Why fintech PPIs are in a soup

On Monday, the Reserve Bank of India said prepaid payment instruments (PPIs) should not be loaded through lines of credit from non-bank lenders, confusing the wallet and the buy-now-pay-later industry. Mint explains the RBI circular and the impact on fintechs.

What does the circular say?

Some fintechs in India partner with banks to issue prepaid cards. At the same time, they partner with an NBFC (or use their own NBFC) to offer a credit limit, which is loaded onto the same prepaid card. RBI’s June 20 circular said that under the main guidelines, PPIs cannot be charged using lines of credit issued by NBFCs. The central bank said that such practices, if followed, must be stopped immediately, and that non-compliance could lead to criminal action under the Payment and Settlement Systems Act, 2007. The latest circular states that PPI can be charged with a debit/credit card, but not with an NBFC line of credit.

What is the central bank’s concern?

Using credit lines to top up prepaid cards has become a popular way for fintechs to operate in the Buy Now, Pay Later segment. The RBI is not happy with this arrangement and is clear that a PPI (a payment instrument) cannot be used as a credit instrument. There appears to be concern about some of these fintechs aggressively extending unsecured lines of credit in various forms, increasing risk in the system. “Fintechs have used a PPI BIN (Bank Identification Number) to literally do a quasi-credit card, and RBI doesn’t like it,” said a top banker.

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Photo: iStock

Why did the circular cause confusion?

The circular applies to “all authorized non-bank PPI issuers”. Some say that fintechs that offer lines of credit on a bank’s PPI are safe. Others say the headline guidelines even blocked banks, but some still did. “When you put the cardinal directions and this circular together, both bank and non-bank PPIs cannot be loaded with a line of credit,” said a neobank founder.

Which companies are affected?

An NBFC founder who has discontinued prepaid cards with lines of credit said, “RBI is clear they don’t want a credit card or any surrogate product that runs without RBI approval.” The move poses problems for NBFC credit-linked wallets and prepaid cards that allow BNPL, such as Slice, Uni, LazyPay, PostPe, MobiKwik, Ola Postpaid, EarlySalary and some neobanks. SBM Bank was one of the preferred PPI banks. publishers for fintechs while M2P is a company that helps fintechs connect to bank PPIs.

What’s next for PPI fintechs?

While some people in the industry are still in denial, some have already started looking for workarounds. The founder of the neobank explains: “A fintech can still borrow aggressively and transfer the loan to your bank account. The next step could be to link a prepaid card to your bank account and now you can withdraw the money, load your card and swipe to a merchant.” The user experience will change and some customers will drop out, but this is still a workable hack, he said.

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