Fintechs stops “Buy now, pay later” as RBI tightens the loop on PPIs

However, it seems that RBI has grown tired of the BNPL service, for June 20, 2022, The Reserve Bank of India issued a notice banning non-banking institutions or fintech firms, including several BNPLs, from setting credit limits on PPIs. -is as e.g. wallets and credit cards. However, RBI has stated that the only way out for customers is to pre-fill the wallet with cash or to make transactions from the bank given debit and credit cards. This maneuver by RBI seems to have taken a fatal blow to FinTech loans with small tickets. PPIs that are loaded through credit lines increase systemic risk concerns for the central bank. Credit lines from banks and non-banking companies (NBFCs) have been used by modern financial players to load customers’ wallets. The central bank is concerned that proper due diligence may not be performed when the PPIs are loaded. RBI is of the opinion that even if it welcomes innovation, the costs must not be regulatory arbitrage. According to industry insiders, fintech companies have asked RBI for clarification of the instructions.

There are three models of prepaid instruments that the central bank examines. Firstly, the credit card model, secondly an operator who gets a loan and gives it to a PPI holder as card loading, and finally a PPI holder who gets a loan and uses it. India is hardly the first country that is worried about the increase in purchases now, pay later services. The UK government is also strengthening BNPL loan guidelines to ensure that lenders make thorough credit risk assessments and do not lure unsuitable applicants with unfair, excessive advertising. As inflation erodes households’ purchasing power, the temptation to use interest-free loans grows. But there is also the danger of ending up in a vicious circle of over-consumption. Even in the UK, there is a strong undercurrent of competition between BNPL experts and banks. According to those familiar with the matter, RBI is not reluctant to have PPIs loaded with debit cards, cash or debits from bank accounts, as it believes that in order to expand a line of credit, the company must have a license. Given that Fintechs lacks a lending license, the central bank considers that they do not work within the legal framework. There have also been allegations of some issues with data security and privacy because the customer’s ownership is not always clear.

There have been many assumptions about the reasons for RBI’s decision, but RBI has not yet given a thorough explanation. While some argue that non-bank prepaid instruments (PPIs) will no longer be able to be filled with credit, others believe that the change is only a method of bridging the regulatory gap between fin-techs and banks, where fin-techs have more latitude. According to reports, the Reserve Bank is evaluating several methods to guarantee that customers are not put at risk as a result of the activity of non-bank fintech companies in relation to prepaid payment instruments (PPIs).

Fintech and shadow banking companies will definitely push against handing over an entire industry to the banks on a piecemeal basis. On June 21, one day after RBI issued its new rules, the shares of SBI Cards & Payment Services Ltd., India’s only listed credit card company, rose by more than 7%.) Furthermore, BNPL is an invention that has attracted enormous technology. giants like Apple Inc. and and large financial institutions like JPMorgan Chase & Co. to challenge startups like Klarna, Afterpay Ltd. and Affirm Holdings. Mainstreaming of innovations paid for later cannot be avoided in India.

Customers around the world are moving payment preferences for e-commerce away from cash and credit cards and towards digital wallets and BNPL. According to BCG’s research “Digital Payments in India: A US $ 10 Billion Opportunity”, the digital payment industry in India will reach $ 10 trillion over the next five years (by 2026), with non-cash contributions accounting for 65% of all payments and two out of three transactions go digital. But what should customers do now? They check if the company or app they receive the service from is a licensed lender and does not have a PPI license. Before you take out a loan, you must also read all the terms and conditions and make inquiries about the company. These loans are reportedly sold at free or low interest rates. However, there is an internal interest rate on the loan amount, so you must ensure that it is stated in the agreement.

Perhaps an intermediate solution for regulating the BNPL sector will be formulated by the RBI. But one thing is certain: BNPL must continue to show that the product is both economically viable and socially useful. If regulatory arbitration remains the chosen means of raising capital, the RBI has the right to wish to forcibly remove it before it is too late.

The author is a recent graduate of ICFAI Law School, Dehradun. The views are personal.