India’s central bank cracks down on fintech startups – Meczyki.Net

for almost everyone Fintech startup, lending has been playing the end game for a long time. A notice from India’s central bank this week has thrown a crack at the ecosystem, which is scrutinizing who can lend.

The Reserve Bank of India has informed dozens of fintech startups that it is stopping the practice of loading non-bank prepaid payment instruments (PPIs) – prepaid cards, for example – using credit lines, in a move that The panic has inspired – and existentially threatened – many fintech startups and caused some to compare the decision to China’s crackdown on the financial services firm last year.

Several startups, including Slice, Jupiter, Uni and CreditBee, have long used PPI licenses to issue cards and then equip them with credit lines. Fintechs typically partner with banks to issue cards and then tie up with non-banking financial institutions or use their NBFC entity to provide lines of credit to consumers.

The central bank’s notice, which does not identify any startups by name, is widely believed to affect everyone, including Buy Now, Pay Later firms such as ZestMoney, a company that provides loans to customers. Use the same mechanics. Amazon Pay, Paytm Postpaid and Ola Money are also on alert, as many believe they too could be affected.

“The rule is very confusing and strange,” said a fintech founder on condition of anonymity to avoid irritating RBI officials. “What RBI is essentially saying here is that do not load credit lines on PPIs. The way things work with PPIs is that the money eventually goes to the traders. Now you are saying that NBFCs cannot give credit lines to merchants and their money should be sent only to customers’ bank accounts.

The founder said this new approach risks eroding all the innovation that has happened over the past five years in the fintech industry, which has attracted more than $15 billion in investment over the past two years from several high-profile backers including Sequoia India and Southeast Asia . , Tiger Global, Insight Partners, Accel and Lightspeed Venture Partners.

“The way everyone works in the fintech space right now, perhaps with a degree of separation where the money goes to the payment gateway first, the money is sent to the merchants. Some banks have been working on the same strategy for a decade! ” Founder added.

Fintech startups are convinced that banks have lobbied the RBI to reach this decision, adopting an age-old strategy where office-bearers cry and rely on the regulator to save the day.

The central bank, which did not offer an explanation in the notice this week, has long expressed concerns about lenders charging exorbitant interest rates and minimum-your-customer minimums to on-board and coerce customers. Details are required. Some of these firms, government agencies have claimed over the past two years, may have been involved in money laundering schemes.

“Some are speculating that when PPI licenses were given, RBI was clear that they are not given as credit instruments. With the PPI + BNPL combo, the PPI route is now being used as an alternative to credit cards or Sahaj BNPL is being offered, which RBI cannot fix as of today,” said an industry player. Said, who requested anonymity.

The new rule is said to be affecting not only such shark lenders and sketchy players, but everyone.

Analysts at brokerage house Macquarie wrote earlier this week, “We believe this regulation could significantly impact the fintechs involved in this business and will be beneficial to banks, as they are less competitive in card acquisitions.” can accelerate further.”

Fintech startups exist, many argue, because they have found a way to bring financial inclusion to millions of users, something that the RBI has long welcomed and a fact that if you don’t bring Banks will appreciate. The PPI model, which brings together two regulated entities, enables lenders to provide loans to customers at a lower cost, dramatically increasing access to credit recipients.

“In the traditional personal loan model, the lender directly deposits the money into the bank account. So, when the consumer spends that money, the lender does not make any money,” explained fintech veteran Himanshu Gupta. “But in PPI instruments backed by the credit line model, since fintech startups generate interchange revenue on every payment, that can be as high as 1.8%. This means they are potentially offering consumers a ‘personal loan in the bank’ model.” can offer loans at a lower cost.

India’s credit bureau data book is thin, making most individuals in the South Asian market unqualified for credit. As a result, banks do not provide credit cards or loans to most Indians. Fintechs use modern-day underwriting systems to lend to clients and a maze of regulatory intermediation – all considered fine until now – to operate.

It may be too late for the central bank to make a decision now, some argue. Fintech serves over 8 million customers in India, and without clarity, most of those customers are not bound to meet their current payback deadlines, which will create significant stress on firms.

Additionally, NBFCs run by various startups are regulated entities. Some fintech giants argue that if the RBI really wants to ban the use of PPIs as a credit instrument, they should consider granting credit card licenses to startups, something the RBI has not done till date.

Meanwhile, investors are panicking and with many startups that are in the midst of raising new funding rounds, some VCs are looking back, according to people familiar with the matter. Some industry players believe that India’s central bank is taking a similar approach to China in cracking down on lenders and fintechs at large. (On the other hand, shares of SBI Bank, a state-owned bank in India, have risen over 14% since the central bank sent the circular.)

“We do not believe that the RBI is too keen on issuing digital banking licences, as evidenced by the recent statements by the RBI governor. The RBI has been coming down heavily on fintech and has been advocating for tighter regulations for the past several months. It is our view that the message is clear that fintech will be further regulated,” Macquarie wrote.

“RBI’s Payments Approach 2025 document talks about looking at various charges for payments made in India in such a way that it encourages further digital adoption, which means different payment charges to encourage more adoption. likely to decrease. It is clear to us that risks are rising for the fintech sector, for which regulations have so far been mild.

Entrepreneurs are scrambling to take their concerns to the RBI. At least three entities, including the Digital Lenders Association of India and Payments Council of India (PCI), part of lobby group Internet and Mobile Association of India, are in the process of writing letters to the RBI and various ministries to address their concerns.

Dozens of fintech executives discussed what they should inform the RBI over a Zoom call on Thursday. According to those involved in the call, some of their pressing requests include extending the deadline for the new rule to six months and establishing the central bank that the fintech industry at large is “responsible and trying to do the right thing”.

Fintechs also try to elaborate on their business model and make a case for why people who know your customer completely should be allowed to continue.

But unless there is some change or clarity, there are chances of major disruptions. Tiger Global-backed Jupiter and Azim Premji’s PremjiInvest-backed CreditBee have already temporarily barred customers from doing any transactions on their prepaid cards.