Account aggregators can rescue MSMEs

The Micro, Small, and Medium Enterprise (MSME) sector is a critical component for the development of India’s economy, contributing to around 30 per cent of India’s Gross Domestic Product (GDP) and generating employment opportunities for about 11.1 crore people. However, the government figures suggest that the formal sources of credit have reached only 39 per cent of the MSMEs. This gap may be caused not only by a lack of credit supply, but also by the absence of relevant and easily accessible low-cost, low-ticket-size, collateral-free sources of credit through formal banking channels. With the Account Aggregator (AA) Ecosystem serving many relevant use cases for MSMEs’ financial inclusion, this article attempts to simplify the use case of AAs for MSMEs.

The AA ecosystem enables an individual to move their data between two financial institutions, mediated by a new class of data-blind actors called “AAs.” The key actors in the system that enable consent-based data sharing are:

Financial Information Providers that hold the data the individual intends to move like banks, Non-Banking Financial Companies (NBFCs), Asset Management Companies (AMCs), depositories, insurance companies, GST networks, etc.

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Financial Information Users (FIUs), which include banks, NBFCs, and fintech companies, and provide newer and innovative financial products to customers, including loans

AAs, which act as consent managers on behalf of individuals moving their data.

The immediate benefit that the AA ecosystem promises is to empower MSMEs with greater control over their financial records, make data sharing easier and more time- and cost-effective. It will remove the hassle of approaching multiple entities to procure the otherwise scattered financial statements and presenting them to the potential creditor. The FIU will also not have to rely solely on the verification of physical copies of the documents, an exercise that can be time-consuming and prone to abuse.

In due course, it has the potential to create relevant and easily available financial products for MSMEs. For example, consider a vendor who sets up her stall every day in the local market and wants credit to set up another stall. Like many other vendors, some of the payments made to her are through QR codes. She can earn Rs 2,000 per day on average and approaches the bank for her first credit product, but faces rejection for a variety of reasons, including a lack of a credit history, the requirement of a guarantee for a small ticket loan, or the lack of a relevant credit product to suit her needs.

The AA platform will enable such vendors to access their first credit product without the requirement of presenting a guarantor for repayments or any credit bureau score through consent-based sharing of her microdata. The bank, FIU, in this case, would be in a position to develop and offer her relevant, low-cost credit products. It may be possible to see that her cash flow is consistent every day and assess her repayment capacity. Thus, her everyday transaction history becomes a source of credit. It will also prevent her from approaching informal sources of credit. This also opens up a whole new customer segment for FIUs to design financial products that use this financial information as collateral to assess the creditworthiness and revenue generation of a microenterprise, rather than a traditional collateral.

Adoption of the AA ecosystem enables shifting away from the traditional asset-based lending approach to a cash-flow based approach to serve microenterprises.

From the demand side, data indicates that MSMEs are willing to share their data with banks in exchange for customised products, lower interest rates, and a better banking experience. The burden is on the FIUs to build upon and leverage the full potential of the ecosystem.

However, given that the ecosystem is still in a developing stage, there are challenges. For example, uncertainty associated with maintaining projected cash flow, and slower rates of adoption by smaller banks may pose. Given the immense potential the AA ecosystem has to revolutionise access to credit for MSMEs, it will be interesting to see how long
it takes before it becomes a game changer.

(The writers are with Vidhi Centre for Legal Policy)