Importance of account aggregators in financial planning
The massive digital disruption happening in all areas is changing the way we work and do business. Companies that are well positioned to take advantage of the shift to remote working, digital payments and online shopping are seeing their revenue grow rapidly, often at the expense of slower, less nimble incumbents. The ubiquity of digital payments, thanks to a host of reforms like UPI, is certainly a testament to how far the financial ecosystem has come; so it’s no surprise that 71% of all payment transactions in India will be digital by 2025 (Source: ACI Worldwide).
Although the financial services sector has experienced the most disruption, it is likely that the same situation will worsen with the Account Aggregator (AA) ecosystem. AA is an RBI initiative that aims to empower consumers to use their financial information to their advantage with the click of a button. Once fully functional, all aspects of financial data, investments, insurance policies, loans, bank details, etc. of a user would be at hand.
While lending fintechs have been rapidly adopting AA to better serve their users with faster, lucratively priced lending products, the personal finance and investing space will also see increased adoption over time. . AA has many use cases in personal finance planning and investments.
Over time, other use cases will emerge, but for now, let’s look at a few of the main ones.
Effective monitoring and control of investments
If you can’t measure it, you can’t improve it – Peter Drucker
The investments of most retail investors are scattered all over the place – different MFDs, banks, brokers and insurance companies. Most investors find it difficult to get a single view of all their investments on one platform. Historical platforms that also allow this unfortunately have no choice but to require users to fill in their data manually which is a very cumbersome process or to scrape mutual fund/NSDL statements which again are not exhaustive and not entirely accurate. .
The AA ecosystem alleviates all of these concerns by enabling both traditional and online advisors to provide their users with access to all investments on a single platform. Additionally, advisors can process data and derive actionable insights from investors’ portfolios with their explicit consent.
This will not only allow investors to monitor their holdings in real time, but also allow them to take faster and smarter action on their investments, leading to potentially better returns and avoiding costly mistakes.
Unclaimed / Forgotten Investments
Tracking investments with a unique identifier (like a mobile phone number) would ensure that investors don’t miss or inadvertently forget various investments made years ago. According to ET Wealth, unclaimed investments in mutual funds, stocks, insurance companies, etc. years, especially during times of need for them or their dependents when the user is away.
A large part of the unclaimed investments is attributable to either:
- Dependents not being aware of the investments after the death of the investor and
- The lack of nomination leads to a cumbersome and sometimes endless process of recovering these investments
The AA ecosystem provides an excellent platform for implementing the Unified register of candidates (UNR). A UNR is a consolidated record of an investor’s nomination details (nominees) for all of their investments in various asset classes.
Personal finance/wealth management platforms can access this ecosystem to ensure their users’ nominations are in place and alert/attend to investments that are not nominated, all under one roof. This will result in massive benefits for the entire investor ecosystem, with families not having to run from pillar to pillar to claim their rightful investments in times of need and grief.
Fewer investment leaks
Every year, thousands of crores of rupees are earned by banks on funds placed in checking accounts and low-yielding savings accounts. Much of these deposits are purely there due to a lack of information or a lack of proper financial planning.
The account aggregator guidelines will enable fintech companies in the personal finance sector to effectively plan and guide depositors to ensure that any money that does not need to be parked in these accounts can be invested with better yields. Needless to say, this is a double-edged sword that can lead to erosion of wealth if investors take disproportionate risks to earn higher returns. It is therefore crucial for the investor to have the right advisor.
Providing all transactions and financial statements to its CA from all accounts is an annual ritual closer to tax filing deadlines. Instead, fintech players such as investment advisors can simply use the AA ecosystem to prepare and display all relevant details including capital gains, income, etc. required for tax reporting. The background work of all calculations and tax preparation can be done with virtually just a few clicks.
These are just a few use cases for account aggregator regulations and may just be the tip of the iceberg. Over the next few years, as the ecosystem becomes more robust, we should see a host of innovations that will make investing and personal finance more exciting and rewarding for everyone.
For a very long time, accessing our financial information, whether to file taxes or just to find out what’s going on, has never been a pleasant experience with snippets of data scattered among countless financial institutions. Information that should ideally be accessible at a glance requires hours of reviewing accounts and statements. This drawback is exactly what the Account Aggregator ecosystem intends to get rid of.
Although the ecosystem is still nascent, few major banks have yet been onboarded and it is only a matter of time before adoption becomes the norm.
The opinions expressed above are those of the author.
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