Future of BNPL in India : Did RBI kill the BNPL Industry with its notification?
On June 20, 2022, A circular released by RBI has sent shockwaves across the fintech ecosystem, especially the BNPL (Buy Now Pay Later) players. The circular was addressed to all “Authorized Non-bank Prepaid Payment Instrument (PPI) issuers”. It said, “The PPI-MD does not permit loading of PPI from credit lines”
Sounds confusing right? With a single circular, RBI sent the fintech companies in the state of chaos. So, what is BNPL? who are these BNPL players and how would this regulation affect them and us as customers?
Let’s start from the beginning.
Technically, BNPL was not a new concept, we have been seeing/using it since our childhood. Remember, when we use to buy groceries in local kirana shops, and the shopkeeper used to keep a track of our credit line and we used to pay the credit in installments. Well, BNPL runs on this model, and was hugely successful and controversial too in Europe and North America region before it entered India.
For starters, only less than 5% of Indians use credit cards and it is not easily accessible to everyone, you have to a have a certain credit score and an income to get a credit card in India. So, there’s a huge untapped market like the Millennials, College going youth that these BNPL players can target into. For example, most of these companies offered “zero interest” loans to customer. They would partner with merchants and come up with an interesting deal. Say if somebody wanted to make a purchase of ₹5000, the BNPL company would promise to take care of the bill at no cost. And then they would ask the customer to pay back the amount in 30 days or split the amount into installments over a period. They wouldn’t charge any interest for the customer. They would pay the merchant immediately, but instead of settling the entire ₹5000, they would pay something like ₹4500 and earn the difference. The merchant agrees to take the hit because, it leads the customer for an immediate purchase, and it works in their favor too. And for customers, who did not have access to credit cards, it was a blessing, which led the BNPL industry to grow by a whopping 637% in 2021.[i] But then some of these companies felt that rather than being just a “credit-card challenger”, they felt that urge to replicate the “feel” of credit card for their customers. They wanted to issue physical cards that we can use in our local kirana stores to buy groceries or shop in e-commerce websites. But, as we know, RBI only allows banks to issue credit cards, they wont even allow large NBFCs like Bajaj Finserv or Aditya Birla Capital to issue credit cards. So, these BNPL players came up with a new idea — Prepaid Payment Instruments.
Prepaid Payment Instruments or PPI are nothing but a physical card or a digital wallet, where you can load money and use it for payments. It is like gift card or the metro card that we can use to make payments. But these BNPL companies thought to add a new feature to it, that is loading the wallet with credit from some other entity. So, they partnered with companies having a PPI license, then they issued prepaid cards like Slice, and topped it up using loans or credit lines, and these credit lines didn’t come from banks in most cases but came from NBFCs.
The below illustration may give a better idea about the ecosystem and the players involved in it.
To sum it up, these cards are NOT credit cards, they are prepaid cards where the issuing company like Slice has tied up with an NBFC, to load these cards with a “credit line”. So basically, when you signed up with Slice, an NBFC gave you credit limit (just like an overdraft limit). You can use these cards till your limit gets exhausted and when you repay back the amount, the credit gets reset.
Now these are two different products — a prepaid card issued by Slice and a credit line approved by an NBFC like State bank of Mauritius (SBM) which has a PPI license. Standalone these products are serving their purpose, but when they are combined, a card which was originally issued as a prepaid card functions like a credit card. So, RBI realized that these type of products are like LIIT that we drink, in isolation they are good to drink, but when you combine they can make you very high (maybe not in a good way).
So, RBI issued a guideline saying that the BNPL companies need to keep their prepaid card separate from a credit line. Which means that a prepaid card like Slice or Uni cannot be loaded with a credit line.
But are only fintech companies like Slice or Uni which load their credit from NBFCs are impacted by this regulation?
Look at the below illustration, BNPL players like Slice, Jupiter edge who get their credit line from NBFCs or Non-Bank PPIs are affected from this regulation. They must stop loading their PPI credit lines. On the other side One card, which is not an online wallet or prepaid card, but a co-branded credit card in partnership with banks which has a PPI license. But the catch is that these co-branded credit cards cannot market/advertise the card as its own. They have to explicitly mention on the card whom they are partnering with.
Well, the regulations comes up in a good light (if not for the BNPL companies), because there have been multiple instances in Europe and Australia, where these BNPL companies have encouraged the customers to spend beyond their limit and take a new credit to pay of their exiting credit, thereby damaging their credit score and pushing them into a debt trap. And RBI just wants the model to be simple, not complex as what we saw, hence the regulation.
Now what can these companies do, is it the end of BNPL in India?
Perhaps no! The circular forced the companies to go back to the drawing board and come up with some solution. Few have already built something — some companies decided to either give a loan into a bank account and then link the bank account with the prepaid card or will just issue credit card with lesser limit, Or Some companies may follow One and issue co-branded credit cards. The guideline is an example that innovation must proceed with certain regulations, and there is lot much of innovation these players could do.
Maybe say an alternate business model like SNBL(Save Now Buy Later), a model which is becoming increasingly popular in few of the European nations. In SNBL, the users save money with merchants and benefit from the discounts that come from advance payments. For example, lets look at Multipl, which slightly twisted this model.
In this model, say suppose you want to buy the latest I-phone 14 which costs you around ₹1L. A traditional BNPL will give you the credit immediately for which you have to pay it back in a certain time or in instalments. But in this model, we can set a goal for buying the I-phone few days prior to the launch, a merchant will be automatically tagged and the Multipl recommends us investments like mutual funds as per our risk profile and goal horizon, as the merchant is already tagged earlier, we get a certain discount while buying this product.
Now this model is in its nascent stages and its still under experimentation. What I’m trying to convey is there are many alternate models these BNPL companies can foray into with their expertise. As of now, the future of BNPL in India is looking slightly grim with the new regulation and confusion surrounding it, but nevertheless, there has been instances where our start-ups redefined their strategies after regulations from government and emerged successful, lets see what’s in bag this time…
References:
[i] https://razorpay.com/learn/the-rise-of-bnpl-in-india-razorpay-capital/
