When it comes to digital lending, data is not enough. In India’s digital lending ecosystem, there has been a race to collect more and more data on borrowers as the theory suggests that more data leads to more loan disbursements. However, data is only the beginning of a strong lending process, not the end.
Here is how.
The business success of companies that offer digital loans does not only depend on the amount of data. It is the quality of the underwriting as well as the wealth of the said data that makes the lending possible. Additionally, the borrowers will make the greatest leap in their overall experience with the financial institutions.
This is made possible by the development of innovative underwriting, which is being driven by the latest data innovations as well as clever risk modeling at the fintechs, which are now at the forefront of digital credit sales in the country.
However, the loan is still the responsibility of the lender or the NBFCs who write it on their balance sheet. In order for the risk teams to have a good night’s sleep, it is imperative that a lender be very confident about properly assessing borrowers. At the same time, worries about profitability creep in, because more appraisals usually mean more manpower.
So what does a lender and / or fintech need to build the strongest borrower review process while ensuring a seamless borrower experience?
At least a comprehensive look at multiple transactions linked to multiple bank accounts. For a truly holistic assessment, you would need to include pension data, tax data, insurance data, and securities data in the list.
It is not a simple process to bring these data sources together and evaluate them efficiently. For the borrower, this means passing on physical and scanned copies of bank statements, notifying relevant documents and sharing passwords to give third parties access to financial history. For the lender, it means understanding different data sources through a time-consuming and error-prone process.
Bringing different data sets together
Data plays a key role in improving access to low-cost, customizable financial products and thus in promoting financial inclusion. The smooth exchange of information between the Financial Information Provider (FIP) (IT department, banks, asset management companies) and the Financial Information User (FIU) (the lender) is an essential part of this process.
This is where the Account Aggregator (AA) comes into play. Account Aggregators are an RBI approved non-bank financial institution that acts as a technology intermediary between the FIP and the FIU. Banks create an API for every product they offer – from deposits to credit cards – and these APIs connect to account aggregators to send information as FIPs and receive information as FIUs.
This replaces the time-consuming processes mentioned above with a secure, mobile-based digital data exchange – the first step towards the introduction of open banking in India.
In the Account Aggregator ecosystem launched in September 2021, data is shared with the FIU with the full and transparent consent of the user, who can revoke this consent at any time. With ongoing privacy concerns in the digital age, account aggregators ensure the security of all data collected and shared.
Expand access to credit
In 2019, the government announced its ambitious vision of turning India into a $ 5 trillion economy by 2025. However, corporate and individual lending needs to scale quickly for this vision to become a reality.
Account aggregators play a vital role in expanding credit access for new customers and businesses. MSMEs in particular have limited access to formal credit as almost 85% of companies are unregistered. This lack of formal data and credit history would otherwise exclude them from the formal banking system.
But even these segments, which have traditionally been excluded from formal creditworthiness, have a comprehensive digital footprint resulting from transactions with various payment apps.
The Account Aggregation Framework enables these small businesses to share their financial footprint and transactional data with lenders who can hedge them based on cash flows, online spending behavior, tax returns, and more.
By minimizing the need for paperwork and separate submission, account aggregators enable faster and more efficient data exchange. This enables lenders to rate borrowers and process loan applications faster without compromising on data security or quality. In addition, the continued exchange of data with lenders can also help make them more convenient when it comes to lending to new loan customers.
With the introduction of the Account Aggregator ecosystem, borrower ratings have become not only faster, but also more reliable. First, unlike manually uploading bank statements, the AA data is tamper-proof. Second, with mobile data or digital footprints collected by loan apps, AA can help quickly identify a pool of pre-qualified borrowers, saving them time and lender costs. Third, with the high quality aggregation of financial, transactional, personal, and other data in technology-driven credit ecosystems, risk modeling becomes even stronger over time.
All of this is intended to work together to reduce payment defaults and give lenders and fintechs more confidence in lending.
Enabling a new paradigm of financial transactions
The Account Aggregator Framework, combined with contextual credit offered on apps and digital platforms, will do for lending what UPI did for payments. It enables instant, small ticket size loans with ease and minimal documentation.
Embedded credit providers using account aggregators can now secure borrowers faster and better with a unified view of their finances.
Together, these advances will go beyond just improving lending. Loans can finally get to those who need it most – first-time borrowers outside of urban India, first generation entrepreneurs, and your local neighborhood kirana business.
The author, Rajat Deshpande, is the co-founder and CEO of FinBox. The views expressed are personal