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India’s central bank cracks down on fintech startups – TechCrunch

For almost everyone fintech startups, lending has long been the end game. A notice from India’s central bank this week threw a wrench into the ecosystem, examining who can lend.

The Reserve Bank of India has informed dozens of fintech startups that it is banning the practice of charging non-bank prepaid payment instruments (PPIs) – prepaid cards, for example – using lines of credit, in a move that has caused panic among — and existential threat to — many fintech startups and led some to compare the decision to the Chinese crackdown on financial services firms last year.

Several startups including Slice, Jupiter, Uni and KreditBee have long used PPI licenses to issue cards and then endow them with lines of credit. Fintechs typically partner with banks to issue cards and then partner with non-bank financial institutions or use their own NBFC unit to offer lines of credit to consumers.

The central bank advisory, which does not identify any startup by name, is widely thought to impact just about everyone, including buy now, pay later companies such as ZestMoney which also use a similar mechanism for offering loans to customers. Amazon Pay, Paytm Postpaid and Ola Money are also cautious as many believe they could also be affected.

“The rule is very confusing and strange,” said a fintech founder on condition of anonymity to avoid upsetting RBI officials. “What the RBI is basically saying here is don’t charge a line of credit on the PPI. The way things currently work with PPI is that the money ultimately goes to the traders. You are now saying that NBFCs cannot extend lines of credit to merchants and that their money should only flow to customers’ bank accounts.

The founder added that this new position risks erasing all the innovation that has occurred over the past five years in the fintech industry, which has attracted more than $15 billion in investment over the past few years. past two years from dozens of high profile backers including Sequoia India and South East Asia. , Tiger Global, Insight Partners, Accel and Lightspeed Venture Partners.

“The way everyone works in the fintech space right now, maybe with a degree of separation where the money goes to a payment gateway first, the money is routed to merchants. Some banks have been using the same strategy for ten years! adds the founder.

Fintech startups are convinced the banks lobbied the RBI to make the move, using the age-old tactic where incumbents cry foul and rely on the regulator to save the day.

The central bank, which did not provide an explanation in this week’s notice, has long expressed concerns about lenders charging exorbitant interest rates and requiring minimal know-your-customer details to onboard and coerce customers. Some of these companies, according to government agencies over the past two years, may be engaging in money laundering schemes.

“Some people speculate that when the PPI licenses were granted, RBI made it clear that they are not granted as credit instruments. With the PPI + BNPL combo, the PPI route is now being used as an alternative to credit cards or offering transparent BNPL, which RBI may not agree with at this time,” said one industry player. industry, who also requested anonymity.

The new rule is said to impact not just those shark moneylenders and sketchy players, but everyone else.

“We believe this regulation could have a significant impact on fintechs involved in this business and would benefit banks as they can further accelerate card acquisition with less competition,” the brokerage analysts wrote. Macquarie earlier this week.

Fintech startups exist, many say, because they’ve found a way to bring financial inclusion to millions of users, something the RBI has long welcomed and a fact banks would appreciate if you didn’t mention . The PPI model, which brings together two regulated entities, allows lenders to offer credit to customers at a lower cost, dramatically increasing the reach of who can receive credit.

“In the traditional personal loan model, the lender deposits the money directly into a bank account. Thus, the lender does not earn any money when the consumer spends that money,” explained fintech veteran Himanshu Gupta. “But in PPI instruments backed by the line of credit model, since fintech startups earn interchange revenue on each payment, which can be as high as 1.8%. This means they can potentially offer credit at lower cost to consumers versus a pure ‘personal loan at the bank’ model,” he added.

India’s credit bureau data book is thin, which makes most individuals in the South Asian market unworthy of credit. As a result, banks do not offer credit cards or loans to most Indians. Fintechs use modern underwriting systems to lend to customers and a maze of regulatory arbitrage – all considered acceptable so far – to operate.

The central bank may well be too late to make a decision now, some say. Fintechs serve over 8 million customers in India, and without clarity, most of these customers are not required to meet their current repayment terms, which would create significant stress for businesses.

Additionally, NBFCs run by different startups are regulated entities. Some fintech veterans argue that if RBI really wants to crack down on the use of PPI as a credit instrument, then they should really consider giving startups a credit card license, which RBI has not done to date. .

In the meantime, investors are spooked and many startups that are in the process of raising new funding are starting to see some VCs return, according to people familiar with the matter. Some industry players believe India’s central bank is taking a similar approach to China’s in cracking down on lenders and fintechs in general. (In contrast, shares of SBI Bank, India’s state-owned bank, have jumped more than 14% since the central bank sent out the circular.)

“We don’t think RBI is very keen on issuing digital banking licenses as evidenced by recent statements by the Governor of RBI. RBI has been heavily critical of fintechs and advocated for tougher regulations over the past few months. We believe the message is clear that fintechs will be increasingly regulated,” Macquarie wrote.

“The RBI Payments Vision 2025 document also talks about looking at various fees for payments made in India so as to further encourage digital adoption, which we believe means there is potential for various payment fees decline to encourage greater adoption. It is clear to us that the risks are increasing for the fintech sector, where regulations have so far been light.

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

In a Zoom call on Thursday, dozens of fintech executives discussed common grounds for what they should inform the RBI. Some of their pressing demands include extending the timeline for the new rule by six months and establishing to the central bank that the fintech industry as a whole is “responsible and trying to do the right thing,” according to people who attended the call.

Fintechs are also looking to fully explain their business models and explain why those operating with full know-your-customer mandates should be allowed to continue.

But until change or clarity comes, great disruption is expected. Jupiter backed by Tiger Global and KreditBee backed by Azim Premji’s PremjiInvest have already temporarily blocked customers from transacting on their prepaid cards.

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