The new financial aggregator system has vast potential for good and evil
13-Sep-2022 •Dhirendra Kumar
Most people I know have negative opinions of their banks. This negative impression varies from a mild dislike to deep hatred and, occasionally, a seething rage bordering on a sort of blood feud. This feeling is universal. No one likes their bank, anywhere.
Maybe someone like Vijay Mallya or Nirav Modi used to like their banks once, but those relationships also soured eventually. I assume it must be their relationship manager's fault because, in modern banking, everything is the relationship manager's fault. Anyhow, that's a separate story, and there are many more like those.
There's an interesting parallel here with telecom companies about customers disliking their banks. People used to dislike their telecom operators at one point, but once number portability came in, this dislike mostly faded. The reason is that proper consumer choice and satisfaction come not just from being able to choose any provider but from switching from one to the other quickly. This is true of any goods and services and is why monopolies are bad. It was not the original privatisation and multiple providers but number portability that introduced competition in telecom services.
Let's combine the two things I've discussed and create the ultimate pro-consumer fantasy: What would it be like if you had bank account portability? If such a thing ever gets implemented, even in a rudimentary form, there would be a drastic improvement in most people's experience with their banks. Of course, bank account portability is nowhere on the horizon. As far as I know, no one has even mentioned it ever. However, something else is already rolling, which could provide a few of the same benefits, not now, but in the future when it's fully realised.
This is the new financial account aggregation system. First announced by finance minister Sitharaman a couple of years ago, a basic version of this system is now rolling out. The AA system is essentially an easy and secure way of routing an individual's or a company's financial information, with their consent, from financial institutions that hold it to others to whom the account holders want to give it. The kind of use-cases initially getting off the ground are credit appraisal, where authentic financial information can be passed digitally from banks where you might have accounts to some other institution from which you want credit. Lack of consolidated, trustable details on their finances is a stumbling point for many people and businesses. The inability to easily prove their financial facts' authenticity and freshness are another. The aggregator system takes care of both these points.
Account aggregation could be a first step toward what is now called 'open banking'. From a consumer point of view, not being tied to a financial service provider and quickly accessing best-of-class services from different providers is the ideal outcome. Of course, that's a long way off, but that's undoubtedly the ultimate goal which will bring the providers, the intermediaries and the consumers into the future of financial services.
There will be many hurdles. The aggregator system is a threat to many financial businesses. It reduces the gatekeeping power of the more established financial businesses. It creates a door through which newer, smaller companies can leach away customers from established ones. If you are a significant, established player who offers universality of services, you may feel you have everything to lose and little to gain from the aggregator system.
The real pain will be data abuse by unscrupulous players. Most of the talk about data security issues in the aggregator network is about how the aggregator will be data blind, and the data user will get only what the customer permits. This argument side-steps the real problem. Based on what we see in the financial industry right now, the problem will be with the user entities. Many will take overly broad permissions for data and misuse and abuse customer data. We all know that collecting and misusing vast amounts of data lies at the heart of the business model of a lot of financial companies. This problem must be brought up front and rooted out instead of swept under the carpet. If the aggregator system is to reach its potential, this should be treated as the central problem.