless transfer of data along with allowing interoperability.

Currently, four AAs i.e. CamsFinserv, Finvu, Onemoney, NESL have received operating licenses and three AAs i.e. Perfios, PhonePe, Yodlee have received in-principle approvals from the RBI. Further, four banks are already sharing data based on consent (Axis Bank, ICICI Bank, HDFC Banks, and IndusInd Bank) and four are in the process of doing so (State Bank of India, Kotak Mahindra Bank, IDFC First Bank, and Federal Bank).

AAs constitute the consent layer of India Stack, a set of APIs that enable interoperability between multiple financial service providers and consumers. By placing the consent to share data with the consumers, the system creates a mechanism to operationalise individual’s and small businesses’ control over their data.

Why do we need account aggregators?

Account aggregators tap into the opportunity of aggregating and collating the fragmented and siloed financial data of consumers. While fragmented data exists for many consumers across the country, AAs facilitate creation of a dashboard which gives a fairly accurate insight into the consumers’ financial status. It can be better understood as AAs putting together pieces of a jigsaw puzzle, with the pieces being the myriad financial information of a consumer relating to deposits, securities and shares, insurance policies etc.

This has two advantages: first, for consumers who have generated data through transactions undertaken by them, access to credit is possible based on information as the collateral, rather than collateral in the traditional sense. Thus, AAs assist in a shift from asset backed lending to cash-flow based lending on the basis of information collateral, resulting in democratisation of credit. Second, the insight into a consumer’s financial affairs are crucial for FIUs to offer tailored financial management solutions, loans and loan monitoring to prevent build of NPAs.

For example, an FIU may use the AAs for loan monitoring and raise early warning signs in case of a potential default. Such products which are suited to the consumer’s needs are more efficient and less likely to be defaulted upon. It also serves as a stepping stone into ‘hyper personalisation’ of financial services – a rising trend in the financial space which works towards providing suitable products for different kinds of consumers. For low-income consumers, hyper personalisation would mean tailoring products which are priced at the lower spectrum, which are simple to understand and which take into account risk assessment.

The other major benefit of account aggregation is reduction in cost, which trickles down to customers in terms of reduced fee to be paid by them for availing financial services. As AAs automate collection and storage of data from the source in real-time, it results in frictionless intermediation between FIPs and FIUs resulting in more efficient data sharing and collection.

This has a positive impact on cost, and in fact, a recent UK report found that those on the margins of financial inclusion are likely to pay less fee in open banking regimes – saving an equivalent of 0.8 percent of their income. It is imperative that service providers pass on the benefit of reduced cost to the customers, for open banking and AA to achieve its objective of inclusive finance.

In jurisdictions with a wide ambit of financial information, non-traditional financial data such as telecom data, social media data and utilities data may also be aggregated. Such data may provide insights into consumers’ spending habits and behaviour and reasonably predict their financial behaviour, and build their credit history in an alternative way. Such regimes therefore have the potential to support access to bank accounts and other financial services for thin-file customers who are financially excluded.

Lastly, for an average person, sharing of information with FIUs consists of sharing physical signed and scanned copies of bank statements, running around to notarise or stamp documents, or having to share personal username and password with a third party.

All these hassles and risks to privacy of consumers’ financial data will be drastically reduced through an AA system as it collects the required financial data directly from the FIPs and shares it with the FIUs in an automated and encrypted manner. Further, the consent to share such data with FIUs being time specific, the risk of it being lost or misused is also mitigated.

Designing a more inclusive AA framework

Open banking regimes do not drive opening of bank accounts, but they do translate into increasing the number of relevant financial products and improving their quality. Quality of financial products for customers, especially underserved customers is often ignored, when in fact, it is a crucial factor for the uptake of fintech products given that the uptake is directly linked to consumer experience and trust.

The recent Financial Inclusion Index released by the RBI in August 2021 assigns 20 percent weightage to ‘Quality’ of financial services which covers financial literacy, consumer protection, and inequalities and deficiencies in services. Hence, open banking of which AA is a big part of, is expected to directly contribute to enhancing the quality of financial services by collating data in a sensible format and enabling offering of tailored products and services.

