Account Aggregators - Making Investing and Borrowing Simpler
Despite the immeasurable humanitarian impact that COVID-19 has had on the world, it is hard to ignore its contribution to the massive digital disruption that is changing the way we work and do business. Companies that are well-positioned to leverage the shift towards remote working, digital payments and online shopping are witnessing their top-lines rise rapidly, often at the expense of slower and less-agile incumbents. The ubiquitousness of digital payments, thanks to a slew of reforms like UPI, is certainly a testimony to how far the financial ecosystem has come; hence it is no surprise that 71% of all payment transactions in India are projected to be digital by 2025.
The users of fintech platforms have arguably been one of the biggest beneficiaries of this digital disruption and rightly so. The advent of discount brokers like Zerodha, robo-advisors and online investing platforms like Groww has made investing easier and cheaper than ever before for retail investors who flock to these platforms in search of new, easy and exciting investment opportunities both domestically and globally. More than 7 million users have signed up on Groww between September 2020 and April 2021, with more than 60% of them from Tier-2 and Tier-3 cities.
Successful digitization of other financial products like insurance policies, bonds and gold, which were largely offline products is a huge boon for consumers who can now invest in shares of Apple or open online FDs without opening an account with the said bank from the comfort of their homes. In 2019, the total value of fixed deposits was more than twice the total amount invested in mutual funds. Over 70% of Indian households have more than 90% of their financial savings in fixed deposits.
For the longest time, accessing our financial information, whether for filing taxes or just to know what’s going on, has never been a pleasant experience with bits and pieces of data dispersed amongst countless financial institutions. Information that should ideally be just a glance away takes hours of scouring accounts and statements. This inconvenience is exactly what the Account Aggregator ecosystem intends to get rid of.
The Account Aggregator ecosystem is an RBI initiative that intends to grant consumers more transparent and easier access to all their financial information with just a click of a button. Once the ecosystem is fully functional, all aspects of our financial data, past or present, viz. investments, insurance policies, loans, bank details etc would be just a glance away. The kicker is that consumers can now consent to revoke or grant selective access to this priceless information to institutions they trust at any frequency of their choosing, thanks to AA and RBIs strict data security guidelines.
Though the ecosystem is still nascent, few large banks have already been onboarded and it’s just a matter of time before the adoption becomes the norm.
Apart from democratizing consumer financial data, the AA ecosystem has plenty of other practical benefits for everyone. Here are some examples:
Better Tracking and Monitoring of Investments
If you can’t measure it you can’t improve it – Peter Drucker
Most investors suffer from an inability to visualize all their investments under one platform. The incumbent platforms that do allow this also, unfortunately, don’t have any choice but to get users to fill in their data manually which is a highly cumbersome process or scrape mutual fund / NSDL statements which are again not exhaustive and also not totally accurate.
Manual updating of transactions and holdings, apart from being tedious, also leads to a higher chance of investors entering incorrect information or missing out on certain investments entirely.
The AA ecosystem eases all these concerns by allowing traditional and online advisors alike to access, process and derive actionable insights from investors’ financial information with their explicit consent.
This will not only enable investors to monitor their holdings in real-time but also empower them to take quicker and smarter actions on their investments, leading to potentially better returns and avoiding costly mistakes.
Unclaimed / Forgotten Investments
Tracking investments with a unique identifier (like a mobile number) would ensure that investors do not miss or inadvertently forget sundry investments made years before. The amount of unclaimed investments in mutual funds, equities, insurance companies etc is reaching record highs (> ₹ 140,000 cr. as of 30th March 2020) and it would be a shame to see investors lose or forget their little pots of gold that were accumulated over many years especially during times of their or their dependants’ needs when the user is not around.
A large part of the unclaimed investments is attributable to either
- Dependants not being aware of the investments post the investor’s demise and
- Lack of nomination which leads to a cumbersome and at times endless process of retrieving those investments back
The AA ecosystem provides an excellent platform for the implementation of the Unified Nominations Register (UNR). A UNR is a consolidated register of an investor’s nomination details (nominees) across all his / her investments across various asset classes.
Personal Finance/wealth management platforms can hop on to this ecosystem to help ensure that their users’ nominations are in place and alert/attend to investments that aren’t nominated, all under one single roof. This will lead to massive benefits for the entire investor ecosystem with families not having to run from pillar to post for claiming their rightful investments in times of need and grief.
Lower Leakages in Investments
Every year thousands of crores of rupees are earned by banks on funds sitting in low-yielding current and savings accounts. A large part of these deposits is purely lying there due to either lack of information or lack of proper financial planning.
Account Aggregator guidelines will allow fintech companies in the personal finance space to effectively plan and guide depositors to ensure that any monies not needed for immediate use can be parked at higher rates of interest. Needless to say, this is a double-edged sword that can lead to wealth erosion if investors take disproportionate risks to earn higher returns (Arbitrage Funds, Short Term Debt Funds, bonds etc. generally could help fetch higher returns based on the investors’ time horizon/risk appetite etc.)
Loans Based on Credit Scores And Assets of Borrowers
Due to the spate of defaulters, healthy borrowers are inadvertently penalized in many ways. Lenders have to build in this default rate and hence charge higher loan rates to compensate for the default percentages.
Secondly, the credit disbursement process is lengthy and cumbersome as lenders want to be certain of the creditworthiness of borrowers. The database available with credit agencies is not enough to further fragment the loan applicants and build better analytics.
This is where AA comes in – credit histories along with investment details of borrowers would be available to lending institutions at the click of a button and would help them separate the wheat from the chaff. This is a win-win for both lenders and honest borrowers.
These are but just a few use cases of the Account Aggregator regulations and is possibly the tip of the iceberg. Over the next few years, as the ecosystem becomes more robust, we should witness a host of innovations that will make investing and personal finance more exciting and rewarding for one and all.
About the Authors
Vivek is a veteran in the financial services industry with about two decades of financial services experience across companies like BNP Paribas, IIFL Wealth and Altiore Capital (acquired by IIFL Wealth in late 2018).
Abhisek, also a veteran of the industry, has worked across firms like ICICI Bank, Alchemy and IIFL Wealth ( where he headed International Products and also Indian products). He also has founded a couple of startups himself and is an alumnus of IIM Kolkata.