In September 2016, the Reserve Bank of India (RBI) released the account aggregator guidelines, providing a framework for a special category of non-banking financial companies (NBFCs) known as account aggregators. However, despite the potential benefits they offer in terms of financial inclusion, the business model of account aggregators faces significant challenges.
The Importance of Account Aggregators in Financial Inclusion
Millions of individuals and small businesses struggle to access loans, insurance, and other financial products due to the lack of customer data availability for banks and insurance companies. While there is a wealth of financial data available, it is often scattered across multiple organizations. As a result, the entire process, from data sharing to underwriting and disbursement, becomes cumbersome and time-consuming. This inefficiency leads to customer drop-offs and a loss of business for banks.
The Role of Account Aggregators
Account aggregators act as intermediaries, retrieving customer data from one financial institution (the financial information provider, or FIP) and securely sharing it with another financial institution (the financial information user, or FIU), with the explicit consent of the customer. FIPs can include banks, asset management companies, depositories, and insurance companies, while FIUs encompass banks, brokers, alternative investment funds, and insurance companies, among others. In essence, account aggregators facilitate the seamless flow of relevant data between these two entities.
Challenges Faced by Account Aggregators
While there are currently 14 companies that have received operating licenses from the RBI, with three more having received in-principle licenses, the business model of account aggregators is not without its problems. Two major conglomerates, Reliance Industries Ltd and Aditya Birla Group, surrendered their newly-approved licenses in 2019-20, potentially due to a lack of a solid business case.
Relevance and Scale of Account Aggregators
Despite the challenges, some account aggregator firms have shown promising growth. For instance, Pune-based firm Finvu claims to process between 150,000 and 350,000 new consents (customer consent to share data) on a daily basis. Additionally, the ecosystem boasts over 80 FIPs, including the top 10 public sector banks and the top 10 private banks. Sahamati, a non-profit organization responsible for setting standards and codes of conduct for the account aggregator ecosystem, reports that as of September this year, they had received 102 million customer consents.
The Lingering Question: Is there a Viable Business Model?
Despite these positive developments, it is important to address the fundamental question that dissuaded major conglomerates from pursuing the account aggregator license in a previous instance: does the business model of account aggregators hold up under scrutiny? With the complex dynamics of the financial industry and the challenges posed by data privacy and security, finding a sustainable and profitable model remains a crucial challenge for account aggregators.
Account aggregators play a vital role in addressing financial inclusion by streamlining the data flow between financial institutions. However, the broken business model of these aggregators poses significant hurdles. While there have been successes and promising growth, the ultimate viability of the business model of account aggregators requires further examination and refinement to ensure long-term sustainability and profitability.
Exploring the Business Model of Account Aggregators
In this article, we will delve deeper into the business model of account aggregators and examine its current state. Account aggregators play a crucial role in facilitating the flow of financial data between institutions, but the challenges they face raise questions about the viability and sustainability of their business model.
The Payment Structure of Aggregators
Aggregators receive payment from financial information users (FIUs) for the services they provide. When the framework was introduced in 2021, FIUs paid aggregators an average of ₹10 to ₹30 per data pull. However, the increasing number of aggregator licenses led to competition and a downward pressure on prices. Currently, some aggregators are experiencing prices below ₹5 per data pull. In cases of high volumes, FIUs negotiate even lower charges, sometimes as low as 75 paisa per data pull.
For example, NeSL Asset Data Ltd (NADL), an account aggregator company, charges ₹2 per data pull according to its published tariff plan.
Competitive Pricing and the Challenges Faced
The growing number of licensed account aggregators has created an extremely competitive business atmosphere, with pricing undercutting becoming the norm. NADL pointed out the need to popularize the usage of account aggregators as the default option in digital financial transactions on a large scale. While lower pricing has been beneficial for end customers, it has made the account aggregator environment challenging for businesses. However, with a monthly usage growth rate of 15% to 20%, the industry is moving towards long-term sustainability. The regulator, RBI, is also playing a crucial role in this effort through its ‘RBI Kehta Hai’ series currently airing in digital media.
The Impact of Market Size on Revenue
The small size of the market poses additional challenges for account aggregators. Sahamati projects that data pulls through account aggregators could reach 500 crore by 2027. The revenue generated by aggregators is directly linked to this data.
For example, if the rate is ₹1 per data pull, the revenue would be ₹500 crore. In comparison, if the rate is 50 paise, the revenue would be ₹250 crore, as explained by Tejinder Pal Singh Manchanda, CEO of CAMS Financial Information Services Ltd, an account aggregator company.
Expense Structure of Account Aggregators
Apart from resource costs, account aggregators also incur expenses on application programming interfaces (APIs) that enable communication between different applications and SMS for one-time passwords. When a customer provides fresh consent, multiple API calls are made, resulting in an accumulated cost of a little over ₹5 per consent.
