Why This Set Of Fintech Firms Need To Worry About RBI's New Card Guidelines
Card-focussed fintechs likely to face challenges as RBI changes rules of the game.
Fintech firms which offer credit card-like products could be looking at a tougher operating environment as the Reserve Bank of India's latest guidelines on card issuances come into effect.
Two specific directions by the RBI in its guidelines could result in fewer tie-ups between these fintech firms with banks and NBFCs, making it more difficult for fintechs to issue cards.
The banking regulator has stated that:
Without prior approval, no non-bank finance company is allowed to issue debit cards, credit cards, charge cards, or similar products virtually or physically.
Partners in a co-branded card product may not get full access to customer transaction data.
The new guidelines will come into effect from July 1.
Card-focused fintech firms have become popular in recent years, as they offer specialised services on top of a bank or non-bank lender's traditional offerings. These offerings are customised to the user's needs, with a completely digital onboarding process.
Some of the more popular services include Jupiter, which offers a debit card with Federal Bank Ltd.; Slice which offers a credit card challenger, backed by lenders such as DMI Finance and Vivriti Capital; and Uni Card, which offers a pay later card backed by RBL Bank and SBM Bank.
According to the founder and chief executive officer of a card company who spoke on the condition of anonymity, the wording of the RBI's circular imposes restrictions on products that are similar to credit or debit cards could be detrimental to the fintech industry.
Currently, fintech firms use two methods to issue cards to customers.
First, a company may get a prepaid card licence from the regulator and issues a credit card alternative. Funds are loaded on these prepaid cards by a traditional lending partner and they are then marketed by the fintech as a credit product to the customers.
If a fintech firm is expected to get specific approvals for such products, future issuance of cards will need to be held back for the time being as the RBI's nod tends to take time, the founder quoted above said.
The second method for card issuance is where the fintech issues a co-branded debit or credit card with a traditional bank. Here the fintech firm is just the face of the operations, where credit and technical assistance is provided by the banking partner.
Companies such as Jupiter and Slice, as well as the so-called neo banks, have been offering such co-branded cards to their customers, while accessing data to customise product offerings, a second fintech founder told BloombergQuint, also speaking on the condition of anonymity.
Without access to customer transaction data, cross-sell or customisation would not be possible. Without these value-added services, there is no reason why a customer would want to take a fintech's debit or credit card over a bank's offerings, the second founder said.
Queries emailed to Jupiter and Slice on April 22 didn't elicit a response.
The RBI's move comes amid the regulator's concerns that too many technology firms are entering the formal financial services business without adequate approvals in place.
According to the head of retail banking at a large private bank, the regulator wants to institute a framework where each of these fintech firms will need to come and seek a formal approval. This will give the RBI some insight into each of these companies and the quality of their technology, the banker said.
"The RBI's guidelines have come at a time when there is increased noise around mis-selling of cards, ultimately putting customers in a debt trap. These guidelines will help protect cardholders' interest and regulate the conduct of card companies that are aggressively pushing cards," said Anand Dama, senior research analyst at Emkay Global Financial, in an April 22 note.
According to R Gandhi, former deputy governor at RBI, the latest guidelines will also help reduce regulatory arbitrage.
"These new guidelines are an updated version of existing guidelines, with added clarity," Gandhi said. "This clarity may impact some fintechs who have earlier built their businesses in this space."