Why India needs a data sharing incentive model
They say data is the new oil. Besides the essential banality of this phrase, it’s also slightly misleading at least when applied to the financial services sector, particularly banks. Why? Because the phrase implies that owning financial data would prove a strategic resource for banks. This isn’t entirely true anymore, as the very idea of ‘data ownership’ has been turned on its head.
The Facebook debacle and the ‘own your data’ movement that followed made it incumbent on governments all over the world to enact data protection laws, thereby transferring power from businesses to individuals.
In India, although the data protection law is still in the making, industry players are cognizant of it and are already preparing for a privacy-first world. Anyway, we already have budding financial data sharing systems that embed core privacy principles, case in point being Account Aggregator (AA).
Reserve Bank of India (RBI) made way for the data economy by introducing the AA framework — a financial data sharing framework that helps an individual securely and digitally access and share information from one financial institution they have an account with to any other regulated entity in the AA network.
Essentially, the status of banks have changed from ‘owners of financial data’ to mere ‘custodians of financial data’. Basically, banks have had to renounce their power and control over hard-earned data to make way for the open finance era.
So, the big question is why should banks allow someone else to onboard their customers using the data and transactions they worked hard to generate?
Before we explore this question further, let’s pause to dwell a bit on why we need financial data-sharing frameworks in the first place.
Where there is data smoke, there is business fire
Diverse and complex sets of data with the potential to unlock solutions to long-standing business challenges of financial services and banking companies exist — but they exist in the form of ‘data islands’. Hence, connecting these ‘data islands’ becomes crucial. This is where a data-sharing model fits in. More importantly, the open data model has become a defining trend in scientific, and even national, innovation.
For instance, the AA framework holds the promise of democratising data, thereby allowing new entrants to innovatively use information to provide differentiated products and services to customers.
Put simply, it has disrupted the big business of bundling, analysing, and using financial information; case in point — GeM Sahay (a government initiative to facilitate frictionless flow of credit to MSMEs) has been integrated with AA to enable the sharing of bank statements completely digitally and in a machine readable format which in turn facilitates machine-driven underwriting. This is expected to open up access to credit to a much larger number of MSMEs.
As an early adopter of AA, we at FinBox have experienced first-hand the many benefits of the framework — such as data privacy, advanced fraud detection capability, and ease of access and integration. In fact, our recently released report shows that 71% of the customers are open to sharing data via the AA platform. Clearly, consumers love it too. And the framework is picking up momentum.
Recently, Sahamati, a member-driven industry alliance formed to promote and strengthen the AA ecosystem, announced that 1.1 billion accounts (both private and public banks accounts) are now live on AA.
This is a remarkable feat! This means millions of consumers now have access and control over their financial records. What this also means is that lenders and fintechwill now be able to access financial data of 1.1 billion accounts within seconds at minimal cost — whether it is to assess creditworthiness of small business, recommend a wealth management product for an individual, or tailor an insurance policy for a family.
Priorities without incentives
There are no doubts about the merits of data sharing. Clearly, AA is already revolutionising investing and credit. But an AA framework would be rendered useless if there isn’t enough participation.
Going back to the very first question we raised — why should banks part with data they worked hard to acquire?
Well, currently, there aren’t many good reasons why a bank would want to be part of AA, unless they think it wiser to accept the government’s counsel.
There’s a major incentive problem. Much like UPI which has been a loss-making proposition for banks because of the zero Merchant Discount Rate (MDR) regime, if AA also fails to set the right pricing structures in place, banks, particularly less digital ones might be strongly disincentivised to participate in the AA ecosystem. Mere exhortation on the part of the government won’t cut it. Some kind of an incentive or payment structure is necessary for long term support and innovation on AA.
The importance of incentives in any kind of an open framework is two fold:
It provides motivation for sector participants to participate actively. Case in point — think of sales incentives for business development teams, if the commercial incentives don’t line up, the sales often turns to spam and reduces the revenue potential of the entire organisation.
It ensures long-term innovation. Innovation by startups might be philosophically fuelled by the desire to solve a long-standing problem but it’s ultimately the financial incentives that force driven founders to burn the midnight oil and create something that generates value for stakeholders. In the absence of financial incentives, innovation takes a back seat and even the best solutions suffer. Case in point: Highly regulated price ceilings often result in overall economic deflation as innovation stagnates and companies would rather focus energies on industries where they get to take home a larger share of incentives.
Fundamentally, open architecture — especially in financial services — still has two problems that need solving: one, lack of incentive to share and two, inability to share. The latter is a digitisation problem which will likely solve itself in the course of time. There’s a compelling need to fix the former. With the right incentives in place, even non-digital financial entities, in all likelihood, will be motivated enough to accelerate their digitisation efforts.
How do you think policymakers can align incentives in frameworks such as AA? I’d love to hear your thoughts.