In today's newsletter we talk about the new buzzword in town —Account Aggregators, and how they plan to revolutionize the world.
The idea behind account aggregation is simple. Your digital footprint is everywhere. Unfortunately, it’s locked up in silos operated by different agencies. For instance, your bank has access to your savings account information and the transactions you’ve made using this account. Data about your other investments are tied up elsewhere — mutual fund aggregators, mutual fund houses etc. Your insurance company has data related to your annual premium payments. And that’s locked up somewhere else. In essence, there’s no way you can access your data from a single touchpoint.
Unless you use an Account Aggregator.
Account aggregators (commercial entities) try to bring together disparate agencies like banks, mutual fund houses etc. (Financial Information Providers, FIP) and connect them to other entities that could use this information (upon user consent) to provide wide-ranging solutions that could make life easier for you — the end consumer.
Think — lending. Lending platforms in India have had a tough time probing prospecting customers, trying to evaluate their creditworthiness i.e. ability to repay loans. More often than not, it’s because they can’t get people to put up any real collateral and instead, you have to assess an individual's repayment ability based on his monthly income (cash flows). Getting a hold of this information on a real-time basis is a pain. If only lending platforms could access customers' data (on banking), they could immediately grant a loan. With Account Aggregation, that’s a real possibility.
Once the user consents to share his information with the lending platform, the account aggregator fetches the transaction-level data from the bank and transmits it to the lending platform. Meanwhile, the Account Aggregator can’t see or use this data. They simply act as a conduit to facilitate the exchange. It’s all very amazing.
But wait, what’s the incentive for an FIP to share their precious data elsewhere? Why would they even want to offer this information to some lending startup working out of Bangalore?
Well — reciprocity. You can’t use data from an Account Aggregator (AA) unless you are willing to share what you have. If a bank were to refuse to share information, they would probably not be able to use information about a customer (from another bank) and offer their own services on top. Ergo, if you want in on the information, you’ll have to show the AA what you have. And rumour has it that some of the biggest banks in India are already on board.
And considering that the groundwork is already in place, it’s perhaps prudent to look at some other use cases. Now since we are a website that has strong ties to the investment arena, we will talk about financial planning. Imagine having access to an individual’s net worth, savings account details, other investments to then offer a tailor-made plan to suit his requirements. That would be amazing. But the real game-changer is likely to transpire in the risk profiling department. Right now most people assess an individual’s risk appetite by simply asking the consumer what he believes — more risk, less risk etc. Unfortunately, asking an individual if he wants to pursue higher risk and therefore higher returns is much like asking your pet dog if it wants more food. The most likely answer is going to be — yes. But we both know that this approach is sub-optimal.
Instead, if a planner could check an individual investor’s track record, and see how well they stack up, it’s likely to yield a more accurate assessment. Imagine somebody who’s sold his mutual funds every time there’s a short blip in the market. You know he is more likely to stick the course if he were on a conservative roadmap. Yet, for all we know, he’s already moved most of his assets into Real Estate (after that terrible market downturn) and is now looking to generate a return of about 5% every year with a small plot in Koramangala. A terrible shame that.
Also, most online financial planners right now are dummies in many ways. They’ll ask if you want to buy a house in Bangalore in 5 years and offer a plan that involves a monthly SIP of 80,000. How is an individual supposed to make a monthly investment of 80,000 when he’s barely making 40,000 a month after tax?
Well, he can’t. And that’s precisely why we need financial planners to be smarter. Planners that can analyze an individual’s finances, and offer recommendations that are in line with his abilities and expectations. Account Aggregation will make one-half possible — with the data.
If there was someone else just trying to build the other half. Wouldn’t that be splendid? :P
Point of Interest: AA's will be regulated by Reserve Bank of India.
Well, in any case, that’s it from us. However, if you are looking to read more about the whole AA phenomenon, here’s an excellent piece from Aaryaman that should answer most of your questions.