Rise in Loan Scams: How the Account Aggregator Framework Will Help Mitigate the Ecosystem

The AA framework would collect data from all loan providers to determine the authenticity of loan applicants, which in turn would reduce instances of loan scams.

With several Fintech companies offering easy credit, it is becoming increasingly difficult to determine the creditworthiness of a loan applicant unless the data is available from all the sources the person has taken out loans from. To address the challenge, the Reserve Bank of India (RBI) authorized the formation of an Account Aggregation (AA) framework, which would collect data from all loan providers to determine the authenticity of loan applicants. , which would reduce the instances of loan scams.

Rajat Deshpande, CEO and co-founder of FinBox, describes how AA would reduce fraudulent loans and increase the amount of loans to genuine borrowers.

What is AA and how does it work

Think of an account aggregator (AA) as a watertight conduit for financial data. The framework is built on the Data Empowerment and Protection Architecture (DEPA) to ensure secure data portability between stakeholders.

This will help reduce fraud 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 – misuse of data is thus prevented on both sides.

At the same time, the previous alternative to AA was the analysis of bank statements, which is very expensive and error-prone if done physically. Additionally, the most common fraud involves users simply creating fraudulent bank statements to obtain a loan. With AA, these problems will disappear because the data will come directly from the bank or their financial institution.

Additionally, since account aggregators aggregate data from multiple sources, they ensure that a wider variety of metrics are considered when signing up, diluting instances of fraud. Bad borrowers are weeded out early in the risk assessment process and transaction costs go down. Lenders thus have the latitude to be flexible with the loan amounts offered to genuine borrowers.

Reduces access barriers for new credit customers

Those who have long been excluded from traditional lending – MSMEs and new borrowers – will benefit enormously from the AA framework. Traditional lenders typically look for home collateral as well as credit history when taking out loans – MSMEs often don’t have home collateral and naturally new clients have no history to show.

With the AA framework, their creditworthiness can be assessed using alternative data sources such as GST bills, bank statements, bill payments, and other cash flow surrogates. It removes the requirement for physical collateral and strengthens access to credit for an untapped group of borrowers.

Enables innovation in financial services in lower-tier cities

Innovation in the FinTech space is entirely dependent on information asymmetry. Resolving this asymmetry is the first step to launching truly innovative products and services. For example, with the launch of the GST system, the asymmetry of information disappeared regarding the rates and taxes applicable in different states, and all of a sudden revenues began to rise as more and more people learned about interstate commerce.

Likewise, by solving information asymmetry at a very deep level, the AA framework is linked to the creation of new use cases in various industries. Whether it’s a trading app that can perform KYC faster or a lending app that can pre-assess and approve a certain group of borrowers and grant them loans on the fly.

Other use cases are likely to emerge on the identity side as well. AA’s data is 100% fraud-free and verified, so AA’s data can be used across the financial services spectrum without the need for manual KYCs or in-person visits. This will reduce the cost of serving each consumer massively and globally, reduce prices for the entire market.

Account aggregators are already collaborating with FinTechs – neobanks in particular – to deliver innovative products to underbanked populations. For now, digital lending has taken off, but soon insurance and investing could be next.

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