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Why fintech PPIs are in a soup

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On Monday, the RBI said prepaid payment instruments (PPIs) must not be loaded through credit lines from non-bank lenders, sending the wallet and buy-now-pay-later industry into confusion. Mint explains the RBI circular and the impact on fintechs.

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

What does the circular say?

Some fintechs in India tie up with banks to issue prepaid cards. At the same time, they partner an NBFC (or use their own NBFC) to offer a credit line, which is loaded to the same prepaid card. RBI’s 20 June circular said that under its master directions, PPIs can’t be loaded using credit lines issued by NBFCs. The central bank said any such practice, if followed, should be stopped immediately, and non-compliance may attract penal action under the Payment and Settlement Systems Act, 2007. The latest circular says PPI can be loaded using debit card/credit card but not with a credit line from an NBFC.

What is the central bank’s concern?

Using credit lines to top up prepaid cards was becoming a popular way among fintechs to operate in the Buy Now, Pay Later segment. The RBI is not pleased with this arrangement, and is clear about the fact that a PPI (a payments instrument) can’t be  used  as  credit  instrument. There seems to be concerns about some of these fintechs who have been aggressively extending unsecured lines of credit in various forms, increasing the risk in the system. “Fintechs have been using a PPI BIN (bank identification number) to do a quasi-credit card literally, and RBI is not okay with it," a top banker said.

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Why did the circular create confusion?

The circular addresses “all authorized non-bank PPI issuers". Some say fintechs offering credit lines on a bank’s PPI are safe. Others say the master directions barred even banks, but some were still doing it. “When you put the master directions and this circular together, both bank and non-bank PPIs cannot be loaded with a credit line," a neobank founder said.

Which companies will be impacted?

An NBFC founder who has stopped prepaid cards loaded with credit lines said, “RBI is clear that they don’t want any credit card or a surrogate product run without RBI approval." The move spells trouble for NBFC credit line-linked wallets and prepaid cards allowing BNPL, such as Slice, Uni, LazyPay, PostPe, MobiKwik, Ola Postpaid, EarlySalary, and some neobanks. SBM Bank was among the preferred PPI issuers to fintechs, while M2P is a company which 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 searching for workarounds. The neobank founder explains, “A fintech can still do aggressive lending and transfer the loan to your bank account. The next step could be linking a prepaid card with your bank account and now you can take out the money, load your card, and swipe it at a merchant." The user experience will change, and some customers will drop off, but this is still a workable hack, he said.

 

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