Account aggregator framework set to change dynamics in retail finance scene

Among the key data points in  this year’s Economic Survey were the following: More than 1.1 billion bank accounts are being shared under the account aggregator (AA) framework; 23 banks are now live on it; and 4.4 million users have shared their data on the platform. It confirms the finding of the country’s first analysis of AA performance in August 2022 — by Finbox, a B2B fintech credit infrastructure company — that the financial services sector is on the cusp of some truly exciting developments.

The analysis showed that 90 per cent of those who opted for the AA route closed their loan applications — almost twice the conversion rates seen in net banking and manual PDF uploads. The survey, which covered more than 380,000 account holders, also revealed that fraudulent uploads fell to 6.4 per cent from 11.04 per cent due to direct data-transfer between financial information providers (FIPs) and financial information users (FIUs).
 

The AA framework is creating a huge marketplace — based on customers’ consent for sharing data — for all manner of financial vendors. It does away with the earlier carpet-bombing approach to customer acquisition, even as clients can seek and avail themselves of tailor-made offerings.
 

Will bespoke pricing and offerings across retail to be a reality soon?
 

They might be around the corner, but “AA has uses beyond personal finance management, wealth management, and advisory services,” says Rajat Deshpande, founder and chief executive officer of FinBox. With large FIPs such as Income Tax and GSTN (Goods and Services Tax Network) set to join, it will act as a huge incentive for more and bigger FIUs to come on board. “This will create demand pressure on pricing.”
 

The monthly growth in consents filed for AA was nearly 60 per cent in 2021-22 (FY22). And if the trend continues, new commercial models are bound to come in. AAs may be able to price themselves more competitively once they acquire a critical mass of users. The bigger FIUs with paying capacity could build solutions around AA, and another set will be those who can build consumable analytics on top of the data fetched via AAs.
 

Two critical developments to watch out for is cross-selling (the number of products and services hawked to a customer), and whether it will also lead to a shift in deposits from banks with relatively poor retail banking abilities. 

“AA will help cross-selling quite meaningfully based on how banks triangulate data from it, credit bureaus and some unstructured data as well. And this will no doubt play out on the liability side as well. It can potentially bring on far-reaching changes over time,” says Shyam Srinivasan, managing director and CEO of Federal Bank.
 

No study on banks’ cross-selling in India is in the public domain, but senior bankers put the number at 3.5 for the better banks. Wells Fargo had claimed to be a world-leader in cross-selling among banks, with a ratio consistently near six. Banks around the world sought to emulate its business model.
 

Of course, a pitfall of the desire to hike cross-selling is greed. In 2016, Wells Fargo was involved in the alleged creation of over two million fake bank accounts by thousands of its employees. It was asked to pay $185 million in fines for creating over 1.5 million accounts and 500,000 credit cards that its customers never authorised.
 

This is not to downplay the importance of cross-selling. The renewed interest in this game helps banks to both reduce the cost of customer acquisition and conserve capital, which is expensive. This has implications for an industry reeling under margin pressure — the wholesale book of banks has been under stress owing to a sluggish economy for a good part of the past decade and more.
 

Some have sought to compensate this with a shift to more profitable retail loans. Take Axis Bank, for example. More than 80 per cent of its retail assets are sourced from existing customers. And three years ago, it made a fresh start with “Aarambh”, to enhance product personalisation and cross-selling.

Nikhil Kurhe, CEO of Finarkein Analytics, argues that cross-selling also depends on the post-consent behaviour of customers. “Whether they will utilise it to shop for better products and get bespoke deals is to be seen. It will also call for customer education on behalf of lenders. What I mean is that in itself, the AA framework will not lead to better cross-selling”.
 

But, he adds (seconding Srinivasan’s stance) that “on the liabilities side (read deposits), you could see customers shift loyalties (akin to telecom number portability) and this, in turn, can affect the pricing on the asset side as well.”
 

Take account portability. It was an idea mooted by S S Mundra, then deputy governor of the RBI. “Just consider the possibility of a dissatisfied, or less than satisfied customer asking for shifting the banking relationship — lock, stock and barrel to another bank. He/she would ask, ‘If I can switch my mobile service provider without changing my mobile number, why not a banking service provider without changing my account number.’”

The idea never took off. It would have meant considerable rewiring of banks’ innards, reorienting staff behaviour, and revisiting strategies. But nearly six years on, the world has changed (and a National Financial Information Registry, or NFIR, is also in the works).
 

Where does the NFIR fit in with AAs? “They can utilise the NFIR to get permission from customers before accessing their financial data, protecting the privacy of customers. The NFIR also enables AAs to acquire current and accurate financial data from a variety of sources, making it effective,” notes Sreekanth Nadella, MD and CEO, KFin Technologies. 
 

And with AA gaining traction, it would not be far-fetched to imagine that it will only reshape the lending and liabilities side of the game. It raises several other questions as well. If banks can expand their retail footprint via AA, should they factor this in when they think of acquiring another bank, or even a slice of its business — like Axis Bank’s buyout of Citi’s retail book?
 

What will this mean for the country’s state-run banks, which are losing business at a fast clip to private banks — on both the assets and deposits side (in retail, especially)? Will this erode their valuations, and perhaps more critically, affect their sale?
 

The account aggregator is a genie!