Game over for BNPL?

If you use BNPL (Buy Now, Pay Later) service or cards from Slice or Uni Pay, this development will interest you. BNPL has emerged as a competitor to credit cards. Easy onboarding. Seamless and convenient process. Easy repayment terms. Instant credit. Who needs a credit card?

However, RBI, in its latest notification to non-bank PPI (prepaid payment instrument) issuers, has spoilt the party for many borrowers and BNPL players alike. How? Well, before we get there, let’s first look at what are PPIs. How do they facilitate BNPL services? And what has changed?

What Are Prepaid Payment Instruments (PPI)?

Think of a wallet (Paytm, Mobikwik etc.), a gift card, metro card, or a travel card. As the name suggests, it is prepaid. You load the money into a prepaid payment instrument. Then, you can use PPI balance for purchases. You can load the PPI using cash, debit/credit cards, net banking, or UPI.

And the recent RBI notification makes it amply clear that you can’t load through a loan or a credit line.

This clarification makes life difficult for many BNPL players. Why? How does this affect BNPL players? Let’s look at how most BNPL schemes in their current avatar work.

Where Do These Prepaid Instruments Figure in BNPL?

Only banks can issue credit cards. NBFCs can’t issue a credit or a debit card for purchases. Similarly, wallets (Paytm, Mobikwik) and card issuers such as Slice or Uni Pay cannot issue credit cards. You can swipe your prepaid card or pay using wallet, but you won’t get credit.

Then, how do the NBFCs and PPI issuers (fintech) offer a product that can rival credit cards?

This is their workaround. Many BNPL players have tied up with NBFCs and banks and offer on-tap loans/credit lines to customers.

  1. You want to make payment on an e-commerce website or at a merchant store.
  2. You select a wallet/Slice/Unipay card during checkout and make the payment.
  3. In the background (step 2), you are issued an instant loan by a partner NBFC/Bank (or under pre-approved credit limit for you), your wallet is loaded, and you make the payment through your wallet balance. You may not realize that you have taken a loan, but you have. You can check the loan in your CIBIL report.
  4. You repay the loan over the next few months as per the repayment schedule. Again, you may not realize that you are repaying the loan to the NBFC. For you, the repayment is to the wallet issuer.

Such a setup gives you illusion of a credit card but there is no credit card in play here. Some of these players like Slice have also partnered with Visa for almost universal acceptability.

Further Reading: Buy Now Pay Later vs. Credit Cards

What Has Changed Now?

As per Master Directions on Prepaid instruments, 2021, PPIs shall be permitted to be loaded / reloaded by cash, debit to a bank account, credit and debit cards, PPIs (as permitted from time to time) and other payment instruments issued by regulated entities in India and shall be in INR only.

In this notification to all Non-bank PPI issuers dated June 20, 2022, the RBI has specified that PPI-Master Directions do not permit loading of PPIs using a credit line. Such practice, if followed, should be stopped immediately.

This means PPI (prepaid instrument) can’t be loaded using a loan. As I understand, it does not matter whether the loan is from a bank or an NBFC. Therefore, even if the PPI issuer has tied up with a bank to offer BNPL card (and not a co-branded card), there is a problem. By disallowing loading of PPI (wallet/prepaid card) through a credit line/loan, RBI has just pulled the rug from under BNPL players’ feet.

If the wallet can’t be loaded through a credit line/loan, everything falls apart.

Note there is no problem in taking a loan from an NBFC. It is just that such loan should not be used to load a prepaid instrument (wallet). If the loan money comes to your bank account, then there is no problem.

What Could Be the Possible Reasons behind RBI Direction?

  • BNPL category is growing very fast. About 8-10 million customers.
  • Compared to credit cards, the eligibility requirements are quite lax. Can pose a threat if the space becomes big.
  • Given the way how everything works (and how seamless everything is), the users may not be aware that they are taking a loan. Hence, while they might have thought of the card/BNPL product as a credit card, it is not. They may also think of it as a postpaid arrangement (just like your mobile phone bill), it is not. Not many understand BNPL is a loan.
  • From borrower perspective, there are other issues too. For instance, if you purchase an item using BNPL and subsequently return it, you still have a loan to repay. No such worries with a credit card.

Where do we go from here? I think the final word is yet to be written on this matter. Given the wide impact, the fintech industry will send representations. The Reserve Bank will take a final call and may offer relief. Until then, expect things to be difficult for the BNPL industry. If you use a BNPL product, you won’t be left untouched either.

Additional Reading

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