Fintechs generally collaborate with banks to issue cards before partnering with non-banking financial institutions or operating their own NBFC business to provide credit lines to consumers. The Reserve Bank of India has prohibited fintech companies from loading credit lines into non-bank prepaid payment instruments (PPIs).
Lending has always been the end goal for practically all fintech firms. This week’s warning from India’s central bank threw a kink in the system, calling into question who can lend to whom. The Reserve Bank of India has informed dozens of fintech startups that it is prohibiting the use of credit lines to load non-bank prepaid payment instruments (PPIs) — such as prepaid cards — in a move that has caused panic among — and an existential threat to — many fintech startups, prompting some to compare the decision to China’s crackdown on financial services firms last year.
PPI licenses have long been utilized by several firms, including Slice, Jupiter, Uni, and KreditBee, to issue cards and subsequently outfit them with credit lines. Fintechs generally collaborate with banks to issue cards before partnering with non-banking financial institutions or operating their own NBFC business to provide credit lines to consumers.
The central bank’s notification, which does not name any startups, is widely assumed to affect almost everyone, including purchase now, pay later companies that employ a similar mechanism to give loans to clients.
Amazon Pay, Paytm Postpaid, and Ola Money are also wary, since many feel they may be affected as well.
“The rule is quite perplexing and odd. Essentially, the RBI is saying don’t load credit lines on PPI,” a fintech startup remarked on the condition of anonymity in order not to irritate RBI authorities.
The way PPI works now is that the money eventually gets to retailers. You are now claiming that NBFCs cannot provide credit lines to merchants and that their funds should only be transferred to consumer bank accounts.
Fintech companies believe banks pressured the RBI to make this judgment, utilizing an age-old strategy in which incumbents cry foul and rely on the regulator to save the day.
The central bank, which did not provide an explanation in its notification this week, has long voiced worry about lenders who charge outrageous loan rates and use minimal know-your-customer information to enroll and compel clients.
Over the last two years, federal authorities have stated that some of these organizations may be involved in money laundering activities. With the PPI + BNPL combination, the PPI channel is now being utilized as an alternative to credit cards or to give seamless BNPL, which the RBI may not be happy with right now,” said an industry member who also sought anonymity.
The new law is claimed to affect everyone, not only shark lenders and dodgy gamers.
Many say that fintech firms exist because they have found a method to offer financial inclusion to millions of people, something the RBI has always applauded and which banks would prefer if you didn’t bring up.
The PPI model, which combines two regulated companies, allows lenders to give credit to clients at a lesser cost, significantly expanding who may access credit. However, in the PPI instruments supported by the credit line model, fintech businesses gain interchange money on every payment, which may reach 1.8 percent.
Because India’s credit bureau data book is limited, most persons in the South Asian market are uncreditworthy. As a result, most Indians do not have access to credit cards or loans.
Fintechs function by using modern-day underwriting algorithms and a maze of regulatory arbitrage that was previously thought to be acceptable.
Some say that the central bank is just too late to make a judgment right now. In India, fintechs service over 8 million consumers, and without clarification, the majority of those customers are under no responsibility to meet their present repayment dates, putting substantial strain on companies.
Furthermore, the NBFCs run by various startups are regulated businesses.
Some fintech experts believe that if the RBI truly wants to crack down on the use of PPI as a credit instrument, it should seriously consider issuing credit card licenses to startups, something it has yet to do.
Meanwhile, investors are concerned, and several businesses in the midst of obtaining fresh investment rounds are seeing some VCs pull out, according to sources familiar with the situation. Some industry participants feel that India’s central bank is following China’s lead in cracking down on lenders and fintechs in general.
Macquarie wrote, “We believe the RBI is hesitant to provide digital banking licenses, as evidenced by the Governor’s recent pronouncements. Over the last several months, the RBI has been harshly criticizing fintechs and pressing for tougher controls. In our opinion, the message is clear: fintechs will be progressively regulated.”