Ban on loading pre-paid payment instruments from credit lines leaves fintechs in a tizzy

Fintechs are hoping to get more clarity from the Reserve Bank of India on its recent directive to non-bank prepaid payment instrument (PPI) issuers not to load their wallets and cards from credit lines. Most players are trying to work out how to phase out such cards in a non-disruptive manner for customers.

According to industry sources, most fintechs issuing such cards are yet to discontinue these, though a few have suspended services and are communicating the same to customers.

Sugandh Saxena, CEO, FACE said, “We are trying to understand the technical and operational issues and implications for the customers. These products have been in the market for some time, and we have to ensure that customers do not face disruption. We also need to understand the regulatory concerns and perspectives to respond adequately. We are taking inputs from FACE members and their partner PPIs, and will reach out to the RBI. ”

In a notification to non-bank pre-paid instrument issuers on June 20, RBI said the PPI Master Direction does not permit loading of PPIs from credit lines.

“Such practice, if followed, should be stopped immediately,” it said, adding that any non-compliance will attract penal action.

“The RBI directive will impact companies in the card-based segment. The difficulty is that the RBI has not given any time to correct, but has said it should be stopped immediately,” said Akshay Mehtrota, CEO and co-founder, EarlySalary, adding that the company has also complied with the regulation until there is more clarity.

A recent report by Macquarie noted that players like Slice and Unicards  have added a lot of customers through this route. “Some of the new generation players were adding close to 2,00,000–3,00,000 cards using PPI licenses and loading consumers’ wallets using credit lines from NBFCs, banks,” it said.

Industry associations are hoping to meet the RBI soon on the issue, even while there is growing expectation that the RBI could take action against neobanks on the usage of the term “bank”.

Advantage for banks?

Players and experts also point out that the new guidelines should be read in the backdrop of the RBI master direction in April on credit and debit cards, and believe it indicates the regulator’s intent that banks remain in charge of core banking activities, including credit cards.

Srinath Sridharan, corporate advisor and independent markets commentator, said the latest RBI circular should be read in conjunction with the April circular on co-branded cards. “It looks like that anything to do with customer data, KYC will rest with banks. However, it should be kept in mind that not all fintechs are dependent on this business model. For most, lending via PPIs makes up a small part of their balance sheet,” he noted.

Macquarie said the positive impact is naturally on banks with a large credit card base.

“The main purpose of a PPI licence is to act as a payment instrument and not as a credit instrument, and we believe many fintechs were using this as a channel to load credit. We also believe many customers were unknowingly taking a line of credit through their wallets at the point of check-out. Some of these practices have not gone down well with the regulator, in our view,” the report said, adding that this regulation could significantly impact fintechs involved in this business, and would be advantageous to banks as they could further accelerate card acquisition with less competition.

“Many customers don’t know if it’s a credit card or a prepaid card. A key problem that arises in such a situation is that who should the regulator take to task if something goes wrong,” said Anuj Kacker Co-Founder, Freo.

Another concern is the experience and capacity of fintechs to take up roles such as credit underwriting, experts point out.

Diverse lending models:

But barring a few large players, the impact would be limited, although it could hamper penetration of credit-linked products in the country.

“Since the fintech lending market is diverse, the impact will differ across lenders, from nil to material for those who are heavy on card-based lending,” Saxena said, adding that the impact is not significant for FACE members. 

It is unclear whether segments such as merchant integrated Buy Now Pay Later and cash loan based lending will be impacted, although players are hopeful the directive is only for card-based products.

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