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 Will the most recent RBI circular destroy the Indian fintech cards and credit industry?

1. Prepaid payment instruments cannot be loaded with credit lines, the RBI allegedly stated in a notification sent to PPIs issued by non-banks.

2. Analysts claim that the RBI is attempting to eliminate any regulatory advantages that a wallet or non-bank PPI may have over a bank.

3. The announcement raises concerns about several of these businesses' business models and poses a threat to their existence while fintech players wait for clarification from the central bank.

The PPI-MD (Prepaid Payment Instruments-Master Directions) RBI announcement from June 20th, which forbids loading non-bank PPIs from credit lines, has the fintech ecosystem up at night. The impact of the notification is the subject of a Twitter discussion among users at the same time.

On the RBI website, there isn't yet an official release, though. To determine the effects of the notification, Inc42 attempted to contact a number of players, including Slice, LazyPay, MobiKwik, Capital Float, CashFree, KreditBee, and Jupiter.Money. All of these players, though, declined to comment on the situation.

There is a great deal of uncertainty here. We anticipate a thorough explanation from RBI in this case, the CEO of a lendingtech NBFC stated on the condition of anonymity.

Nonbank vs Bank PPIs

The notification is directed at non-bank PPI issuers, according to an investor who has holdings in important BNPL companies in India. These can be companies who offer travel cards, mobile wallets, or people who use PPIs that were not issued by a bank for any other reason.

Simply put, players like HDFC Flexipay, ICICI Paylater, HDFC Payzapp, SBI YONO, and ICICI Pockets are examples of pure play bank PPIs. Independent online wallets like Paytm, PhonePe, Google Pay, MobiKwik, Oxigen, Ola Money, and Amazon Pay are examples of non-bank PPIs.

In the end, this means that a non-bank PPI player can collaborate with any NBFC or lending institution to offer a credit line as long as it is not done so without going through an RBI-authorized bank, and the partner bank can be closely watched by the RBI in order to keep track of all lending transactions.

Which Non-Bank PPIs Will Be Impacted?

Mobikwik is a clear illustration of this. According to its website, all that is required to utilise the loan facility is to download the app, complete the minimal wallet KYC, and receive a quick loan approval. After that, the credit will be sent to the user's Mobikwik online wallet.

This indicates that the customer is adding money to his Mobikwik wallet (non-bank PPI) using a credit line made available by Mobikwik through partnerships with banks or NBFCs. A single bank, IDFC First Limited, and five NBFCs, including Fullerton India Credit Company, Incred Financial Services, Western Capital Advisors, Home Credit India Finance, and Growth Source Financial Technologies, are currently partners with Mobikwik. Whether the associated bank or an NBFC with a bank partner routes the credit line to the user's wallet is unclear.

LazyPay's situation is comparable. One of the top online lenders, PayU Finance is the NBFC division of PayU, which also operates Lazypay. In parallel, LazyPay launched the Lazy Card, which grants the customer a credit limit of up to Rs 5 Lakh through partnerships with SMB Bank India and Visa.

The notification calls into question the viability of such organisations' current business models because it is unclear to them where the credit line actually comes from and whether it complies with the new RBI regulations.

Analysts believe that companies like Jupiter.Edge and OneCard may not be affected by the RBI's new notification. For instance, the neobanking site Jupiter.money just introduced Jupiter Edge, which permits credit of up to INR 20K. The RBI-regulated IDFC First Bank, which is the parent business of LivQuik, serves as the intermediary for these transactions. In a similar vein, OneCard, a platform for selling credit cards, has partnered with five banks, including IDFC First Bank, Federal Bank, and SMB Bank among others, and does not have any connection to NBFCs.

On the other hand, the announcement can have an effect on players like Slice, Uni, and post-paid providers like Paytm Postpaid. Many of these BNPL participants get their loans through NBFCs, which aren't directly connected to banks for funding. Slice has worked with NBFCs like Vivriti Capital Private Limited, Quadrillion Finance Private Limited, DMI Finance Private Limited, and Northern Arc Capital Limited. Then there is Paytm Postpaid, where Clix Capital, an NBFC that launched after purchasing GE Capital's commercial loan and leasing business in 2016, facilitates credit.

These transactions are viewed as "deposits" by the RBI at the NBFCs' end. Since KYC is carried out for rival credit card and wallet businesses, it is unclear whose end user is obtaining the loan.

According to tweets from Deepak Shenoy, the creator of portfolio management service (PMS) Capital Mind, "NBFCs can't have accounts that allow you to pay using them and issue cards. You can deposit the cash into your bank account and make the payment there. Cards cannot be issued by NBFCs.

This raises the question of whether these challenger credit card businesses will be able to demonstrate that their business model complies with RBI regulations or whether they would be forced to immediately halt operations.

Potential Motives Behind RBI's Decision

The decision was made because the KYC requirements for a wallet are less stringent than those for a credit card. Whether it's a personal loan, credit card, debit card, or any other type of credit, the RBI is simply attempting to eliminate any regulatory arbitrage that a wallet/non-bank PPI may have over a bank where the drop-off rate is extremely high.

Additionally, BNPL is expanding very quickly in India. In addition to pure-play BNPL firms, such as Simpl, Lazypay, Zestmoney, ePayLater, ecommerce marketplaces Flipkart and Amazon India also offer their own BNPL products, while even fintech and payments startups such as PhonePe (via Flipkart) and Paytm have entered into this field.

For instance, Simpl has over 2,500 merchant partners and over 7 million active users. India's BNPL sector is anticipated to reach $100 Bn by the end of 2023, with a compound annual growth rate (CAGR) of 36%, demonstrating just how well-liked these lending platforms are even at this early stage.

The RBI is currently having trouble tracking PPI transactions that are channelled through wallets or NBFCs. These NBFCs, or even the linked banks, are currently spreading loans on the basis of payment capacity of the PPI platforms. The central bank wants to bring the end user under the direct supervision of affiliated banks with this notification so they can obtain the appropriate loans.

The RBI's decision can alternatively be viewed as a favour to banks or card issuers like Mastercard and Visa. Fintechs may wonder if the RBI opposes the innovation that these tech firms hope to introduce to the ecosystem.

Last week, RBI Governor Shaktikanta Das indicated that the central bank is monitoring emerging fintech products like BNPL, and is not trying to regulate them yet.

Lending activity also includes BNPL, which is now provided by a number of e-commerce businesses. In order to avoid starting to interfere everywhere, we must be cautious and calibrated in our approach. The governor answered, "Let them go about their business.