The Payments Council of India (PCI) and other fintech firms have asked the government to step in and mediate a way out that has debarred payment companies from adding credit to their wallets and prepaid payment instruments on the back of a directive on the same by the Reserve Bank of India (RBI).
It has demanded that wallets that comply with the ‘know your customer’ (KYC) norms should be treated as par with banks and should be allowed to disburse credit.
The Reserve Bank of India (RBI) is now examining the models of Buy Now Pay Later (BNPL) services and prepaid payment instruments (PPI), such as wallets. The central bank has recently raised concerns on PPIs being loaded through credit lines, as this could lead to systemic risks. The central bank has said that while it encourages innovation, it should not be based on regulatory arbitrage. According to industry sources, the fintech players have approached the RBI seeking clarity over its directive.
The current directive of the RBI is likely to hit the business models of a growing number of fintech firms, such as Slice, LazyPay, PayU, and KreditBee.
The RBI is mainly examining three models related to PPI. The first model is like that of credit card companies, while the second is like an operator getting a loan and giving it to the PPI holder as card loading; and the third is the PPI holder getting a loan and spending it.
“Some of the BNPL players were getting a credit line from banks and/or non-banking financial companies (NBFCs), and providing a prepaid card as a payment form factor, which was loaded by the credit line to earn the prepaid interchange, which is now not allowed via the regulatory circular. As an overall industry, BNPL will not get much impacted, as the credit can still be provided via credit card, virtual cards, merchant app etc.,” says Mihir Gandhi, partner, PricewaterhouseCoopers (PwC) India.
Also, a lot of fintech players do not have the license to lend money to customers, as the RBI believes they are not operating within the legal framework.
“The fintech players are trying to do their innovations. That only adds value to the market and provides convenience to the customers. If the entire BNPL players are wiped out, there would only be monopoly in the market, which is not good. Ideally, they and the RBI needs to work in tandem to provide good services to the customers, in a regulated manner,” says a senior industry expert on condition of anonymity.
The RBI has explicitly declared that all PPIs should be loaded only via banking instruments e.g., account transfers, debit cards, credit cards. As such, the RBI has now clearly barred the loading of PPIs through credit lines issued by non-banking entities. One of the popular post-paid facilities permits a consumer to avail credit lines issued by non-banks in an interest-free scenario, provided the dues are repaid within the stipulated time, typically in 15-30 days. This arrangement is obviously very attractive from a consumer’s standpoint. In addition to fintech companies, some banks are also offering BNPL facilities to customers, such as ICICI Pockets, HDFC FlexiPay, SBI Yono.
“Without explicitly mandating, the recent guidelines are an effort to introduce uniformity in this sector i.e., banks and fintechs are now envisaged to be operating on a level playing field. Fintech companies will now have to abide by a stricter operating regimen in terms of enhanced KYC norms, credit bureau reporting and also implement a more robust risk management discipline. The new guidelines are indeed a step in the right direction and will result in greater oversight by the regulator, thereby ensuring the long-term health of this sector,” says Raj Khosla, founder and managing director of MyMoneyMantra, a loan aggregator.
According to industry experts, fintech companies are planning to seek a six-month window to comply with the above guidelines.