64. AA — Account Aggregator
What is the difference between New-Gen FinTechs and traditional finance companies?
Talk to one of the sales folks of FinTechs and they will explain the difference till the cows come home.
But let me tell you what is the similarity — the way they handle user data irresponsibly.
As per my Aadhar card, I live in Flat No 4 B
- HDFC Securities updated it as Flat 48
- Slice Cards updated it as ‘Fa D’ (whaaaaaaat???)
Talking of ‘data’… if used well (without allocating new Flat numbers to users) it has great value… And this article is about that… Let’s start
“Credit is generally defined as a contract agreement in which a borrower receives a sum of money or something of value and repays the lender at a later date, generally with interest.” — Investopedia [1/1 for boring people with boring definition :)]
Credit is the cornerstone product in the long evolution of financial products and an important product for both companies and individuals alike. Credit existed even before we (humans) invented ‘modern money’.
Did you know that credit goes back to Mesopotamian Civilisation (what an amazing civilisation — gave us farming, writing and Tax… yeah… the tax). Various aspects of ‘credit’ such as write off, interest, penalties are written in Code of Hammurabi. If you are interested in ‘money’ and ‘history’ then do read The Ascent of Money and Sapiens.
Made in heaven?
[Demand] How many of us could afford to buy a house without a housing loan? Or how many companies can afford to build a new factory or how many vendors can procure inventory without loan? Or how many can buy a fancy new & totally unnecessary iPhone 13?
[Supply] Technically, anyone can lend (one can borrow from friends, family, village sahukar or loan shark)… But legally, only the entities that are authorised by RBI can lend.
Banks (except payments banks), NBFCs (Non-Banking Financial Companies), MFI (micro finance institutions) are the lenders. Then there are FinTech or LendingTech companies who lend using NBFCs’ licences.
There are institutes who can lend money and there are people/companies who need money.. A classic ‘Demand and Supply matching’.
Glimpse of different lending models/products:
Belief
The word ‘Credit’ comes from the Latin word, Credo (meaning: “I believe”).
You may wonder how a notional word evolved into a finance jargon. Think about it… the credit is based on belief, the belief that the borrower will return the money.
Belief is subjective… how will the lender put belief in ‘borrower’?
The simplest way is ‘to take collateral’ — Gold, House, land etc. Not just that, Fixed Deposits, Insurance policies can also be taken as collateral.
If a borrower defaults on a gold loan, the lender doesn’t have to think much as the lender has the borrower’s gold.
Another way is… check whether the borrower is ‘credit worthy’… meaning whether the borrower has a record of borrowing and repaying it back on time.
Who can tell you the credit worthiness?
Credit bureaus (Credit Information Companies) such as TransUnion CIBIL, Equifax, Experian, CRIF Highmark.
Credit bureaus are RBI licensed institutes that collect borrowers’ data from lending institutes (banks, NBFCs etc.) and then spit out a credit score. Credit Scoring is a ‘black box’ and credit score logic and scoring varies from bureau to bureau. Higher credit score indicates better credit worthiness.
Looks simple na? If you want a credit card then your lender (e.g. issuing bank) can simply check your credit score and decide whether you are ‘worthy’ of getting one… it is that simple… but wait… what if I don’t have a credit score?
Then… you are in Catch 22 situation: you won’t get a credit card if you don’t have a credit score and you can’t have a credit score without a credit card (assuming you don’t have other loans)
But what if you are ‘good’ with returning money but you do not have a credit score or you do not have collateral?
So we have to find a way to use alternate data… that can be used to build ‘that belief’ or ‘credit worthiness’. This data can be whether you have a car loan, how much tax you paid, whether you have insurance, whether you have investments in Mutual Funds etc.
Clever… these data points surely indicate whether the borrower is ‘good’ in returning borrowed money. But the problem lies in not having a central repository of all these data pointers… data is sitting with different institutes/companies and governed by different regulators who work in silos.
Thus, the birth of the Account Aggregator model…
The idea is simple: Bringing the financial data that is sitting in silos onto a single platform.
How this is done:
Such a collaboration won’t happen without framework and guidelines… RBI issued guidelines for NBFC Account Aggregator (AA)
Entities and Actors involved:
- Financial Information Provider (FIP): Entities that have user’s financial data (can be bank, NBFC, Mutual Fund house, Insurance Providers, Tax/GST platforms)
- Financial Information Users (FIU): Entities that lend (Bank, NBFCs etc.)
- NBFC Account Aggregator: Entities that are licensed by RBI to collect data from FIPs and share it with FIUs (there are bunch of guidelines for AAs)
- TSPs: Technology Service Providers (who interpret data)
- User: You, me and any company who is willing to be part of AA ecosystem by giving consent
Process:
- A user has to download one of the AA apps (Here) and provide consent.
- Lending company will have integration with the AA via a TSP.
- So when you apply for a loan, the lending company will be able to access your financial data, play around with it (‘do science stuff’) and approve the loan
Put your trust in God and show me the data:
Yes, exactly. Just because there is data, doesn’t mean the user becomes credit worthy. FIUs have to decide (do AI/ML thingy or ‘do science’) and give you credit.
Will this data driven model be successful?
That is the problem with data… As I have serious doubts about the ability of FIPs to have correct data and have even more serious doubts about them using that data responsibly.
Here are few of my personal examples:
- Maxlife keeps sending me SMS and calls me every day to pay the premium of a policy that I stopped 8 months back
- LIC added an additional ‘A’ to my name
- Bajaj Finance shows my loan is active which was pre-closed in 2016
- As per HDFC Securities, my apartment number is 48 and not the actual number 4 B
- Slice Card updated my flat no as ‘Fa D’ instead of 4B
Data works on a golden rule — “Garbage In and Garbage Out”.
AA <> OCEN
OCEN (Pronounced as o-ken not o-sen… else people will judge you :) )
The core idea of OCEN is to put in place a set of frameworks and protocols that can enable the democratisation of credit. [wow… lot words but no clue what it means]
In simple language, “OCEN contains the APIs for each step of the lending lifecycle. Digital Platforms can integrate with these APIs and integrate with the lenders seamlessly and digitise the entire lending process and offer loans on their platform”
[If you wish to know more then read here]
So what is this ‘hungama’ about AA… it was called ‘UPI movement in lending’.
Unlike payments companies (which are stuck in a never ending price ‘quarrel’), lending companies can enjoy profitability. In a credit hungry country, it is super important to come up with innovative models to lend while reducing the risks. [Else lending is pretty much same since the day it is invented]
But I wonder if companies will genuinely put effort to use AA or on surface claim that they are using AA but underneath simply fetch CIBIL score to issue loans or is it some big facade to raise more funding from investors!
