Regulatory Headwinds for BNPL Fintechs

Posted On - 4 July, 2022 • By - Souvik Ganguly

The Reserve Bank of India (RBI) in its recent notification addressed to non-bank prepaid payment instrument (PPI) issuers, may have sounded the death-knell for several financial technology (Fintech) firms contributing to revolutionize India’s digital lending infrastructure. The short 2-paragraph notification states that PPIs may not be loaded through credit lines and must necessarily be loaded only through certain permitted sources of funds. Some of these sources of funds include cash, debits to existing bank accounts, debit or credit cards, or other payment instruments issued by regulated entities. While the notification may seem to be clarificatory in nature, it has had a significant impact on the business models of a spate of Fintech firms offering digital lending services, more particularly buy-now pay-later (BNPL) services.

In our earlier coverage on regulation of fintech firms operating in the digital lending space, we had highlighted (i) a few existing instances of regulatory arbitrage in the sector, and that (ii) regulatory overreach should not lead to restricting innovation and development in the Fintech sector. We specifically discussed two mechanisms through which Fintech firms were conducting the digital lending business, i.e., the prepaid credit mechanism and the co-branding mechanism. Please click here to read our earlier coverage. The present notification has adversely affected a number of fintech firms operating under the prepaid credit mechanism.

Under the prepaid credit mechanism, fintech firms obtained licenses for issuance of PPIs, which were loaded with funds obtained through tie-up arrangements with banks and regulated non-banking financial companies (NBFCs). Pursuant to RBI’s notification the loading of these PPIs by way of credit lines issued by banks and NBFCs has been expressly barred, which forms the basis of the business models of these fintech firms. A number of significant market participants have already temporarily suspended their services, for fear of being in breach of the financial regulator’s notification.

It may be understood from media reports that pursuant to a number of concerns and queries raised by the industry, the RBI is presently engaged in talks with the concerned stakeholders and may soon take a decision on revisiting or even revising its diktat.

The present notification of the RBI appears to flow from the need to ensure that an entity in the business of offering credit facilities to retail consumers, must be subject to strict regulatory oversight, including mandatory compliance with any and all prescribed prudential norms and regulations. While the notification unquestionably seeks to further the protection of retail consumers, a balance needs to be struck between regulatory supervision and over-regulation which may result in disrupting the growth of new technology trying to solve problems relating to credit flow to the unbanked section of the population who may not have access to formal credit system.

Authors: Souvik Ganguly 

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