A two-paragraph notification from the RBI on June 20, which clarified that loading prepaid payment instruments (PPIs) such as wallets and prepaid cards with credit lines was not permissible, left the entire fintech ecosystem concerned about the legality of many current business models.
In a panel discussion by Moneycontrol, fintech founders and experts said that companies would have to build business models within these regulations if they are to thrive in the fintech space.
Srinath Sridharan, a member of the Fintech Association for Consumer Empowerment, said that the move by the RBI shouldn’t be viewed as negative towards fintech startups. Earlier, MoneyControl had reported that fintech startup founders had not taken kindly to the notification issued by the RBI.
Being a part of a regulated space, fintech startups would have to build business models around the rules, Sridharan said. “If you want to play the big boy game, be ready for fit and proper scrutiny. The only war here is worrying about regulations. If you are worried about those then you probably don’t even fit in,” he added.
Disbursal of credit comes in different packages -- a direct loan from a bank or a Non-Banking Financial Corporation (NBFC), a bank-issued credit card or the now infamous credit-linked prepaid cards.
For fintech startups such as Slice and Uni, these cards are their core business model, issued by their partner banks including SBM Bank India and RBL Bank. These are loaded with a line of credit by their partner NBFCs and marketed and distributed by the fintechs. It is this layering of the product that the RBI may have had an issue with as it is difficult for customers to differentiate between models.
In the past few months, the prepaid cards have come under scrutiny with customers alleging lack of transparency on the part of the fintech startups. “People discover different loans that they don't remember taking from different NBFCs. This is a theme that has been recurring now as some of these businesses scale and that is a legitimate consumer problem,” Sahil Kini, co-founder of the recently acquired fintech startup Setu, said.
“The RBI looks after the person on the street who may not know how to use a card or credit line payments,” Monica Jasuja, executive committee member of the Indian Fintech Forum, said.
Sahil Kini and Srinath Sridharan echoed Jasuja’s thoughts. Kini said that the RBI’s intention is not to keep the nation credit starved and that the central bank cannot be labelled “not fintech friendly,” whenever it bats for consumer protection.
The RBI’s efforts are to prevent the country from reaching the heights of indebtedness of the western world, Sridharan said. “To me, this is like a shepherd managing the flock and getting them back to the farm. Sometimes sheep run away,” he said.
The RBI notification served as a reminder to these fintech companies that this type of lending is not permitted. M2P founder Madhusudanan R, however, said that the fintech community is viewing the notification as a change in the rules rather than an existing regulation. “Most of these large companies have had consultations with very senior Supreme Court lawyers or retired RBI officials, so you're actually sort of questioning the whole collective wisdom of a lot of people,” he said.
The fintech ecosystem in the country has grown both in value and valuations in the past few years and the central bank has begun to take cognizance of the sector. The RBI set up a fintech department earlier in the year, introduced credit on UPI last month and has a fresh set of digital lending guidelines in the pipeline.
Credit-linked cards and the larger BNPL segment have added much to the recent double-digit credit growth in India. Estimates suggest that about 15 to 20 million customers could be impacted by the RBI notification. Of this, Slice alone claims to have 12 million customers. The question is why does the RBI wait so long till startups have acquired millions of customers, before they issue a stop to the business model?
The RBI has decided to take action when it has enough understanding of the product, Shinjini Kumar, Co-founder of the Salt App, said. The main aim of the central bank is to contain systemic risks that the digital lending sphere poses. Moreover, the past few years have seen tremendous innovation within the fintech ecosystem which also brings its own set of complications, causing the central bank to keep its guard up, she said.
Jaikrishnan G, Partner at Grant Thornton Bharat, views the RBI’s notification, which was addressed to non-bank PPIs, as a backing of legitimate PPI models. “We have many companies with huge valuations and we take pride in having them in the ecosystem,” he said.
Many fintech founders, however, have seen the notification as applicable to all PPI models irrespective of whether they use bank-issued cards or not.
The RBI’s notification has also signalled a question mark over the business model of fintech startups which use either venture capital or debt to give out loans, Sridharan said. “One fundamental thing that the RBI has always laid out about credit is that you cannot pay a loan with a loan,” Shinjini Kumar added.
Further, there are signs of a direct fight between banks, which were slow to digital transformation, and fintech startups for credit consumers, Sridharan said.
The road ahead for fintech startups is not all dark and there is a lot of room for conversation with the RBI, and innovation, Sahil Kini said. It is important for the fintech startups to educate their consumers on loan products more clearly as the fintech sector moves through this period of evolution, said Madhusudanan R.
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