India’s Account Aggregator DPI could promote equitable financial access: World Bank
India’s micro, small, and medium enterprises (MSMEs) face a credit gap of between $250 billion and $300 billion. The World Bank says in a blog post that even before the pandemic, 92 percent of small businesses in the nation lacked access to formal credit, but the county is on the right track to address this market barrier.
India’s Account Aggregator (AA) architecture is a part of the nation’s Digital Public Infrastructure that can help underserved businesses and individuals access financial institutions, World Bank Consultant Siddharth Dixit writes.
India currently uses a data-fiduciary-centric model. This means that individuals or businesses would need to go to the original keeper of their data to gain access, inhibiting the potential for data to be used for financial empowerment. Current financial data storage methods are also inefficient and pose privacy threats.
The AA architecture will give individuals complete control over their data by ensuring the electronic transfer of data is standardized format. This also makes it easier to transfer information between institutions. The architecture could have an impact on how financial data is shared comparable to the impact UPIs has had on money transfers.
AAs can transform lending by overcoming predominant barriers. The architecture can use data as collateral in cases where potential borrowers would lack physical collateral. It would also standardize and secure data sharing as well as lower costs.
While only eight banks were a part of the AA ecosystem when it first launched, today, roughly 200 financial institutions are active. This includes all public and private banks as well as some insurance companies. So far in the 2023 fiscal year, roughly $750 million was dispersed using the AA framework, with 50 percent of lending going to the MSME sector.
Originally introduced and made live in 2021, the AA architecture falls under the Data Empowerment and Protection Architecture (DEPA) layer, the third of a three-layered system. UPI was implemented in the nation in 2016, strengthening the second layer, payments.
The Aadhaar Digital ID system was introduced in 2010 and provides the foundation for the first layer, identity. The Aadhaar system has reduced the cost of mobile KYC checks from $12 to six cents each, extending banking to millions of Indians, especially low income populations.
“They have this foundation with the Aadhaar system that means they can do things that most governments around the world can’t do,” says American Economist Paul Romer in an interview. “Just as India did this for Aadhaar for telephony and electronic authentication I think India could show the world how to do it right.”