Will banks sound the death knell Fintech BNPL schemes?

It almost looked like the Buy Now Pay Later schemes of the Fintech players would cut into the business of banks. Not to be left behind, even the banks joined the chorus. One of the first off the block was State Bank of Mauritius (SBM) which had prepaid card partnerships with popular fintech players like Slice, Uni and LazyPay. Now there is trouble after RBI stipulated that BNPL relationships cannot be used to top up the bank account since it was tantamount to loans. SBM has stopped onboarding fresh customers and there is more. 

SBM has opted to stay on the side lines in supporting the BNPL business till the time there is greater clarity from the banks. SBM has already sent an official communication to Slice, Uni and LazyPay that it was onboarding of new customers till the time the RBI approved the first set of guidelines on digital lending announced on the 10th of August. That will take some time and obviously till that time most of the existing LazyPay, Slice and Uni customers are going to be in a state of limbo, unsure of how it will impact new and existing customers.

While the SBM has opted to pause new customer onboarding, its partners like LazyPay, Slice and Uni will have no choice but to call a halt to onboarding for prepaid cards too. However, these fintech players can still continue with their other offerings that entail UPI payments. However, some of the Fintechs hav been proactive on this front. For example, Uni had already stopped onboarding customers in June while LazyPay had stopped new card issuances as well as loading of credit into PPIs since the month of June itself. 

As per the latest rules put out by the RBI, all loan disbursals and repayments should happen to and from bank accounts of the regulated entity only. The RE is the lending entity while the agent is the unit that handles the marketing, lending and collection of repayments. As per the extant rules, the transactions should not pass through a pool account or any third party. It was hoped that the prepaid instruments (PPIs) would be seen as an exception to the rule and they may be allowed to onboard new customers, but that was not to be.

For the banks, the problem is with the rather open ended language used by the RBI. For instance, the RBI has not explicitly said that loans can be disbursed to fully KYC compliant PPIs. Hence banks are not in a position to assume that it can be done. Most banks and even fintech players have decided that it would be safer to stop onboarding new customers until there is clarity on the relationship. But that still leaves the open issue of what happens to the existing customers of these fintech players?

Again there is no clarity on the existing customers too. For instance if you have a Rs3 lakh credit limit with LazyPay, what does it mean for you as a customer. Once again, there is no clarity on this front. The RBI has not said anything on what it intends to do, but in the absence of any clarity, most of the banks would prefer to play it safe since these banks are already regulated by the RBI. This refers to the customers who hav been given credit lines or short-term loans through its co-branded PPI cards. They may look for alternate partners.

That brings us to the core question, will this impact the BNPL business in India. In the short run yes, but in the long run, the impact may not be much. BNPL is an innovation that is in sync with the changing face of fintech. But, there cannot be regulatory arbitrage and that is what the RBI wants to ensure. Fintechs need to submit themselves to higher degree of regulation and that should solve the problem. After all, tighter regulation has always been in the long term interest of orderly growth of any business.