Context: As the account aggregator ecosystem went live on September 2 following the Reserve Bank of India (RBI) framework,  experts said a viable commercial model needs to evolve for the system to become sustainable.

• The AA framework allows customers to avail various financial services from a host of providers on a single portal based on a consent method, under which the consumers can choose what financial data to share and with which entity.
• An AA creates secure, digital access to personal data at a time when Covid-19 has led to restrictions on physical interaction. 
• It reduces the fraud associated with physical data by introducing secure digital signatures and end-to-end encryption for data sharing.

Background

• ?The framework, which has been under discussion since 2016 and in the testing phase for some time, will now be open to all customers.
• In early September 2021, a new technology infrastructure account aggregator (AA) was launched at a virtual event. 
• Touted to be a game-changer for opening up access to financial data of individual and business customers, it quickly saw eight major banks joining the AA network.
• These included State Bank of India, ICICI Bank, Axis Bank, IDFC First Bank, Kotak Mahindra Bank, HDFC Bank, IndusInd Bank, and Federal Bank.

About Account Aggregators(AAs)

• It is a non-banking financial company engaged in the business of providing, under a contract, the service of retrieving or collecting financial information pertaining to its customer. 
• It is also engaged in consolidating, organising and presenting such information to the customer or any other financial information user as may be specified by the bank.
• It was created through an inter-regulatory decision by RBI and other regulators including Securities and Exchange Board of India, Insurance Regulatory and Development Authority, and Pension Fund Regulatory and Development Authority (PFRDA) through and initiative of the Financial Stability and Development Council (FSDC). 
• The licence for AAs is issued by the RBI, and the financial sector will have many AAs.

AA network explained

The AA network features financial institutions such as banks, NBFCs, NBFC-AAs, third-party services, and others. Banks act as financial data providers, lenders act as financial data seekers, NBFC-AAs act as mediums of communication between banks and lenders, and third-party service providers work with AAs.

1. First, an individual or business opens an account with an account aggregator. Then, they create a funnel for their financial data by linking their bank accounts, insurance policies, etc — which are accounts containing the customer's financial data.
2. Second, the customer can provide consent to a lender to access their financial data through the NBFC-AA. This usually happens when the customer is looking for a loan or some other financial product that requires their financial information to be collated.
3. Third, after consent is provided, the account aggregator seeks permission from the financial data providers to access the customer's data.
4. And finally, the data is sent to the account aggregator, which, in turn, empowers lenders to better evaluate the customer's financial profile and risk associated with providing a loan.

How does it work?

• It has a three-tier structure: Account Aggregator, FIP (Financial Information Provider) and FIU (Financial Information User).
• An FIP is the data fiduciary, which holds customers’ data. It can be a bank, NBFC, mutual fund, insurance repository or pension fund repository.
• An FIU consumes the data from an FIP to provide various services to the consumer. 
• An FIU is a lending bank that wants access to the borrower’s data to determine if the borrower qualifies for a loan. Banks play a dual role – as an FIP and as an FIU.
• An AA should not support transactions by customers but should ensure appropriate mechanisms for proper customer identification. 
• An AA should share information only with the customer to whom it relates or any other financial information user as authorised by the customer.

RBI's role and verdict

• The Reserve Bank of India (RBI) has mandated banks, NBFCs, insurance firms and other financial institutions to share customer data in a structured manner with account aggregators.
• The RBI has also mandated that the data cannot be monetised, and that data flowing through the AA platforms should be deleted after a specific period of time. 
• Further, the data is encrypted to prevent any form of leakage or exploitation.
• "AAs enable secure, consented data flows while protecting user privacy. 
• In conjunction with other platforms like the Unified Payment Interface, Account Aggregator creates in India the most cutting-edge digital financial infrastructure in the world.”