SUMMARY
In an unprecedented turn of events, a recent notification by RBI has left the entire fintech sector perplexed with the sector's startups seeking clarification on the notification
With 21 fintech unicorns and over 4,000 fintech startups to date, the Indian fintech market is expected to be worth $1.3 Tn by 2025
In June, the RBI issued a notice prohibiting non-bank prepaid instruments (PPI) such as wallets and prepaid cards from loading credit lines into these instruments
The Reserve Bank of India, also known as the RBI, is the country’s apex financial body in charge of regulating fintech companies and other financial institutions. However, in an unprecedented turn of events, a recent notification by the central authority bank has left the entire fintech sector perplexed; the sector’s startups are now seeking clarification on the notification in order to continue operating.
In June, the RBI issued a notice prohibiting non-bank prepaid instruments (PPI) such as wallets and prepaid cards from loading credit lines into these instruments. This bank diktat is seen as an attempt to shut down card-based fintech and firms that operate as neo-banks to provide credit cards.
The RBI issued a notification on June 20 to all authorised non-bank PPI issuers, stating, “PPI-MD does not permit loading of PPI from the credit line.” Following the immediate implementation of the notification, fintech startups have sought clarification and extension from the central bank. Experts have questioned the decision, advising the financial regulator to allow modern financial firms to offer innovative products and services to consumers.
Following the notification, fintech associations and startups met with the RBI, requesting a six-month extension to implement the recent PPI mandate. Sources at the meeting revealed that the RBI is concerned about the possibility of people falling into the trap of cards and issuance of credit to the undeserving middle-income or less-income population.
What Is PPI?
A prepaid instrument (PPI) is an instrument that can be loaded and reloaded with cash, debit to a bank account, or credit and debit cards before purchasing goods and services. PPI is a non-bank instrument that can be a smart card, internet account, internet wallet, mobile account, mobile wallet, or paper voucher that can be used to obtain a credit line for purchase by a PPI holder.
Impact On Indian Fintechs
The Indian fintech market is expected to be worth $1.3 Tn by 2025. Keeping up with cutting-edge technology and supported by domestic and international investors, India now has 21 fintech unicorns and over 4,000 fintech startups. Over the years, the RBI has managed to remain risk-averse toward fintech. RBI, on the other hand, intends to establish a fintech department to foster innovation in India’s fintech sector.
With updates and mandates in the guidelines on PPI, payments banks, digital lending, credit cards, or crypto, the fintech ecosystem has been pushed to its limits on a regular basis.
There have been instances of loss as a result of the RBI’s standard guidelines changes, such as the rollout of the Unified Payments Interface (UPI) and the implementation of stringent obligations to ensure KYC compliance in 2017. These factors led to a loss of appeal in providing wallet services, and the scrutiny of digital lending, prepaid payment instruments, and buy now pay later (BNPL) raised concerns and hampered international firms’ entry.
While the RBI’s guidelines and mandates have had an impact on the rise of organisations in the financial sector, the immediate concern will be whether the RBI is adequately addressing non-bank PPI. It should specify the scope of this notification and give fintech startups enough time to make informed decisions.
Conclusion
With the advancement of technology and economic growth, the fintech startup ecosystem of India is expected to expand. Therefore, it is imperative that all stakeholders identify the vital problems in the initial stage and work together to implement robust solutions.
Update | 12th Oct’22, 4:00 PM
The article’s conclusion has been edited for clarity.
