Explained: RBI's Directions On Prepaid Instruments And Credit Cards
In one week, the RBI issued directions on prepaid instruments and credit cards, which BOOM breaks down
The Reserve Bank of India's (RBI) notification on non-banking prepaid instruments (PPI) is having a ripple effect on the fintech space, as several players depending on them have stopped customer transactions on their own prepaid offerings.
Fintech firms such as KreditBee, EarlySalary and Jupiter have stopped loading prepaid credit lines, an NDTV report states.
A credit line is a loan account that can be tapped for a loan upto a limit. Repayment towards this limit replenishes it. A PPI is any instrument - like a card or wallet - that needs to be be filled with funds before utilisation.
The report also states that several banking partners of these firms will stop offering their own PPIs to these services as they seek clarification from the RBI.
Further, fintech players have sought a sunset clause of atleast one year for these new rules, and have appealed to the RBI to delay its implementation fearing disruptions to their operations.
On June 20, the RBI, in a letter addressed to "All Authorised Non-bank Prepaid Payment Instrument (PPI) Issuers" and to fintech firms, asked them to stop fronting their prepaid card offering with credit lines. Rather, this PPI could only be loaded with bank transfers, credit cards, debit cards or UPI transactions and then spent. The notification warns of penal actions under the Payment and Settlement Systems Act, 2007.
Several fintech institutions, even those who are prominently known such as Slice, UNI and LazyPay, offer PPI-linked card which are backed by credit lines offered by their partners.
This notification impacts their core business models which often replicates the functioning of a traditional credit card and are a variant of the "buy now, pay later" vertical that gained prominence during the COVID-19 pandemic. This business model helped the end-consumer apply for these cards which followed fixed credit cycles replicating that of a credit card. No interest was charged when a consumer repaid the bill in full, but only the balance. These services let the consumer withdraw and spend at point-of-sale terminals, or withdraw cash, or be integrated directed into e-commerce platforms.
Their services, however, differed from traditional credit offerings with some of these services permitting interest-free borrowing for tenures as long as 90 days, or splitting the principle into interest-free monthly installments.
To be clear, banking PPIs are those offerings directly by licensed banks such as ICICI Pockets of ICICI Bank HDFC Payzapp of HDFC Bank and SBI Yono of the State Bank of India.
While the cards (PPI) themselves are issued by registered banks, the funding is done by NBFCs and by non-banking entities. The RBI is preventing this through the notification, according to Moneycontrol.
However, there is a unanimous call for more clarity, according to the sources who have spoken to various outlets. For example, according to the report cited, PayTM offers its postpaid offering through PayTM Postpaid, but it is a registered payments bank.
This notification also plays in favour of banks, which can now bolster their own PPI and credit offerings with less competition.
The RBI's official notification on this is yet awaited on its website.
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Card compliance taking effect on October 1
The RBI in April had released a master direction with respect to the issuance and maintenance of credit and debit card accounts and banks; standardising how processes governing cards should go about, like levying of fees, closing the card and intimations to the customer.
The circular stated that there would be three compliances taking place from July 1. An RBI notification issued on June 21 has stated that they would now take place from October 1.
These are:
- Banks would have to seek a one-time-password (OTP) activation consent from customers for activating a credit card, if it has not been activated 30 days from issuance. If the consent is not given, banks would have to cancel the card at no cost to the holder
- Banks would have to ensure that the credit limit on card is never breached without customer consent
- No capitalisation of unpaid interest, charges or levies on the card (that is to add these charges to the principal of a loan)
This notification can be read here.
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