The FinTech industry has seen an unprecedented rise in the past few years, with many neo-banks, non-bank prepaid instrument issuers emerging in the market with their outrageous claims and services. Companies like Uni are "Pay 1/3. Anywhere" services utilising their cards, bringing competition to firms like LazyPay, which has a 'Get Credit in 90 Seconds' policy and claims to have a staggering 60 million qualified customers. Razorpay claims that the BNPL sector has risen by 539% in the year 2020 and by 637% in 2021.
However, it seems that the RBI has grown weary of the BNPL service, for on June 20 2022, The Reserve Bank of India issued a notification prohibiting non-bank institutions or fintech firms, including several BNPLs, from putting credit limits onto PPIs such as wallets and credit cards. The RBI has however stated that the only recourse the customers have is to prefill their wallets with cash or to transact from their bank given debit and credit cards. This maneuver by the RBI seems to have taken a fatal jab at small ticket FinTech loans. PPIs being loaded through lines of credit raises systemic risk concerns for the central bank. Lines of credit from banks and non-banking financial businesses (NBFCs) have been used by new age financial players to load clients' wallets. The central bank looks concerned that proper due diligence may not be carried out when the PPIs are being loaded. RBI is of the view that while it welcomes innovation, the cost of it must not be regulatory arbitrage. According to industry insiders, fintech companies have asked the RBI for clarification on its instruction.
There are three models of prepaid instruments that the central bank is scrutinizing. Firstly, the credit card model, secondly, an operator getting a loan and giving it to a PPI holder as card loading, and lastly, a PPI holder obtaining a loan and spending it. India is hardly the first country concerned about the rise of buy now, pay later services. The UK government too is strengthening BNPL loan guidelines to ensure that lenders do thorough credit risk assessments and do not entice unsuitable applicants with unfair, exaggerated advertising. As inflation erodes household buying power, the temptation to use interest-free borrowing grows. But so is the danger of falling into a vicious cycle of overspending. Even in the United Kingdom, there is a strong undercurrent of competition between BNPL experts and banks. According to those aware with the case, the RBI is not averse to PPIs being loaded by debit card, cash, or debits from banking accounts since it feels that in order to extend a line of credit, the firm must have a license. Considering Fintechs lack a lending license, the central bank deems they are not working within the legal framework. There have also been claims of some issues about data security and privacy because the customer's ownership is not always evident.
There has been much conjecture about the reasoning for the RBI's decision, but the RBI has yet to provide a thorough explanation. While some argue that non-bank pre-paid instruments (PPIs) will no longer be able to be loaded with credit, others believe that the change is just 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 clients are not put at risk as a result of non-bank fintech businesses' activity with relation to prepaid payment instruments (PPIs).
Fintech and shadow banking firms will definitely push against handing over an entire industry to banks on a piecemeal basis. On June 21, a day after the RBI issued its new rules, shares of SBI Cards & Payment Services Ltd., India's sole publicly traded credit-card company, rose over 7%.) Furthermore, BNPL is an invention that has attracted huge tech giants like as Apple Inc. and and major financial institutions such as JPMorgan Chase & Co. to challenge startups such as Klarna, Afterpay Ltd., and Affirm Holdings. The mainstreaming of pay-later innovations cannot be avoided in India.
Customers all throughout the world are shifting their e-commerce payment preferences away from cash and credit cards and toward digital wallets and BNPL. According to BCG's research 'Digital Payments in India: A US$10 Trillion Opportunity,' the digital payment industry in India will reach $10 trillion in the next five years (by 2026), with non-cash contributions accounting for 65% of all payments and two out of every three transactions going digital. But what should the customers do now? They check to see if the firm or app from which they are getting the service is a licensed lender and does not have a PPI license. Also, before taking the loan, read all of the terms and conditions and conduct research on the firm. These loans are purportedly sold as having free or low interest rates. However, there is an internal interest rate on the amount borrowed, so one must ensure that it is disclosed in the agreement.
Perhaps a middle ground solution for regulating the BNPL sector will be formulated by the RBI. But one thing is certain: BNPL must still demonstrate that its product is both economically viable and socially useful. If regulatory arbitrage remains the chosen means of raising capital, the RBI is correct to want to straitjacket it before it's too late.
The author is a recent graduate of the ICFAI Law School, Dehradun. Views are personal.