With RBI acting tough, are fintech companies staring at tough times ahead?

In a move that could have huge ramifications for India’s fledgling Buy Now Pay Later market, the RBI has asked non-bank prepaid payment instrument (PPIs) issuers to not load these instruments through credit lines. 

Issued in the form of wallets or prepaid cards, PPIs facilitate purchases against the value stored on them. They can be loaded by cash, debit to a bank account, credit and debit cards.

Fintechs in the pay later card business like Slice, Uni, LazyPay, PostPe etc make use of bank-issued PPIs and partner with NBFCs to offer credit lines to customers. In some cases, the credit line is provided by the NBFC subsidiaries of the fintech companies. For example, Slice’s prepaid cards are issued by SBM Bank while Uni’s cards come from SBM and RBL Bank. 

According to RBI, there are 37 non-bank PPI issuers, including Amazon Pay, Ola Financial Services and Bajaj Finance -- one of the biggest NBFCs.

RBI rules say that PPIs are permitted to be loaded or reloaded by cash, debit to a bank account, credit and debit cards, PPIs, and other payment instruments issued by regulated entities in India but do not permit loading from credit lines.

RBI’s move has given rise to some confusion even as the industry is still evaluating the impact of its clarification, which is not in the public domain yet. 

Macquarie Capital said it could impact credit card challengers like Slice and Uni, who were adding lakhs of customers every month. 

PPI is meant to act as a payment instrument and not a credit instrument, it said, adding that many customers were also unknowingly taking a line of credit through their wallets at the point of check-out and some of these practices may not have gone down well with RBI.

But given that RBI’s letter is addressed to non-bank PPI issuers, Nomura analysts believe there will not be any restrictions on such pay later players unless a similar letter was also sent to bank issuers. 

Fintech startup RedCarpet’s Founder Sandeep Srinivasa said that all BNPL products in India work on PPIs and the fintech lending ecosystem works on the principle of credit lines through wallets and built on top of PPIs. 

Jaikrishnan G, Partner & Head of Financial Services Consulting, Grant Thornton Bharat says, this will impact everyone in the BNPL space. Banks are allowed to top up PPIs through credit line, he says. With PPI out of equation, borrowing experience for customers will be impacted. This is a clear shock to the industry, will have a heavy impact, he says. 

Macquarie said that risks are increasing for the fintech sector, for which regulations have been light-touch so far. With the regulatory arbitrage now being plugged slowly, it is expecting a slowdown in growth and profitability prospects for the fintech sector in India. 

According to the brokerage, RBI has been coming down heavily on fintechs. Given the increasingly dominant role of fintech companies in the payments ecosystem, RBI’s Payments Vision 2025 states that a discussion paper on the need for proportionate regulation for them encompassing domestic incorporation, reporting, data use, etc., will be published.

It also talks about looking at the various charges for payments in such a way that it further encourages digital adoption.

Nomura also says the RBI may want the underlying lender to formally issue a credit card by tying with card networks instead of creating a quasi-product for which customer ownership, and the responsibility of ensuring data privacy and security, are not always clearly defined.

Jaikrishnan G of Grant Thornton Bharat says RBI strives to address regulatory arbitrage between banks and non-banks. We must not be under the impression that fintechs are not regulated by RBI, he says. 

With RBI not keen on the idea of issuing licences for digital-only banks, Grant Thornton Bharat’s Jaikrishnan G said that neobanks and fintechs are under pressure to reinvent their business models, as they were hoping to eventually transform into open/digital banks.