Like any other company, FinTech Organisations have various agreements and contracts executed for smooth operation. In our previous blog, we detailed documentation crucial for fundraising as a Startup. We also discussed the options for raising funds and the legal process and documentation.
It is crucial to have all arrangements, including IT-related ones, drafted without any loopholes. Any gaps can be detrimental to the organisation, primarily resulting in heavy monetary penalties levied by the regulator and loss of customer confidence.
Having covered the fundamentals, let dive in and see what RBI’s latest guideline is and how it impacts a majority of FinTech Organisations.
As per Master Directions on Prepaid Payment Instruments (MD-PPIs) (“Master Direction”) issued by RBI on August 27, 2021, Banks and Non-bank entities are entitled to issue Prepaid Payment Instruments (“PPI”) after obtaining the necessary RBI approval/authorisation under Payment and Settlement Systems Act, 2007 (PSS Act).
As per Regulation 7 of the Master Direction, PPI issuers were allowed to load PPI through 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.
With the recently issued guideline, RBI has prohibited non-bank FinTech Organisations from loading prepaid payment instruments (“PPI”) through credit lines.
WHY THIS BAN?
RBI intends to ensure that the companies (including neo-banks) issuing credit lines have the authority to do so and also meet the regulatory requirement of complete KYC.
In a conference, RBI Governor highlighted that good governance remains fundamental to success and should not be compromised and that due care needs to be taken to protect the stakeholders from digital frauds, data breaches and cybercrimes.
HOW DOES THE BAN AFFECT?
Many FinTech Organisations have now reached out to banks with the license to issue credit lines for partnering and issuing co-branded credit cards.
With this approach, it is believed the banks would be able to increase their customer base by onboarding new clients, and in turn, FinTech Organisations would be able to service them with their tech-based payment solutions.
The ban has sent the investors in a spiral putting investments on hold until clarifications about the business model are issued. One such fundraising put on hold is at Slice.
It was noted that the last funding round in which $50M was raised, led by Tiger Global, is on hold as stakeholders await clarity. Being a startup unicorn, it picked up $220M in the previous round led by Tiger Global and Insight Partners. And currently, it is valued at around $1.5B after the $50M funding in June.
Using the State Bank of Mauritius’ platform, FinTech Organisations like Slice and Uni have been able to continue servicing the existing cards.
With an NBFC license already under the belt, Slice is contemplating applying for a credit card license. The said license will help the company continue business, albeit with enhanced compliance requirements.
INDUSTRY’S OPINION
Many FinTech Organisations and the Payments Council of India (PCI) have approached the Government to step in and help reach a mutually beneficial stand.
The industry believes that full KYC wallets (or PPI) should be treated on par with bank accounts and hence, should be allowed to disburse credit.
The Digital Lenders’ Association of India and the Fintech Association for Consumer Empowerment have also approached RBI to defer the implementation timeline as a temporary relief.
CORPORATE GOVERNANCE IS THE KEY
RBI has been cautious about how the financial segment is performing and kept corporate governance as a priority. This also is evident in BharatPe’s case, where misappropriation of funds was identified. Founded by two IITians, Ashneer Grover and Shashvat Nikarani, in 2018, BharatPe offered – payments to merchants, “instantly without any additional fee.” Read more on the discrepancies identified in an audit in BharatPe’s case here.
Payment Aggregators existing as of March 17, 2020, were required to submit applications by September 30, 2021, for seeking authorisation under the PSS Act per the circulars issued for Guidelines on Regulation of Payment Aggregators and Payment Gateways. However, considering the disruption caused due to COVID-19, RBI has allowed an extended period, i.e. by September 30, 2022, to complete the applications. The timeline of March 31, 2023, for achieving the net worth of ₹25 crore shall, however, remain.
Also, multiple organisations have been slapped with monetary penalties owing to various non-compliances with KYC directions issued by RBI.
CONCLUSION
RBI, though being supportive of innovations and wanting to build a stable financial system, has a stern eye for the companies flouting regulations and operating outside of the licensed scope. The companies are expected to apply for the requisite license if they intend to issue a credit line. Any company not meeting the regulations will be penalised per the provisions of the PSS Act.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavoured to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.
Sources:
- https://economictimes.indiatimes.com/tech/startups/slice-fundraising-on-hold-as-rbi-note-triggering-uncertainty-for-sector/articleshow/92940238.cms
- https://economictimes.indiatimes.com/tech/startups/card-based-fintechs-switch-to-plan-b-for-biz-continuity/articleshow/92860259.cms
- https://economictimes.indiatimes.com/news/economy/policy/digital-lending-entities-should-only-carry-out-activities-for-which-they-have-licenses-says-rbi-guv/articleshow/93058349.cms
- https://economictimes.indiatimes.com/tech/technology/card-based-fintech-in-dire-straits-with-ppi-lending-ban/articleshow/92395045.cms?from=mdr