Surge in Lending Scams: How Account Aggregator framework will help mitigate the ecosystem
With multiple Fintech companies offering easy credits, it’s becoming increasingly difficult to determine the creditworthiness of a loan seeker, unless the data is available from all the sources, from which the person has taken loans. To overcome the challenge, the Reserve Bank of India (RBI) has authorised formation of an Account Aggregator (AA) framework, which would collect data from all the loan providers to determine the authenticity of loan seekers, which in turn would reduce the instances of lending scams.
Rajat Deshpande, CEO, and Co-founder of FinBox, describes how AA would reduce fraud lending and increase the ticket size of loans to authentic borrowers.
What is AA and how it works
Consider an Account Aggregator (AA) a leak-proof conduit for financial data. The framework is built on the Data Empowerment and Protection Architecture (DEPA) to ensure secure portability of data between stakeholders.
It’ll help reduce frauds traditionally associated with physical data sharing by introducing secure digital signatures and end-to-end data sharing. Throughout the process, borrowers are fully aware of what they are consenting to and can revoke this consent at any time – data misuse is thus prevented from both ends.
At the same time, the previous alternative to AA was bank statement analysis which is very expensive and error prone if done physically. Also, the fraud that happens the most involves users simply creating fraudulent bank statements to get a loan. With AA, those problems will vanish as the data will come directly from the bank or their financial institution.
Moreover, since account aggregators aggregate data from multiple sources, they ensure a wider variety of parameters are factored in while underwriting, thus diluting instances of fraud. Bad borrowers are weeded out at the initial stages of the risk assessment process, and transaction costs come down. Lenders thus have the leeway to be flexible with loan amounts offered to authentic borrowers.
Reduces the barriers to access for new-to-credit customers
Those who have long been left out of traditional lending – MSMEs and new-to-credit borrowers – will benefit hugely from the AA framework. Traditional lenders usually seek immovable collateral along with prior credit history when underwriting loans – MSMEs often do not have immovable collateral and naturally, new to credit customers have no history to show.
With the AA framework, their creditworthiness can be assessed through alternate data sources such as GST invoices, bank statements, bill payments, and other cash flow surrogates. It removes the requirement for physical collateral and boosts access to credit for an untapped borrower pool.
Enables innovation in financial services across below-tier cities
The innovation in the FinTech space is entirely dependent on the information asymmetry. Solving for this asymmetry is the first step to launching truly innovative products and services. For instance, with the launch of the GST regime, the information asymmetry vanished about applicable rates and taxes in different states and suddenly, the revenues started growing as more people became comfortable with inter-state trade.
Similarly, by solving information asymmetry at a very deep level, the AA framework is bound to create new use cases across various industries. Be it a trading app that can do quicker KYC or a lending application that can pre-assess and approve a certain pool of borrowers and give them loans-on-the-go.
Some other use-cases are likely to emerge around the identity side as well. Data from AA is fraud-free and 100 per cent verified so there is potential for AA data to be used across the financial services spectrum without having to do manual KYCs or in-person visits. This will bring down the cost of serving each consumer massively and overall, reduce the pricing for the entire market.
Account aggregators are already collaborating with FinTechs – neobanks in particular – to provide innovative products to underbanked populations. For now, digital lending has taken off but soon, insurance and investment could be next.
Check the source here –Source, Financial Express.