However, there are several legal issues which require being tackled to align the AA framework with consumer requirements in India. First, the AA Directions mandate that AAs take the ‘explicit consent’ of consumers for sharing their financial information from FIPs to FIUs. The consent is required to be a ‘standardised consent artefact’ containing details such as identity of the customer and recipient, nature and purpose of collecting financial information, consent creation date etc. While detailed provisions around the consent requirement are present in the AA Directions, there is a lack of provision on ensuring that the customer truly understands what they are consenting to.

With consumers spread across a broad spectrum of income and literacy, informed consent is crucial for the consent layer to work in a secure and transparent manner and for protection of consumer rights. To this end, it is important that additional safeguards are present in the AA Directions which ensure that consumers fully comprehend what they are consenting to, and the implications of the same. For low-income consumers, this may require assistance from the AA ecosystem and beyond, such as incorporation of interactive videos and other innovations.

Second, the remit of financial information that AAs can share is specified in Paragraph 3(1)(ix) of the AA Directions. While it is quite broad as it covers financial data sets across the banking, capital market, insurance and pension sector, it does not cover non-financial data sets which may be useful for bolstering the credit profile of thin-file consumers. For instance, Australia plans to encompass data from the energy and telecom sector and the UK has followed Australia to extend data sharing to the energy, telecom and utilities sector. India also plans to replicate aggregation systems in the health, telecom and education space. However, such data currently falls outside the scope of data that can be shared by AAs and for the financially excluded, such data has great potential to create a credit trail.

Thus, in the future, broadening the scope of financial information that can be shared by AAs may be thought of, along with appropriate safeguards for its safety and security. Linked to this issue is the scope of participants in the AA ecosystem which may also require being broadened. The definition of FIPs and FIUs covers only those entities which are regulated by a ‘financial’ regulator, and hence, entities such as telecom companies, utilities companies, and social media platforms cannot be data providers or users.

Third, putting in place data sharing infrastructure may have its own cost and the law should specify who bears the cost burden for the same. The cost may be borne by the data holder, data user or the consumer, however, the AA Directions do not have any provisions in this regard. In case the fees for data sharing is charged by data holders for each data request, it may increase the costs for data users which may in turn trickle down to consumers, making it a barrier for consumers to adopt such services.

It may also negate the cost advantages gained through the efficiencies of the API system and paperless trail. Hence, it is suggested that depending on the quantity of data required in each data request, a tiered pricing system may be considered, either in the law or as part of the board approved policy on pricing as per Paragraph 13 of the AA Directions.

Lastly, for the low income segment, the AA framework as it stands needs to be adapted to their needs. Several factors need to be pivoted towards such consumers – the AA framework requires being compatible with feature phones and technical standards in this regard require being put in place. As most of the AAs currently operate through apps on smartphones, it may exclude a large segment which uses only feature phones.

Further, the assisted model which appears to be used for the low-income segment requires being used at a larger scale. Such a model provides for consent terms to be read out in a local language and for feature phone users to be assisted with using the AA framework on a smartphone. This requires placing reliance and trust on a third person, and hence, the AA framework may account for such new players in the ecosystem as well.

The AA framework is in its nascent stage in India and has great potential to revolutionize the access to credit space in the digital world. In the words of Shri M. Rajeshwar Rao, Deputy Governor RBI, “The desired objectives in the case of AA ecosystem will be attained when large number of customers/FIUs are on boarded over the AA platforms and they are able to get aggregated data in a form and manner as desired by the users in a completely safe and secured environment”.

Thus, the objective for the AA ecosystem is to benefit the maximum number of consumers, FIPs and FIUs and hence be inclusive. The Indian regime is already broad based, as it covers individual consumers as well as small businesses. A few more steps to make the system more inclusive will benefit the Indian economy and go a long way in achieving the desired objective of financial inclusion.


Shreya Garg is a Senior Resident Fellow and Lead, Law, Finance and Development. The views in this article are personal of the author.