fintech regulations: RBI making life tougher for fintech firms: report

The Reserve ‘s (RBI‘s) fintech regulation – which prohibits non-banking wallets and pre-paid cards from loading credit lines onto these products – might have a significant impact on fintech companies and in turn benefit banks, states a report by Macquarie Research.

The report says the regulation will allow banks to speed card acquisition while reducing competition.

On June 20, the RBI disallowed non-banking wallets and prepaid cards from loading their credit lines onto these platforms,
a notification reviewed by ET showed. The regulator, in a one-page circular addressing non-banking prepaid payment instruments (PPIs), directed them to stop such practices immediately.

“The PPI-MD does not permit loading of PPIs from credit lines,” the regulator said in its communication. “Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007.”

The RBI’s directive has caused widespread confusion in this segment of the payments industry, although the regulatory order came after concern it may have felt over several of the new-age companies seemingly assuming the lender’s role without building sufficient safeguards,
ET reported on June 21.

According to the Macquarie report, some of the new-generation players were adding up to 200,000-300,000 cards using PPI licenses and loading users’ wallets with credit lines from NBFCs, banks, and other financial institutions.

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“The main purpose of a PPI license is to act as a payment instrument and not as a credit instrument. We believe many fintech firms were using this as a channel to load credit. We also believe many customers were unknowingly taking a line of credit through their wallets at the point of checkout,” the report pointed out. “Some of these practices have not gone down well with the regulator.”

Over the last few months, the RBI has been cracking down on fintech companies and pressing for stronger regulations. The report claims there is a clear message that fintech firms will be increasingly regulated.

According to the report, the RBI circular could impact players like Slice, Unicards, etc, who have been adding a lot of customers through this route.

The RBI’s circular comes after widespread discussions between the banking regulator and industry stakeholders as it seeks to understand the business models of lending startups, including credit-card based fintech firms, while aiming to release digital-lending norms by July, multiple sources aware of the talks told ET.

“It is clear that the risks are increasing for the fintech sector, for which regulations have been a light-touch so far. With regulatory arbitrage now being plugged slowly, we are expecting a slowdown in growth and/or profitability prospects for the fintech sector in India,” the report further noted.

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