Restricting Regulatory Arbitrage on ‘Buy Now Pay Later’ Schemes

The Indian public has embraced the adoption of digitisation of payments with open arms. The first quarter of 2022 alone saw 9.36 billion transactions through the Unified Payment Interface (UPI) culminating in a whopping Rs. 10.25 trillion cash flow during the period.^[1] Riding the wave, the ‘Buy Now Pay Later’ (BNPL) schemes introduced by many of the banking and non-banking entities in the country have seen an exponential rise. HDFC Securities predicted that the merchandise value for BNPL schemes was projected to grow 74% year-on-year, becoming a $56 billion market by March 2026.^[2] However, as the RBI recently provided clarification on the regulations governing the ‘Prepaid Payment Instrument’ (PPI) issuers involved with BNPL services, the move has attracted eyebrows and remains to determine its effects on primary fintech institutions engaged in the trade. 

WHAT ARE ‘BUY NOW PAY LATER’ SCHEMES?

As the name suggests, the BNPL model allows users to pay for their purchases at a later stage, either in whole or through preferred installment payments. It is a short-term financing scheme that enables a line of credit to be issued by a lender. In many ways, it acts as an alternative to the prevalent use of credit cards, albeit with easier approval convenience and longer duration on interest-free EMIs.^[3]

BNPL schemes in India are currently offered by emerging startups, expanding e-commerce marketplaces, and other fintech players. The way these entities are structured is through the issuance of PPIs as stipulated by the Master Directions (PPI-MD) issued by the RBI on August 21, 2021. A PPI is an instrument that the facilitates purchase of goods, services, and other facilities against the value stored in it.[4] Some of the more common non-bank PPIs function as mobile wallets and stored-value cards which include the likes of Simpl, Amazon Pay, Google Pay, Phone Pe, etc. The non-bank PPIs are usually tied to financial institutions that may either be banks or non-banking financial companies (NBFCs), which load these digital wallets and stored-value cards with credit for the customer to use. 

PPIs can either be issued by banks or non-banks or through a co-branding arrangement. A co-branding arrangement permits either a bank, an NBFC, or a company incorporated in India to enter into an agreement with a PPI issuer. Under the agreement, the bank, NBFC, or company plays the role of the PPI issuer, while the PPI issuer is restricted to carrying out marketing, distribution, and other ancillary roles.

RBI CIRCULAR ADDRESSING NON-BANK PPI ISSUERS

However, more recently, through a letter to all authorised non-bank PPI issuers on June 20, 2022, RBI issued a clarification statement in the PPI-MD with regard to the funding of the PPIs. The circular addressed the non-bank issuers reminding such entities that the directions do not permit the loading of the PPIs through credit lines issued by them. It threatened penal action against non-bank entities who continued to follow such practices under the Payment and Settlement Systems Act, 2007.^[5]

Amidst the growing popularity of BNPL services, the move has disrupted the sector. As opposed to traditional banks, NBFCs do not require direct oversight from the RBI. Currently, many fintech wallets offer lending services through credit lines issued by NBFCs. Prior to the release of the circular, the PPI-MD permitted loading or reloading of such wallets either through cash, debit to an account, debit and credit cards, PPIs, or other regulated payment instruments in India.^[6]Denying permission to top-up PPIs through this route would drastically reorganise lending capabilities and threaten the existence of business models of key players in the sector. 

FUTURE OF FINTECH IN THE BNPL SECTOR

From the RBI’s perspective, it can be argued that the move is an attempt to regulate aggressive unsecured lending carried out by the fintech platforms through such PPIs. First-loss default guarantee up to a certain percentage offered by fintech companies introduces a credit risk liability on the balance sheets of intermediaries.^[7] The RBI’s intervention can hence be seen as an attempt to streamline the use of regulatory arbitrage by BNPL providers to their advantage.  While the circular in question is addressed to ‘all authorised non-bank PPIs’, paragraph 7.5 of the PPI-MD applies to the bank and non-bank PPIs alike.^[8] It is however assumed that the omission of mentioning bank PPIs from the clarification would render permissibility for it to function through credit lines in the future. Simultaneously, the circular has raised further uncertainty as it fails to define what it means by the term ‘credit lines’. Players in the space are eagerly waiting for the RBI to release additional guidelines that clarify where such credit line in question is effectively sourced from.^[9]

Citation:

Shasank Konger, Restricting Regulatory Arbitrage on ‘Buy Now Pay Later’ Schemes, Metacept-Communicating the Law, accessible at https://metacept.com/restricting-regulatory-arbitrage-on-buy-now-pay-later-schemes/

Resources:

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^[1] ‘India saw 9.36 billion transactions worth Rs. 10.2 trillion in Q1 2022, UPI leads’ (Economic Times, 27 June 2022)<https://economictimes.indiatimes.com/news/economy/finance/india-saw-9-36-billion-transactions-worth-rs-10-2-trillion-in-q1-2022-upi-leads/articleshow/92489292.cms?from=mdr> accessed 14 August 2022. 

^[2] ‘FinTech Playbook: Buy Now Pay Later | De-mystifying the tablestakes’ (HDFC Securities Institutional Research, 8 January 2022) <https://www.hdfcsec.com/hsl.docs/FinTech%20Playbook%20-%20Buy%20Now%20Pay%20Later%20-%20HSIE-202201111014177249873.pdf> accessed 13 August 2022. 

^[3] ‘Buy Now Pay Later (BNPL)’ (BankBazaar) <https://www.bankbazaar.com/personal-loan/buy-now-pay-later.html> accessed on 13 August 2022. 

^[4] Draft Guidelines for issuance and operation of Prepaid Payment Instruments in India. 

^[5] Master Directions on Prepaid Payment Instruments (PPIs) (Updated as on November 12, 2021), Paragraph 7.5.

^[6] Manasi Chandriani Shah, ‘RBI Bans Loading of Prepaid Payment Instruments From Credit Lines’ (IndiaCorpLaw, 19 July 2022) <https://indiacorplaw.in/2022/07/rbi-bans-loading-of-prepaid-payment-instruments-from-credit-lines.html> accessed on 14 August 2022. 

^[7] Andy Mukherjee, ‘The RBI is no fan of ‘buy now, pay later’ and it’s wholly understandable’ (Business Standard, 28 June 2022) <https://www.business-standard.com/article/finance/ppi-norms-why-rbi-is-no-fan-of-fintechs-buy-now-pay-later-model-122062800115_1.html> accessed of 15 August 2022. 

^[8] Manya Oberoi, Saloni Palhiwala, ‘IMPACT OF RBI’S PPI CIRCULAR ON FINTECH COMPANIES’ (Inventus Law) <https://www.inventuslaw.com/impact-of-rbis-ppi-circular-on-fintech-companies/#_edn3> accessed on 15 August 2022. 

^[9] Meha Agarwal, Bismah Malik, ‘Will RBI’s Latest Circular Kill Indian Fintech Cards And Credit Business?’ (Inc42, 21 June 2022) <https://inc42.com/features/will-rbis-circular-for-non-bank-ppis-serve-a-death-blow-to-some-star-fintechs/> accessed on 15 August 2022.