Fintech PPIs need regulation, not a ban

Like his peers in other countries, the RBI official too conceded that it was virtually impossible for legislation to keep in step with the fast-mutating fintech landscape. “The social impact of a new technology or its impact on customers needs to be well-understood by all stakeholders- regulators, existing financial firms as well as innovative fintech firms.“ he said. And then, he delivered the clincher: “Slowing down the process of change, which attracts criticism of stifling innovation, is often the best way to ensure consumer protection.“

If fintechs had paid more attention to this early warning -- and correctly read other signals, including from the central bank governor -- the blow from last week's ban on pre-paid instruments (PPIs) such as non-bank digital wallets and prepaid cards from providing credit lines on many fintech platforms, would not have seemed harsh or out-of-the-blue.

The ban, many fintechs have said, will kill their business model and threaten their survival.

The ban raises the important issue of regulatory arbitrage, or, in other words, the interpretation of RBI’s regulatory boundaries and turf. Can issuers of digital wallets or pre-paid cards -- which basically enable users to carry out payments online for multiple activities based on a pre-filled amount from a bank account -- be banned from offering credit to customers? The regulator appears to view this offer of pre-sanctioned credit by a PPI issuer – often through non-banking finance companies (NBFCs) -- as a proxy credit card practice or revolving credit. With this proxy lending having caught on, and customer count having swelled over the last couple of years, especially among the younger client base, the RBI has stepped in, like in the case of loan aggregators.

True to form, the RBI has not offered any rationale for the move. Nor has the regulator indicated as to why it waded in long after hundreds of fintechs including those powered by foreign venture capital funds had built up this business with millions of customers and with delinquency levels reported yet far from being hair-raising. Fintechs may have a case where they point out that the credit offer to a user is from a regulated entity such as an NBFC or a bank. And that they are meeting the credit needs – through low-ticket transactions -- of a segment of the population which is ignored by mainstream banks. From the perspective of a financial firm, the technology platform offers a cheaper mode of disbursing credit and reaching out to a larger customer base geographically, eliminating the need for physical branches, the costs involved, and for carrying out due diligence.

For the fintechs, the hit comes at a most inopportune time. With global central banks on a rate tightening course, the recourse to cheap funds from venture capital funds may be far more limited. The Financial Times has reported that public fintech valuations have collapsed even faster than they climbed, as funding slowed sharply in the first quarter of this year after the liquidity taps were turned off. Last year, VC firms more than doubled their investments in the sector to $134 billion, according to the newspaper.

Mark Carney, the former chief of UK's central bank, said a couple of years ago that new finance demands a new Bank of England. In the Indian context, that would mean a more open central bank which engages with the players in digital finance in a country that has one of the highest rates of digital adoption. Banks are at the heart of the financial system in India, as it is globally, but fintechs have clearly shown yet again how local lenders have to be nudged to step up their game and to design innovative solutions and products to fulfill the credit needs of a vast swathe of Indians. It would certainly help if the RBI unveils a non-disruptive framework for fintechs – with minimum technology standards, outsourcing norms for regulated entities, and governance norms.