By Ashish Desai & Hrushikesh Mehta
“Poverty is the deprivation of opportunity,” said economist Dr Amartya Sen. For the financially weak, financial inclusion enables access to credit and channels their savings into investment. As per the global Findex database, published in 2018, 80% of Indians have bank accounts. Thanks to India’s digital public infrastructure, specifically India Stack, India took only six years to reach 80%+ bank account penetration, which otherwise would have taken 46 years. The India Stack consists of:
Identity Layer: Powered by Aadhar, this facilitates unique identification number and electronic verification of the customer’s credentials.
Payment Layer: Enabled by UPI and other payment technologies offered by NPCI.
Consent Layer: The Account Aggregator framework, launched as recently as August 2021, powers the digital sharing of standardised, high-provenance data, digitally signed and directly from the source. The first and most compelling use case is in lending.
While the first two layers of the India Stack enabled account opening and subsequent transactions (UPI recorded 14.04 billion transactions in May 2024), access to credit is still challenging for micro and small entrepreneurs. Credit is available to corporations and salaried people with relative ease; micro and small entrepreneurs are completely underserved, primarily due to a lack of data footprints. They are relatively ‘data dark’, i.e. there is no clear way to assess their creditworthiness since they have no formal access to credit and, hence, no repayment track record.
Additionally, there was no formal system to enable the sharing of high-provenance data outside of credit information. There is also a product segment mismatch. At the same time, the bottom of the pyramid could afford smaller loans; it was not economical for financial institutions to serve them, given the manual processes involved.
The third layer of the account aggregator facilitates the closing of this gap. Let’s delve into a key component of the India Stack: The Account Aggregator (AA). But first, what exactly is an Account Aggregator? An AA is an RBI-regulated entity enabling individuals to consent to share their data with any regulated third party. Bank statements, SEBI-regulated depository and mutual fund data, and GST data are available on the AA network.
This provides a game-changing opportunity to drive financial inclusion. Why? Currently, bank statements must either be downloaded, stamped, scanned, and then uploaded again, or a scrapping tool is used to access that data. This results in the potential of fraud due to tampered statements or reduced trust because one is expected to provide login details to unregulated companies.
However, with AA, this process can be digitised and simplified. Imagine a customer who wants to get a small business or personal loan, and he is a customer with Bank A and intends to apply for a loan from financial institution B.
To assess his creditworthiness, banks would require his credit bureau score and his bank’s transaction data to determine cash flows and, in turn, his ability and possibly willingness to repay the loan. AA replaces the paper process with a secure consent-based framework to move data from financial institution A to financial institution B in just a few clicks.
It is important to note that AA registration is entirely voluntary for consumers. The sender encrypts the data AAs share, which only the recipient can decrypt. The end-to-end encryption and use of technology make the process much more secure than sharing paper documents. In addition, data-sharing consent can also be revoked, which is a unique feature in data-sharing architecture worldwide.
The early results from the usage of AA in lending have been remarkable. Based on discussions with lenders, a 30% increase in successful applications was observed, while the cost of onboarding a customer has dropped by 65%. Notably, fraud rates from tampered bank statements have been nullified. AA has simultaneously solved the issue of ease of use (loan sanctions in minutes), high provenance data, and lower costs. This should translate into lower costs and more options for borrowers over time.
AA was launched in August 2021, and in less than three years, the number of accounts linked to an AA handle has risen to 88.6 million (as of June 2024), and 88.63 million consents have been successfully fulfilled through eight active AAs. Till June 2024, Rs 42,300 crore of loans was disbursed to 42.20 lakh consumers and enterprises.
There is no denying that issues of technology breakages, such as seamless interoperability and timeout, need to be resolved. Still, this is to be expected for something developed at this scale. As the issues resolve over time, AAs as Digital Public Infrastructure (DPIs) will play a pivotal role in enabling affordability, accessibility, and applicability of financial products, thereby driving financial inclusion in India.
Ashish Desai is Associate Professor, Information Management and Analytics at SPJIMR, and Hrushikesh Mehta is Sr. VP at Open Network for Digital Commerce (ONDC). Views expressed are personal. Reproducing this content without permission is prohibited.