Hello everyone, 

Welcome to the 61st edition of The Pattern, a weekly newsletter where we unpack the latest rumblings in the world of technology and finance. Let’s get started. 

I landed in Bangalore just two days ago along with some of my colleagues here at FinBox, from a stupendous event on the Account Aggregator ecosystem put together by the good folks at Sahamati. The most fascinating thing for me was the excitement. Everyone from a life insurer to a stock broker are excited about AA - essentially a financial data sharing framework. 

This is almost never-seen-before. Usually, there’s always someone unhappy about a new initiative. Even the most well-intentioned ones like UPI faced their fair share of resistance, criticism and downright derision from certain players even as the government pulled all stops to make UPI the centerpiece of India’s payments infrastructure. 

This brings me to the first question that I want to raise today. 

Question 1:   How long before Account Aggregator starts to ruffle feathers?

There have been whispers. There are closed-door conversations. But the cacophony of public adulation shouldn’t drown the private concerns financial institutions are expressing about the current shape and form of the AA ecosystem. 

Anecdotal evidence suggests that the first and foremost issue currently for lenders adopting AA is the high failure rate. Numbers vary between 20% failures to 70% depending on who you ask. To be fair, failures are to be expected given the massive scale in such a short period of time but there’s a less innocent version of this story too. 

There are suggestions that since the AA ecosystem currently lacks clear financial incentives for financial information providers - the state of the infrastructure will remain a bit raggedy as banks and institutions will find it difficult to devote resources to something that doesn’t directly give them a benefit.

At the same time, there’s also the fear that financial institutions might worry that their customers are moving to competitors aided by the frictionless data sharing and underwriting experience offered by AA. This could further exacerbate the problem and make ecosystem players pull in different directions. 

As our CEO and co-found Rajat wrote in his newsletter - any data sharing network needs clear financial incentives for it to be sustainable and successful in the long run. 

“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.”

Question 2: When will the KYC mess finally be resolved? 

Currently, digital financial services are stuck between a rock and a hard place. While the internet revolution has improved access to banking and credit for new customers, it’s a headache for the service providers such as banks and NBFCs. The RBI guidelines on Know Your Customer (KYC) are stringent - as they should be. But, there’s little clarity in the ecosystem on exactly which method of KYC is valid. 

To recap - KYC can be done either through a central KYC database (C-KYC), or through a video KYC medium where agents verify a person’s documents and identity on a live video call. Other modes of KYC include offline KYC, in-person KYC, or Aadhaar based KYC. 

The RBI has recently flagged C-KYC as a potentially risky method and that has led financial players to scramble for other alternatives especially when Video KYC is about 20x more expensive than a C-KYC, on average. 

Now, the RBI has said that if customers are onboarded through C-KYC, the bank must do an in-person verification or a video KYC to ultimately verify the details provided by the customer. This is bound to increase workload and push costs of compliance further upwards. 

If you’re looking for more, I must recommend the Ultimate Guide To KYC for Digital Lenders put together by our team at FinBox that lays down everything you need to know about KYC as a digital lender. 

Both the issues raised above have the potential to change the direction of the digital finance industry and these developments will be closely watched by industry leaders. 

We’ll continue to keep our eye and bring the best of developments, insights and guides to you. Meanwhile, we’re hosting an interesting discussion next week about the UI and UX strategies that can help build delightful digital credit products. 

Do consider joining if you’d like to hear from industry stalwarts such as Jalesh Parekh, head - digital projects, YES Bank and Nishant Jasapara, Chief Business Officer at Credit Saison.

Of course, there’ll be Rajat sharing his experience of building digital products and I - to ask dumb questions. 

Do consider registering before the slots run out! 

This is all from me this week. As always, leaving some interesting data and reading recommendations below. 

Between the digits 

30% - Women make up less than one third of the users on UPI apps such as Google Pay. And there’s a need for assisted onboarding and other measures to improve and deepen female participation in the financial ecosystem. 

10% - NPCI wants to corner at least 10% of the total credit card spends in the country through its RuPay card network. The payments operator is working with ambitious targets and pushing partner banks to improve RuPay distribution. 

250% - Paytm’s total loan disbursals grew 250% year-on-year according to its latest results. The company disbursed nearly $1.5 billion across 12 million loans. 

Reading list 

1. India Is Once Again Making Money a Plaything

2. CEA asks finance industry to observe self-restraint, not to indulge in predatory practices

3. IIFL and FinBox bagged Sahamati’s award for MSME lending through Account Aggregator

4. Banks mull common framework on hearing borrowers before fraud tag

5. Paytm’s results hint at a turnaround. But loan-collection hacks drive it

Thank you for reading. If you liked this edition, forward it to your friends, peers, and colleagues. You can also connect with me on Twitter  here  and follow  FinBox on LinkedIn  to never miss any updates.  

Cheers, 

Mayank

All opinions expressed are my own and do not necessarily reflect the views of FinBox or its promoters.