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Following the circular by the Reserve Bank of India (RBI) barring non-banks to load credit in e-wallets, several related fintech’s have temporarily put a hold on a few services and began compliance.  

In a social media post shared on Thursday, Jupiter Edge (by Jupiter.money) informed its customers saying, “We’re saddened to inform you that we will be pausing Jupiter Edge services preceding the recent guidelines received from the RBI. We understand the disappointment. Please be assured that we are in the process of evaluation, you’ll be notified once we are back.”

On similar lines, EarlySalary has put brakes on its card services for now, unless it “gets better clarity on the regulation”.

“We have three offerings. One is unsecured loans on the mobile app, which is our primary business, and makes up almost 85 percent of our business; second is BNPL, which is 10-15 percentage of our customer acquisition. The card was just a cross sell product and did not make more than a few percentage of our volumes. It won’t have a large impact on our business,” Akshay Mehrotra, Co-founder and CEO, EarlySalary told YS.

“There was no preparation time given. We are also understanding it (the RBI circular) and will come back with an answer,” he added. 

Though no official note was shared by Paytm Postpaid, the service remained unavailable on third-party apps such as Zomato and Swiggy since the release of the RBI circular. 

In a statement shared with YS, Rajan Bajaj, Founder and CEO at Slice, said, “We are committed to be on the right side of regulation in letter and spirit and are working with our partner bank on this.”

What is the issue? 

The RBI on Tuesday barred non-banks (NBFCs) from loading the credit lines of prepaid payment instruments (PPIs) such as e-wallets or prepaid cards. 

“The PPI-MD (PPI-master direction) does not permit loading of PPIs from credit lines. 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,” said the central bank in its circular addressing the non-banking PPI issuers.

While loading a wallet (for instance Gpay, PhonePe, Amazon Pay, Paytm) using a bank debit card or credit card is allowed, taking a line of credit from the NBFC (non-bank) and then loading the wallet of the consumer is not allowed.

A lot of new-age fintechs like Slice, PayU, LazyPay, and KreditBee, as well as neobanks have been taking a bank’s PPI (example co-branded credit cards) and offering credit lines via their own NBFC or NBFC partners to customers.

Essentially, players like Slice, OneCard, and Uni, among others, primarily known as Challenger Credit Cards, as well as post-paid services such as Paytm Postpaid, Ola Postpaid, and Flipkart Pay Later, will be impacted by the notification as most of these BNPL players source their credit from NBFCs, which do not have a direct affiliation with banks. 

Tightening noose 

“NBFCs can’t have accounts that allow you to pay using them. You can take the money into your bank account and pay from the bank. NBFCs aren’t allowed to issue cards. Wallet providers aren’t allowed to issue credit. Maybe the idea is that NBFC lending should hit a bank account. Otherwise, the NBFC/wallet/mutual fund ecosystem can be used to bypass the banking system completely,” said Deepak Shenoy, Founder and CEO at Capital Mind. 

“MF lends to NBFC, the NBFC loans money to wallet, and the wallet is used to pay. No need for bank at all?” he said.

Consumer protection is touted to be another reason (other than to protect banks from the shadow players taking over) that the RBI has done this. A note by Macquarie Capital Securities said that many customers were unknowingly taking a line of credit through their wallets at the point of check-out. 

“Some of these practices have not gone down well with the regulator,” it added. 

Next course of action 

According to fintech consulting firm Digital Fifth, the impacted fintech companies would potentially acquire NBFC Licence as well as Credit Card Licence on the long term. This would ensure they have the RBI regulatory support.

“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 also 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,” said Sameer Singh Jani, founder and CEO at Digital Fifth. 

Startups might also look at partnering with banks for “Savings Accounts with Credit Lines”, which is within the RBI framework (or close to it), he added. 

Evaluating the impact on customers, experts say that the all “Challenger Credit Cards” will shrink to just being prepaid cards. 

“Many customers of these cards will potentially go back to ‘no credit arena again’, as they may not qualify bank’s credit approval criteria,” said Sameer. 

These cards were a big boon from the inclusion perspective (students and young professionals) and the change will damage the customer credit availability.