The Challenge of Unit-Level Economics
The unit-level economics are heavily stacked against account aggregators, as most companies lose money for every data pull request. This raises concerns about the sustainability of the business model.
Founder of Finvu, Manoj Alandkar, expressed his viewpoint, stating that this is not a sustainable business.
Bottlenecks faced with Large Financial Institutions
In addition to the economic challenges, account aggregator companies also face difficulties in doing business with large financial institutions. This poses further obstacles to their operations.
Account aggregators play a crucial role in facilitating the flow of financial data, but their business model faces significant challenges. Despite competition and pricing pressures, the industry is showing signs of growth and sustainability. However, the small market size, expense structure, and unit-level economics raise concerns about the long-term viability of account aggregators. Overcoming these challenges and establishing effective partnerships with financial institutions will be key to their success.
Revamping the Account Aggregator Ecosystem
The account aggregator framework is still in need of refinement and maturation on structural efficiency parameters, according to an executive from Kotak Mahindra Bank. In order for this ecosystem to succeed, it depends on the active participation of Financial Information Providers (FIPs), such as top banks, in the data sharing process. However, many FIPs listed on paper are not actually active in practicing data sharing.
Limited Functionality of FIPs
For example, Bank of Maharashtra and Kotak Mahindra Bank are listed as FIPs, but their failure rate in data sharing is as high as 99.99%. This means that the account aggregator attempts to fetch data requested by a Financial Information User (FIU) after obtaining customer consent but fails. Kotak Mahindra Bank acknowledges the potential of the account aggregator model, stating that it continues to be a promising solution for various use cases, including lending and personal finance management. However, the framework still requires fine-tuning and maturation to improve structural efficiency parameters.
Data Limitations and Format Challenges
Some large banks may oblige to share data but only provide a partial dataset that does not meet the FIU’s requirements for making lending decisions. The data is supposed to be shared in a structured and predefined format, including transaction details such as transaction type and mode. However, many banks do not adhere to this format, making it difficult for account aggregators to understand money transactions.
For instance, when an account aggregator attempts to fetch one-year customer data from the State Bank of India (SBI), SBI only agrees to provide six-month data. Moreover, there may be further restrictions, such as a limit of 150 data points or the earlier occurrence of six months. This limited data set may not even include critical information like salary deposits, which greatly hinders the loan underwriting process based on such incomplete data.
Concerns of Banks
One reason that makes banks, when acting as FIPs, unwilling to participate is the lack of incentive. Sharing data increases the likelihood of losing business to rival companies on the FIU side. It is important to address this imbalance and provide the proper incentive for banks to actively engage in the account aggregator process.
Challenges for Banks’ Core Banking System
Moreover, banks raise concerns about the saturation of API calls they receive from multiple platforms (FIUs) seeking the same customer’s data for loan processing. This puts a strain on the banks’ core banking system bandwidth. For instance, when a wealth management fintech continuously pings a bank for customer data, it becomes burdensome for the bank to process and integrate this information. These challenges need to be addressed to ensure smooth integration and a positive outcome.
Survival Strategies
Given the broken business model, account aggregator companies are finding ways to survive. One approach is to establish a separate entity called a Technology Services Provider (TSP) within the account aggregator ecosystem. TSPs play key roles in encrypting and decrypting data for FIPs and FIUs, as well as analyzing the data to make it meaningful for consumption. This analysis part of the process allows TSPs to command a premium, earning between ₹20-50 per statement analysis. This area holds promise for account aggregator companies to leverage the value of their services.
Industry Outlook and Consolidation
Account aggregator companies have expressed concerns to the regulator about the excessive number of licenses and the resulting commoditization of prices. Industry consolidation has already begun, with larger companies acquiring smaller ones. For example, KFintech acquired a stake in OneMoney, one of the first companies to obtain an account aggregator license. Fintech unicorn Pine Labs acquired Setu, which holds both an account aggregator license and TSP.
As the industry continues to evolve, some experts remain optimistic about the future of account aggregators, likening their growth trajectory to that of credit bureaus in India. The potential for use-cases in lending and investing is vast, especially in the micro, small, and medium enterprise (MSME) sector, which has a credit gap of around ₹25 trillion. The account aggregator flow has the potential to bridge this gap and revolutionize financial services.
Conclusion
While the account aggregator ecosystem is still facing challenges and requires further improvement, stakeholders are actively working towards scaling and enhancing its efficiency. By addressing the concerns of FIPs and ensuring data availability in the required format, the ecosystem can unlock its full potential in simplifying financial services for customers and institutions alike.
Disclaimer:
Estabizz Fintech compiled the material in this article using the most recent Acts, Rules, Circulars, Notifications, Provisions, Press Releases, and material applicable at the time. They ensured the completeness and correctness of the material through due diligence. When using this material, users must consult the relevant, applicable legislation. The given data may change without prior notice and does not constitute professional advice. Estabizz Fintech disclaims all liability for any results from the use of this material.
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