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Your ‘Buy Now Pay Later’ card is not a credit card!

Slice Buy Now Pay Later

India is emerging as a vital FinTech hub globally: thanks to emerging technology and changing cultural trends. Furthermore, according to a recent report by The Future of Financial Services, the country is leading the world in its intention to employ “Buy Now Pay Later” services in the future.

However, the State Bank of Mauritius (SBM) India, the godfather of several Indian fintech businesses, has just instructed its card-fintech partner to cease the issuance of its new co-branded cards. The decision, which impacts businesses such as Slice and LazyPay, comes after the Reserve Bank of India (RBI) announced digital lending guidelines in August.

In its guidelines on August 10, RBI said that all loan disbursals and repayments have to be executed only between the borrower’s bank accounts and the regulated entity without any pass-through or pool account of the lending service provider (LSP) or any third party. The RBI released norms to regulate digital lending to crack down on the growing number of frauds and unlawful activities.

According to reports, Slice, which claims to be the ‘credit-card challenger’, along with Uni and LazyPay has temporarily stopped issuing new prepaid cards but continues catering to customers with no-cost EMIs and cash transfer offerings.

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RBI’s new guidelines


RBI has released a circular banning nonbanking entities from loading prepaid instruments like digital wallets, or cards by using credit lines. It says that many fintech credit companies are loading prepaid payment instruments (PPIs) from the credit lines, which master direction on PPIs does not allow. In order to do so, fintech companies tie up with banks or NBFCs and offer credit lines into users’ prepaid wallets.


Now, what are PPIs?


If we go by RBI’s definition, PPIs are payment instruments that facilitate the buying of goods and services, including the transfer of funds, financial services, and remittances, against the value stored within or on the instrument. PPIs are in many forms like mobile wallets, smart cards, vouchers, etc. RBI allows both banks and NBFCs to issue PPIs.

On the other hand, a credit line is a borrowing limit that allows a user to access credit at any time till the limit offered is not exceeded. Unlike a lump-sump loan where a fixed amount is borrowed, it is a flexible loan wherein you can use credit as per your needs. However, in the books of account, a credit line is classified as a loan, hence, when a consumer is assigned a credit line, it shows as an active loan in the user’s credit bureau irrespective of whether the consumer uses it or not.

The RBI indicated in its notification that nonbanks could no longer load prepaid instruments utilizing credit lines. Also, credit lines should not be disbursed through PPI. Until now, the RBI has not granted credit card licenses to fintech businesses.


The actual credit cards


Credit cards are the ones backed by banks, usually, with a credit limit, that can be used to purchase goods and services on credit or obtain cash advances. It is a type of revolving credit that gives a customer access to funds as long as the account remains in good standing.

Following RBI’s crackdown, Fintech Slice has tweaked its lending model, as the customers on the platform will now sign up for a fresh loan (called a term loan) instantly every time they make a payment. Under this model, only the amount that the consumer actually borrows will appear in their credit bureau.

The Tiger Global-backed startup informed its customers that they will have to seek fresh approval for a specific amount every time they use the Slice prepaid card to transact. This is a move from its earlier model where Slice would grant a pre-approved credit line to customers to use as per their discretion for any payments.

Other major fintech companies like ZestMoney and Axio (formerly Capital Float), which identify as pure Buy Now Pay Later, lend on a similar model. These players also inform customers of their eligible limit, however, separate loans from different lending partners are sanctioned for specific purchases as sought by the customer.

Buy Now Pay Later in India


BNPL is considered the first step to getting Indian users started on credit products as only 6 per cent of the population currently own a credit card. A recent Juniper Research report predicts that people using this service will grow from 25 million in 2022 to 116 million by 2027 in India.

In the first half of 2022, BNPL transactions in India grew 21 per cent outperforming the 18 per cent growth registered globally, according to the Experian Global Insights report. Some data also suggest that by 2026, Buy Now Pay Later will contribute 14 per cent of the overall e-commerce transactions.