India aims to open up finance to millions with user data system
Regulators have agreed to allow banks, pension funds, tax authorities, insurers and other financial firms to pool customer information – once the user consents – to facilitate transactions . If the system works, businesses will be able to access large amounts of data in seconds to assess the creditworthiness of a small business, recommend a wealth management product to an individual, or tailor an insurance policy to a family.
The account aggregation system, years in the planning, was officially introduced on Thursday. It’s an ambitious approach that combines privacy protection with credit reporting. Here’s how it works:
- On one side are financial information providers, such as banks, tax authorities and telecommunications operators, who own financial information about people and companies and can provide it in a standardized format.
- On the other hand, users of financial information, such as non-bank lenders and fintech companies, who seek data held by FIPs but have so far faced a cumbersome and costly process to find it. to access.
- In the middle are account aggregators, which act as intermediaries to smooth the flow of data and reduce the time it takes to process information.
The approach could be a game-changer in a country where millions of disadvantaged people and small businesses are denied loans because they lack collateral and the relatively young credit scoring system only covers a tiny fraction of population. This could expand the potential pool of customers for lending startups like NeoGrowth Credit Pvt and Lendingkart Technologies Pvt as well as tech giants like Amazon.com Inc. and Facebook Inc. that are expanding into the Indian fintech market via products such as small business loans. .
“The account aggregator model will help democratize data and shift power over data accessibility and usage to data owners rather than data custodians,” said Deputy Governor Rajeshwar Rao. of the Reserve Bank of India, during the launch. .
Rathanlal Jain, who owns a small shop selling party supplies such as swags and decorations in the bustling shopping district of Nagarathpet in Bangalore, is among the beneficiaries.
The 30-year-old businessman gave his consent for the system to grant Lendingkart access to his bank statements. The startup’s algorithms analyzed 10,000 variables on the information to determine that Jain was eligible for credit. “Almost 600,000 rupees ($8,210) came quickly to my bank account without any collateral,” Jain said.
Lendingkart has processed more than 2,000 loan applications like Jain’s through the new system over the past few weeks and approved a third of them. Without the new system, accessing and processing customer data would have been much more laborious and time-consuming.
“More than 120,000 customers contact us each month for credit but just over 10% of them are able to provide us with the digital financial data to process their requests,” said Deepesh Goel, chief strategy officer of the Bangalore-based startup. “The account aggregator system could close the data gap and make nearly 90% of businesses eligible to apply for digital credit.”
The system allows users to gather all sorts of financial data – starting with bank statements, but eventually even mobile bill payments, tax returns and pension fund balances – which they can then choose to share instantly. and temporarily in seeking loans, investment products or even insurance. The country’s gargantuan goods and services taxation system is expected to enter the system to provide user and business financial data.
The newly established digital rules and practices in India lay the foundation for the data sharing system. The central bank now requires financial data to be reported in a standard machine-readable format, which means it is easier to slice and share automatically.
“Most countries have a framework of data laws and privacy laws and recognize the right of individuals over their data, but the challenge has been to operationalize data rights,” said Siddharth Tiwari, Head of of Asia at the Bank for International Settlements. “In India, we envision the world’s first open, revocable and granular system based on digital consent, in which the user is empowered to decide who can view their banking and other financial data.”
A crucial benefit for less fortunate people is the potential access to unsecured loans. The new system could help a person prove their creditworthiness with information such as past financial transactions, combined with already available parameters such as the location of the person or business and the segment in which a business operates.
World Bank data shows that more than a quarter of people worldwide with bank accounts save money in the formal financial system, but only around 10% are able to borrow from the same system without collateral tangible, Tiwari said.
“It’s not even an emerging market or developing country problem,” he said. “The challenge of borrowing plagues even high-income countries.”
The AA system is the starting point for a consent architecture that starts with financial services, but can also apply to healthcare data and employment data, said Nandan Nilekani, co-founder of Infosys Ltd., which has been involved in the country’s Aadhaar digital system. UPI identity and financial backbone projects.
“It’s a transformative initiative,” Nilekani said at the launch. “No other country in the world has developed such a comprehensive data sharing framework that can be deployed to cover over 50 million businesses and over a billion people.”