A masterclass by Salil Ravindran (Head of Research and Advisory, MEDICI Global) about how to assess the potential and size of the Account Aggregator market in India. The entire session’s video can be seen here.
Worldwide Consented Data Sharing Initiatives (5:35m)
Salil starts the presentation by setting some context about how consented data-sharing initiatives are coming up worldwide. It began with PSD2 in the EU about six years ago. The UK started its open banking initiative a year after that covered consented data sharing and payments. Australia and New Zealand defined their initiative, similar to the UK. Most of the data-sharing initiative went hand in hand with data protection, such as GDPR (in EU), Data Protection Bill (UK), Consumer Data Rights (Australia), and Personal Data Protection Bill (India).
Comparisons of Account Aggregator with the rest of the world (12:37m)
Salil believes that there will be faster growth in Account Aggregator in India due to the underlying model’s strength.
- Scope: Unlike the EU open banking, AA already covers not just bank account data but also loans, insurance, pension, wealth, and even GST data. AA enables not just open banking but also ‘open finance.’
- Foundation: When the EU and UK launched open banking directives, there was no foundation. The banks have to start fresh and educate the customer about it. However, there was a firm foundation of UPI payments in India that banks and consumers are familiar with.
- Approach: Unlike the EU model, the AA is a regulated intermediatory and acts as a data fiduciary. There is no intermediatory in the EU, and the consumer has to provide consent directly to the FIPs to share data with FIUs. The reciprocity model of AA is also unique and will enable more FIPs to share the data.
- Clarity of Standards: In the EU, given the number of countries, there are already four different standards and various interpretations. However, with IndiaStack, UPI, and Sahamati, the standards are well defined and settled.
Key Impact Areas (17:53m)
Account Aggregator will significantly impact lending during the loan origination and to monitor loans and manage risks. AA will have an impact on retail loans, MSME loan, and cash flow based lending.
- Onboarding: The electronic submission of financial data with AA will significantly reduce the onboarding time and cost. The banks do not need an army of agents who will verify and digitize the documents submitted.
- Inclusiveness: Over 90% of the MSMEs are outside of the formal credit market since they don’t have any relevant data. With AA, the transaction data with Wallets can be used to secure a loan.
- Cash Flow Lending: With AA, the MSMEs can provide consent to share their cash position in banks and GSTN data to the FIUs at regular intervals. It will help banks avoid funding or under-funding of MSMEs.
- Loan Monitoring: With periodic access to bank account data, banks can better identify the propensity of loan default and manage their risk.
Personal Finance Management and Robo Advisors
The availability of data electronically will significantly reduce the onboarding cost and time. The foolproof and secure access to data provides helps build accurate dashboards.
Accounting and Reconciliation
SMEs and large corporations will reconcile their cash position with their general ledger quickly with reduced human resources and reduced cost. Neobanks will also provide this feature in addition to their bank account aggregation and activation.
Market Potential (33:27m)
The estimated potential of the AA ecosystem in terms of the number of calls AA will receive for data requests in the next five years is given below.
- Retail Lending: According to a study by ICICI Bank and CRISIL in Dec 2019, 60 million (6 Crores) retail loans originated in 2019 and will grow by 70% in 2024 to 108 million (~11 crores). If we assume that 50% of the loans get approved, then the consumer will apply for about 200 million (20 crores), and there will be 200 million data request calls to AA.
- Loan Monitoring: About 200 million active borrowers are in India, and the bulk of them borrow from ICICI, HDFC, Axis, and SBI Bank. Even if 50% of them agree to move towards consented data sharing for loan monitoring, then there will be 100 million data request calls to AA.
- MSME Loans: A conservative estimate projects that banks will process 20 million (2 Cr) loans per month in 2020. It will potentially generate 240 million (24 Crore) data requests calls annually for cash statements, invoice positions, and GSTN data.
- Personal Finance Management: There are 170+ PFM, and 500 fintech companies are in India. Together they have 10 million (one crore), unique monthly active users. They can initiate 30 million (3 crores) data request calls to AA monthly, and 360 million (36 crores) data request calls annually.
- Robo-Advisors: There are 25+ Robo-advisors are in India with 1.5 million (15 Lakhs) unique monthly active users. They can initiate 6 million (60 Lakhs) data request calls to AA monthly and 72 million (7.2 crores) data request calls annually.