The Significance of Account Aggregators in Reviving MSMEs

The Micro, Small, and Medium Enterprise (MSME) sector is a crucial contributor to India’s economy, accounting for around 30% of the country’s Gross Domestic Product (GDP) and providing job opportunities for approximately 11.1 crore people. Despite their significant contributions, only 39% of MSMEs have access to formal credit sources, as per government statistics. The reason for this gap could be the lack of affordable, low-cost, collateral-free credit options accessible through formal banking channels. MSMEs often struggle to access the credit they need to grow and thrive. This challenge has been exacerbated by the COVID-19 pandemic, which has had a significant impact on MSMEs’ operations and financial health. However, there is hope for these businesses in the form of account aggregators (AAs).

What is an Account Aggregator ?

An account aggregator is a licensed financial technology platform regulated by RBI that allow individuals and businesses to consolidate their financial data from various sources. These platforms enable MSMEs to access credit and other financial services more easily by providing financial institutions with a complete view of their financial profile, including bank statements, credit card statements, and other financial data.

AAs can be a game-changer for MSMEs, as they provide a more accurate and detailed picture of their financial health to financial institutions. This increased transparency can help MSMEs access credit more easily and at more favorable terms. The AA ecosystem facilitates the transfer of an individual’s data from one financial institution to another with the help of "AAs," who are interoperable data-blind intermediaries.The system relies on the participation of various Financial Information Providers such as banks, Non-Banking Financial Companies (NBFCs), Asset Management Companies (AMCs), depositories, insurance companies, GST networks, etc., which hold the data that the individual wants to transfer, and consent-based data sharing is enabled through these key actors.

FIUs, such as banks, NBFCs, and fintech companies, offer innovative financial products to customers, including loans, and also act as users of financial information. AAs, serving as consent managers for individuals transferring their data, facilitate the movement of such data.

One of the most significant benefits of using AAs for MSMEs is that they can help businesses overcome the challenges they face when trying to access credit. Financial institutions often require a significant amount of documentation and information to process loan applications. This can be a challenge for MSMEs, which may not have the resources or infrastructure to provide this information quickly and efficiently. AAs can help by consolidating this information and presenting it to financial institutions in a format that is easy to understand and process.

Several successful case studies demonstrate the benefits of using AAs for MSMEs. For example, an MSME in India that used an AA to access credit was able to secure a loan that was 40% larger than what they had initially applied for. This enabled the business to invest in new equipment and expand its operations, creating new jobs and contributing to the local economy.

Over time, the AA ecosystem has the potential to develop financial products that are specifically tailored to the needs of MSMEs, making them more accessible. For instance, consider a vendor who operates a daily stall in the local market and wants to set up an additional stall. This vendor, like many others, receives payments through QR codes and earns an average of Rs 3,000 per day. When he approaches a bank for his first credit product, he may face rejection due to a lack of credit history, the need for collateral for a small loan, or the absence of a suitable credit product that meets his requirements. However, with the emergence of the AA ecosystem, there is an opportunity to create relevant and easily available financial products for MSMEs, potentially addressing such issues.

The AA platform will enable vendors like the one mentioned to access their first credit product without needing to provide a guarantor for repayments or a credit bureau score. This will be made possible through the consent-based sharing of their microdata. As a result, the FIU (in this case, the bank) can develop and offer relevant, cost-effective credit products to such vendors. By analyzing their consistent cash flow, the FIU can evaluate their repayment capacity, turning their everyday transaction history into a source of credit. This also eliminates the need for such vendors to seek credit from informal sources. The emergence of the AA ecosystem also opens up a new customer segment for FIUs to design financial products that leverage this financial information as collateral, allowing them to assess the creditworthiness and revenue potential of a microenterprise without requiring traditional collateral.

The adoption of the AA ecosystem facilitates a move away from the conventional asset-based lending model towards a cash-flow oriented approach that caters to microenterprises.

On the demand side, data suggests that MSMEs are eager to share their data with banks in return for tailored products, reduced interest rates, and an improved banking experience. Therefore, the responsibility lies with the FIUs to capitalize on and maximize the potential of the ecosystem.

Despite the vast potential of the AA ecosystem to transform credit accessibility for MSMEs, there are some challenges that businesses and financial institutions may face when adopting these platforms. One of the main challenges is data privacy and security. Businesses may be hesitant to share their financial information with third-party providers, and financial institutions may have concerns about the security of the data they receive. To address these concerns, AAs must ensure that they have robust data privacy and security measures in place and that they comply with relevant regulations and standards.

Another challenge is the integration of AAs with existing financial systems. Financial institutions may need to make significant changes to their systems and processes to integrate AAs effectively. To address this challenge, AAs can work with financial institutions to streamline the integration process and provide technical support and guidance.

In conclusion , account aggregators can be a powerful tool for rescuing MSMEs and driving economic growth. By providing financial institutions with a complete view of their financial profile, MSMEs can access credit more easily and at more favorable terms. AAs can also help businesses manage their finances more effectively, improve their financial health, and contribute to the local economy. However, businesses and financial institutions must address the challenges of data privacy and security and system integration to fully realize the potential of AAs.

Faq’s :

Some frequently asked questions (FAQs) on Account Ag gregator:

What is an Account Aggregator?

A: An Account Aggregator is a technology platform that enables individuals and businesses to aggregate their financial data from multiple financial institutions and view it in one place.

How does an Account Aggregator work?

A: An Account Aggregator works by connecting to various financial institutions and retrieving financial data on behalf of the user. The user can then view this data on a single dashboard provided by the Account Aggregator.

Is it safe to use an Account Aggregator?

A: Yes, it is safe to use an Account Aggregator as they follow strict security protocols to ensure the safety and privacy of user data. The Reserve Bank of India (RBI) has also laid out guidelines for Account Aggregators to ensure data security and privacy.

What are the benefits of using an Account Aggregator?

A: The benefits of using an Account Aggregator include a comprehensive view of all your financial data in one place, ease of managing multiple financial accounts, and the ability to make informed financial decisions based on the aggregated data.

Is it mandatory to use an Account Aggregator?

A: No, it is not mandatory to use an Account Aggregator. It is an optional service provided by certain financial institutions and fintech companies.

How can a customer get regi stered with an AA?

To register with an AA, you can use their website or mobile application. Upon registration, the AA will assign you a handle, similar to a username, which you can utilize during the consent process.