The Credit on PPI Conundrum

Its been a week since RBI released the notification clarifying that PPIs can not be loaded by credit lines. Reams have been written about it since then with reactions ranging from exasperation, frustration, even anger to hope and reconciliation. Brilliant metaphors were used like “RBI let out the cat amongst the BNPL pigeons”, “No country for fintechs” “ RBI just nuked Indian fintechs” etc. With all that done and dusted, trying to jot down here my interpretation of the episode from a broader industry perspective and where do we go from here.

Lets get one thing out of the way first, RBI has not said anything new. The PPI Master Circular released in Aug 2021 (and revised in Nov 2021) clearly says what has been written in the clarification, so its actually wrong to claim that RBI has suddenly woken up one fine day to kill the BNPL card fintechs, supposedly at the behest of credit card players.

A crude analogy that I could think for this situation is the difference between when you play Tennis ball cricket in a gully/basketball court vs Season ball cricket on a proper cricket ground. In tennis ball cricket, no one ever follows the LBW rule, its all about hitting the ball out of the park. Doesn’t mean the LBW rule doesn’t exist, the players also very well know it does, its just that they have decided not to follow it and since there is no umpire to care to enforce it, you can throw caution to the wind and just focus on hitting runs. However, when you go to a proper match, you have to play with the LBW rule, you can’t cry foul to the umpire that I didn’t know about this rule. The same applies to BNPL fintechs too, RBI has just asked them to prove their mettle in the proper cricket ground and play by proper rules laid down for everyone, if they want to scale up and make a material impact to the credit ecosystem, as simple as that.

Having said that, the question is why did RBI need to do this now? The model has been in place for at least 3-4 years now, why intervene now. There are various versions and opinions around it and the answer probably is an amalgamation of all of these

1. The regulator’s rationale probably for this is systemic risk to the financial ecosystem (while it hasn’t been spelt out explicitly but has been alluded in many statements). To an extent that’s valid largely because of the multiple stakeholders in the entire flow of transaction and the corresponding points of failure exposing it to credit as well as fraud risk. Think of it, a credit line given by NBFC (Party A) used for payment through a Card Instrument issued by PPI Issuer (Party B) orchestrated by BNPL Player (Party C) using a third party platform to manage real time funding (Party D) across Visa/Rupay rails (Party E). Each of these is a potential point of failure and multiplied by supposedly 8-10 Million such cards operating in the system and lakhs of cards issued every month, the possibility of risks in the payment ecosystem can build up very quickly. Add to that the credit risk associated with a lot of it not being reporting to bureau, reason enough to make the regulator jittery, specially given the projected growth rates for BNPL industry floating around in PE/VC ecosystem to justify the valuations.
2. The other rationale being given out is pressure from large Banks and credit card players. Again I think a fair argument, specially in the context of how heavy handed regulator has been towards banks in the last couple of years. Think of it, a behemoth like HDFC Bank was banned from sourcing credit cards for almost an year because RBI didn’t have the confidence in its IT infrastructure. Isn’t it only natural for HDFC Bank to ask (howsoever tacitly) that what confidence or control does regulator have in systems and processes of fintech players issuing credit card challenger products by lakhs every month? How come they are allowed to do business and I am not? The question of parity of regulations was bound to come sooner or later and RBI as the neutral custodian of regulatory framework at least had to show an intent of being neutral, which is exactly what they have done through this circular.
3. The third rationale which probably is getting overlooked is in the broader context of regulation of Credit Cards as a business. RBI recently permitted NBFCs to issue cards after taking explicit regulatory permission. Now if any unlicensed player can issue a credit card equivalent product using the PPI route, why would any NBFC even bother to go through the pain of taking a credit card license from RBI, setting up an expensive Card Management system, signing up for a massive cost of compliance etc. So this move in my view, ensures that Credit Card license is all the more lucrative for NBFCs and players willing to enter credit led payments.
4. Last but not the least, I think this circular is also looking to maintain the sanctity (or so to say superiority) of Credit Cards over PPI as the instrument of choice for transmission of card linked credit in the Indian market. With PPI interoperability guidelines, practically all these BNPL cards would have got enabled with UPI (Slice already launched it I think). That means reach to more than 18 Cr UPI enabled merchants for BNPL cards vis-a-vis just 65 lakhs POS machines for actual credit cards. While UPI on Credit Card has just been permitted, that is only for Rupay, Visa/Master are still quite some time away. With the access to UPI and the muscle of the VC money, BNPL players would have got the first mover advantage to get unbridled access to merchants in every nook and corner of both India and Bharat with a credit linked card product and it would have difficult (if not impossible) for both regulated Credit Card players as well as RBI to play catchup to them. So it makes sense to bring the guardrails now.

So what next.

In my view, while this is definitely a speedbump in the India fintech story, I would like to genuinely believe that this is a sign of better times to come. I say so because this practically means that fintechs are becoming materially relevant to the financial ecosystem in the eyes of the regulator. In the context of the cricket example, they are ready to play the Season ball match in a proper cricket ground with all the rules under the eyes of a proper Umpire. If that means to take a pause for a while, get all the right equipment, train well and then go for the big match, so be it. Its only to ensure no one gets hurt.

Secondly, I honestly think many innovations in the fintech space relied heavily on ambiguity of RBI circulars while playing on the edge of regulations, with almost a sense of pride in India’s jugaad culture. While that may work in other industries like ecomm, social media, technology etc, it can’t be the name of the game in regulated industries like financial services and healthcare where there is a clear tangible risk if things go wrong. We have just seen both Theranos and WeWork stories unfold, no one died because WeWork collapsed, however lives were at risk because of Theranos misdiagnosis.

There is always a reason why a regulation is spelt a certain way. In order to ensure the sustainability of the ecosystem, I strongly believe we need to play by the rules in letter and in spirit. May be continue to try to work with the regulator reform the regulation in parallel through dialogue, but avoid trying to find loopholes to try and circumvent it. Because sooner or later you’ll be called out for it and in regulated industry like financial services, you’ll have no option but to abide by the rules.

To conclude, with a slew of circulars awaited from RBI regarding fintech, I think the next 6 months are going to be extremely exciting to watch and work towards creating genuinely innovative products and business models. As a part of the fintech ecosystem, I would take this circular on my chin and move forward to find ways to change processes to do the business within the rules of the game to build a long term sustainable business. After all that’s we are in it for, solving ambiguous problems day in day out, that’s where the fun is, isn’t it !!!!