RBI removes loading of Prepaid Instruments (PPIs) by Credit Lines

RBI removes loading of Prepaid Instruments (PPIs) by Credit Lines (which is a subsegment of BNPL, also called Credit Card Challengers):

What does it mean to the Fintech ecosystem?

RBI has clearly communicated in its message PPI Issuers as well as Banks that:
– Prepaid can only be loaded by Cash / PPIs / debit cards / credit cards
– Prepaid loading by Credit Lines is not permitted on immediate basis and non compliance would be attract penal action

What it means to the fintech ecosystem?

Impact on Fintech Leaders in this segment (which is a subsegment of BNPL, also called Credit Card Challengers)
– This is a large segment in the ecosystem with many Unicorns and Soonicorns leading the space and they will have to stop the current business model on an immediate basis.

We believe that these leaders would potentially:

– Acquire NBFC License as well as Credit Card License on the long term. This would ensure that they have RBI regulatory support.
– Partner with Credit Card Players for Cobranded Card Issuance. This will have issues of access to the client data at the partner level.
– They may move towards classic BNPL model funded by equity instead of credit lines from NBFC. This segment also carries the risk of regulation, however, it is still available for building up.
– They may move towards Short term individual loans, where payment would be made to the merchants and in the rare case to the customer. This essentially removes the card engagement layer.
– They may partner with Banks for Savings Accounts with Credit Lines), which is within RBI framework (or close to it).

Impact on Customers:

– All “Challenger Credit Cards” will become just a prepaid cards on an immediate basis. Many customers of these cards will potentially go back to “NO CREDIT ARENA AGAIN”, as they may not qualify bank’s credit approval criteria. These cards were a big boon from the inclusion perspective (students to young professionals and beyond) and this change will damage the customer credit availability.

Impact on PPIs / Banks supporting Cards:

– These issuers were having a field day with decent revenue coming to them with limited risks / overheads. This will had adverse impact on their revenue model linked to fintechs.

Impact on Banks / NBFCs providing credit on Prepaid Cards:

– Adverse impact Impact on BaaS Players
– Many BaaS players were getting valued heavily as they powered this segment. These players will have to move to more kosher segments like credit cards, account aggregator, UPI, Core banking to continue to scale.

Long Term Beneficiaries of this change:

– Banks and NBFCs with Credit Cards will now have millions of customers looking to move a formal credit card product after getting trained by Challenger Cards.
– Lending Fintechs / NBFCs / Banks focusing on short term loans
– UPI powering Credit Cards, which is expected to go live over a period of time.