imagine you need urgent funds for renovating your boutique. but you’ve never taken a loan before, so there is no credit score. any NBFC that you approach will suspect your track record. ultimately, the loan request will be rejected.
is there a way to prove your creditworthiness? how about sharing details from your bank transactions? with your full consent, of course.
that’s exactly what ‘open banking’ seeks to offer. by allowing information exchange between banks and other financial institutions, open banking helps customers get on-demand credit and add-on services.
the concept originated in Europe almost a decade ago. called the PSD2 initiative, these regulations offered banks an opportunity to share customer data with third-party financial services providers, albeit with full consent. the idea was to offer a wide variety of financial products to customers, without their privacy being at risk.
slowly, it found broader acceptance in markets such as the United States, Brazil, Australia, and Nigeria, among others. Canada hopped on the bandwagon in 2022.
think of open banking or AAs as brokers for collecting and transferring financial information. the AA gets to the bank, collects data, and passes it on to the financial entity. once the documents are verified, your customized product is ready.
let’s break down the process further
the Reserve Bank of India (RBI) has said that the data collected can be used only for loans or insurance. each customer is also informed of how long the AAs will store their personal information.
since these AAs are not allowed to conduct any other business other than data-exchange services, the risks of data misuse are minimized.
the four stakeholders in this process are banks, customers, finance companies, and AAs. an industry organization called Sahamati helps run this system with no glitches.
Sahamati is a member-driven industry alliance formed to promote the AA ecosystem in India. it lists the banks part of this process and the registered AA providing data services.
putting it to use
simply put, open banking or AAs help access financial products that were otherwise unavailable.
say insurance, for instance. If you are a fashion entrepreneur who doesn’t know what policy to buy, open banking can help. the account aggregators will collate your banking information and pass it on to the insurance providers. looking at your expenses, the insurer can decide which policy is the right fit.
with AAs, all your financial information can be accessed at a click of a button. no more lengthy documents or multiple photocopies for getting a simple loan processed.
it’s not just for taking a business loan. the AA architecture comes in handy in multiple ways:
soon, the open banking system could offer everything — from loans, credit scores, insurance, and wealth advice — on a single application.
let’s talk risks
there is no doubt that India’s open banking with AAs helps bridge the gaps in financial inclusion. customers who were earlier termed ‘unsuitable’ for loans just because of insufficient data get an easier entry.
but it’s also necessary for customers to stay alert. these are some tricks to avoid getting swindled:
by 2027, open banking will play a dominant role in anything related to banks. just pay attention to when, where, and to whom your financial data is shared. while banks will play their part in securing your data, you’ll need to stay cautious, too.