For almost everyone Lending has long been the end game for fintech startups. A statement from India’s central bank this week has rocked the ecosystem, examining who can even lend.
The Reserve Bank of India has informed dozens of fintech startups that it is banning the practice of topping up non-bank prepaid payment instruments (PPIs) – such as prepaid cards – using lines of credit, prompting panic amongst – and existential – ones has threatened many fintech startups, prompting 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 add lines of credit to them. Fintechs typically work with banks to issue cards and then partner with non-bank financial institutions or use their own NBFC entity to offer lines of credit to consumers.
The central bank’s announcement, which doesn’t name any startups, is widely believed to have implications for nearly all, including buy-now-pay-later firms like ZestMoney, which are also using a similar mechanism to offer credit to customers. Amazon Pay, Paytm Postpaid and Ola Money are also wary as many believe they could also be affected.
“The rule is very confusing and strange,” said one fintech founder, on condition of anonymity so as not to upset RBI officials. “Essentially what the RBI is saying here is that the line of credit will not be loaded onto PPI. That’s how things are going at PPI at the moment, the money is finally going to the dealers. They are now saying that NBFCs cannot give credit lines to merchants and their money should only be channeled into customer bank accounts.”
The founder added that this new attitude risks wiping out all the innovation of the past five years in the fintech industry, which has attracted over $15 billion in investments over the past two years from numerous high-profile backers such as Sequoia India and Southeast Asia has attracted , Tiger Global, Insight Partners, Accel and Lightspeed Venture Partners.
“The way everyone is currently working in fintech, with maybe a degree of segregation, where the money goes to a payment gateway first, the money gets routed to the merchants. Some banks have been using the same strategy for about a decade!” added the founder.
Fintech startups believe the banks pushed the RBI into making this decision, using the age-old tactic of the incumbents shouting bad and relying on the regulator to save the day.
The central bank, which did not issue a statement in the notice this week, has long raised concerns about lenders charging exorbitant interest rates and requiring a bare minimum of know-your-customer details to onboard and coerce customers. Some of these firms, government agencies have claimed over the past two years, may be engaging in money laundering schemes.
“Some people are speculating that when the PPI licenses were issued, the RBI made it clear that they would not be granted as lending instruments. With the PPI + BNPL combo, the PPI route is now being used as an alternative to credit cards or offering seamless BNPL, which the RBI may not agree with at this time,” said an industry stakeholder, who also requested anonymity.
The new rule is meant to affect not just such shark lenders and sketchy players, but everyone.
“We believe this regulation could significantly affect the fintechs involved in this business and would be beneficial for banks as they can further accelerate card acquisitions with less competition,” analysts at brokerage house Macquarie wrote earlier this week.
Many argue that the fintech startups exist because they found a way to bring financial inclusion to millions of users, something RBI has long welcomed and a fact banks would appreciate if they didn’t address it . Bringing together two regulated entities, the PPI model allows lenders to offer customers credit at a lower cost, dramatically increasing the reach of those who can obtain credit.
“In the traditional personal loan model, the lender deposits money directly into the bank account. So the lender doesn’t make money when the consumer spends that money,” explained Himanshu Gupta, a fintech veteran. “But in the PPI instruments backed by the credit line model, as fintech startups earn interchange revenue that can be as high as 1.8% on each payment. That means they may be able to offer consumers credit at a lower cost than a pure personal loan-in-bank model,” he added.
Indian credit bureaus’ data book is thin, making most individuals in the South Asian market uncreditworthy. As a result, banks do not offer credit cards or loans to most Indians. Fintechs use modern underwriting systems to lend to clients and a maze of regulatory arbitrage — all previously thought fine — to operate.
Some argue that the central bank may simply be too late to make a decision now. The fintechs serve over 8 million clients in India and without clarity, most of these clients are not required to meet their current payback periods, which would weigh heavily on the businesses.
In addition, the NBFCs operated by various startups are regulated entities. Some fintech veterans argue that if the RBI really wants to crack down on the use of PPI as a lending tool, they really should consider giving startups a credit card license, something the RBI hasn’t done so far.
Meanwhile, investors are becoming unsettled and many startups in the process of raising new rounds of funding are starting to see some VCs pulling out, according to people familiar with the matter. Some industry players believe that the central bank of India is taking a similar approach to China when it comes to cracking down on lenders and fintechs at large. (In contrast, shares in SBI Bank, India’s state-owned bank, are up 11% since the central bank’s circular.)
“We don’t think RBI is very keen on issuing digital banking licenses, as recent statements from the RBI governor indicate. The RBI has heavily criticized fintechs and has lobbied for stricter regulations in recent months. In our view, the message is clear that fintechs are becoming increasingly more regulated,” Macquarie wrote.
“RBI’s Payments Vision 2025 document also speaks of looking at the various fees for payments made in India in a way that further encourages digital adoption, which we believe means there is an opportunity for various payment fees to be reduced in order to promote greater acceptance. We recognize that risks are increasing for the fintech sector, for which regulation has so far been a light touch.”
Entrepreneurs endeavor to forward their concerns to the RBI. At least three entities, including the Digital Lenders Association of India and Payments Council of India (PCI), part of the Internet and Mobile Association of India lobby group, are currently writing letters to the RBI and various government departments to address their concerns.
On a Zoom call Thursday, dozens of fintech officials discussed the common rationale behind what they should tell RBI. Some of their urgent demands include extending the deadline for the new rule by six months and telling the central bank that the fintech industry as a whole is “responsible and trying to do the right thing,” according to conference call participants.
Fintechs are also trying to detail their business models and argue why those operating with full know-your-customer mandates should continue to be allowed.
But until change or clarity arrives, great disruption is expected. Tiger Global-backed Jupiter and PremjiInvest-backed Azim Premjis have already temporarily blocked customers from transacting with their prepaid cards.
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