For almost all fintech startups, borrowing has long been the endgame. A message from India’s central bank this week has thrown a wrench into the ecosystem, scrutinizing who can borrow.
The Reserve Bank of India has informed dozens of fintech startups that it is banning the practice of loading non-bank prepaid payment instruments (PPIs) – prepaid cards, for example – using lines of credit, in a move that has sparked panic among and existential threats. for – many fintech startups and caused some to compare the decision to China’s crackdown on financial services firms last year.
Several startups, including Slice, Jupiter, Uni and KreditBee, have long used the PPI licenses to issue cards and then equip them with lines of credit. Fintechs typically partner with banks to issue cards and then affiliate with non-bank financial institutions or use their own NBFC unit to offer lines of credit to consumers.
The central bank’s message, which does not identify any startup by name, is widely believed to affect just about everyone, including buy now, pay later companies like ZestMoney that also use a similar mechanic to offer loans to customers. Amazon Pay, Paytm Postpaid and Ola Money are also cautious as many believe they are also affected.
“The rule is very confusing and strange,” said a fintech founder on condition of anonymity to avoid upsetting RBI officials. “What the RBI is essentially saying here is that there should be no credit limit loaded on PPI. The way things currently work with PPI is that the money is finally going to traders. You are now saying that NBFCs cannot give lines of credit to merchants and that their money should only be diverted to customer bank accounts.”
The founder added that this new stance risks erasing all the innovation that has happened in the past five years in the fintech industry, which has attracted more than $15 billion in investment over the past two years from dozens of leading lenders, including Sequoia India and Southeast Asia, Tiger Global, Insight Partners, Accel and Lightspeed Venture Partners.
“As everyone now works in the fintech space, with maybe one degree of segregation where money goes to a payment gateway first, the money is routed to merchants. Some banks have been using the same strategy for ten years!” added the founder.
Fintech startups are convinced that banks lobbied the RBI to make this decision, using the age-old tactic of incumbents crying foul and relying on the regulator to save the day.
Not allowing the loading of prepaid instruments through credit is intended to protect the bank’s lazy credit card operations from Fintech’s powerful BNPL operations. It’s a flexible move by banks – seek rent. But market is market and regulation will ultimately meet what the market needs.
— Ashneer Grover (@Ashneer_Grover) June 23, 2022
The central bank, which did not provide an explanation in the release this week, has long expressed concerns about lenders charging exorbitant interest rates and requiring minimal “know-your-customer” data to onboard and coerce customers. Some of these companies, government agencies have argued in the past two years, may be involved in money laundering schemes.
“Some people speculate that when the PPI licenses were given, RBI was clear that they were not given as credit instruments. With the PPI + BNPL combination, the PPI route is now used as an alternative to credit cards or offers seamless BNPL, where RBI may not agree to it as of today,” said an industry player, who also asked for anonymity.
The new rule would not only affect such shark borrowers and sketchy players, but everyone.
“We believe that these regulations could have a significant impact on the fintechs involved in this business and would benefit banks as they could further accelerate card acquisition with less competition,” analysts at brokerage firm Macquarie wrote earlier this week.
The fintech startups exist, many argue, because they have found a way to bring financial inclusion to millions of users, something the RBI has long welcomed and a fact that banks would appreciate if you didn’t bring it up. Bringing together two regulated entities, the PPI model allows lenders to offer customers credit at a lower cost, dramatically expanding the reach of who can receive credit.
“In the traditional personal loan model, the lender deposits money directly into a bank account. So the lender doesn’t make money if the consumer spends that money,” explains Himanshu Gupta, a fintech veteran. “But in the PPI tools supported by the credit line model, as fintech startups earn exchange revenues on each payment, which can be as high as 1.8%. This means they may be able to offer consumers credit at a lower cost compared to a purely ‘personal bank loan’ model,” he added.
The data book of the credit bureaus in India is thin, leaving most people in the South Asian market not worthy of credit. As a result, banks do not offer credit cards or loans to most Indians. Fintechs use modern insurance systems to provide credit to customers and a maze of regulatory arbitration – all of which have been deemed in order until now – to operate.
According to some, the central bank may simply be too late to make a decision now. The fintechs serve more than 8 million customers in India, and without clarity, most of those customers are not required to meet their current repayment deadlines, which would cause significant stress for businesses.
Moreover, the NBFCs operated by various startups are regulated entities. Some fintech veterans argue that if RBI really wants to crack down on the use of PPI as a credit tool, they should really consider granting a credit card license to startups, something the RBI has not done so far.
Meanwhile, investors and many startups in the process of raising new funding rounds are starting to see some VCs back, according to people familiar with the matter. Some industry players believe that India’s central bank is taking a similar approach to China in tackling lenders and fintechs in general.
“We do not believe that RBI is very keen on issuing digital banking licenses, as evidenced by the recent statements from the RBI Governor. RBI has been hit hard by fintechs and has been pushing for stricter regulation in recent months. We believe the message is clear that fintechs will become increasingly regulated,” Macquarie wrote.
“RBI’s Payment Vision 2025 paper also talks about looking at the different fees for payments made in India in such a way that it further encourages digital adoption, which we believe means there is a possibility that various payment fees could go down to allow for more It is clear to us that risks are increasing for the fintech sector, where regulation has been a light touch until now.”
Entrepreneurs are trying to relay their concerns to the RBI. At least three entities, including Digital Lenders Association of India and Payments Council of India (PCI), part of the Internet and Mobile Association of India lobbying group, are writing letters to the RBI and various ministries to address their concerns.
During a Zoom call on Thursday, dozens of fintech officials discussed common grounds for what they should inform the RBI. Some of their urgent requests include extending the timeline for the new rule by six months and stating to the central bank that the fintech industry in general is “responsible and trying to do the right thing,” according to people who attended the call. .
The fintechs are also trying to explain in detail their business models and argue why those operating with full know-your-customer mandates should be allowed to continue.
But until some change or clarity comes, major disruptions are expected. Tiger Global-backed Jupiter and Azim Premji’s PremjiInvest-backed KreditBee have already temporarily prevented customers from transacting with their prepaid cards.