Why do card-based fintech companies need a backup plan for business continuity?

A paradigm shift is taking place in the financial services industry.Emerging technologies such as artificial intelligence, machine learning, the Internet of Things, and blockchain, combined with constantly changing customer expectations and preferences, are reshaping how financial institutions provide services. Maintaining competitiveness in this ever-changing environment is a monumental task. Banks, insurers, and asset management firms are undergoing significant transformation efforts to move from complex legacy technology environments to more agile operations, as well as to create more efficient compliance processes that fully comply with evolving global and jurisdictional regulations. Startup financial technology firms, or fintech's, are seen as an important part of the digital future by financial institutions.Since 2015, financial institutions have invested more than $27 billion in fintech and digital innovation.

FinTech's Rapid Evolution

The swift evolution of fintech has forced traditional financial institutions banks, insurers and asset management companies to face a new reality. Products, services and business models that have worked for decades are no longer an option in the digital world. Legacy infrastructure must be replaced or augmented by newer, more efficient technologies. To thrive, organizations recognize that they need to reinvent what they do and how they do it. Competitors are evolving too, and it’s not just fintech's knocking on the market door large tech giants, retailers and other global companies are looking for ways to provide the financial services customers want.

The card Economy in FinTech

Today's FinTech firms are introducing something novel yet familiar. They are inspiring product teams to reinvent the credit card, which has long served as the backbone of payments, banking, and financial transactions. Credit cards are becoming increasingly popular. Companies are devising new strategies to get more cards into the hands of consumers. They are creating new experiences that are seamless and end-to-end, as well as supporting software, to help businesses and consumers. It is crucial to understand why this is important and how they are currently designed.Today, our global economy's underlying payments infrastructure is being redesigned and transformed. But recently we noticed Reserve Bank of India has barred all non-bank prepaid payment instrument issuers from loading credit lines, according to its recent notification. The central bank directed PPIs to stop this practice immediately if not done already.

The RBI circular has left fintech firms puzzled and confused

The RBI stated in a circular sent to all non-bank prepaid payment instrument issuers that its guidelines allow PPIs to be loaded with cash, debit to a bank account, credit & debit cards, and other payment instruments in rupees. The difference between credit and a credit line is that credit is deposited in the borrower's account, where the interest metre starts ticking the moment the funds arrive. A credit line is provided by the bank to the customer, but it only becomes a loan when the money is drawn. This follows the addition by some wallet providers of an option that allows a user with no balance to pay later by providing a line of credit. Fintechs, which partner with banks and NBFCs for lending, have claimed to be serving the poor and underserved for several years. The RBI's move, according to industry observers, poses a threat to many fintechs' rapidly growing business models, including those of Slice, KreditBee, LazyPay, Uni, and others. India currently has around 22-25 million BNPL users, according to Benori Knowledge, a global provider of custom research and analytics solutions. As per reports, RBI’s move may affect 8-10 million or about 40 percent of total users.

Why Plan B is Crucial in Fintech and for its Customers

Following the Reserve Bank of India's recent prohibition on loading credit lines onto wallets and prepaid payment instruments, card-based fintech firms have begun working on Plan B to ensure business continuity. Several fintech firms have approached major banks to investigate alternative credit models. These include opening a bank account with lenders as well as an add-on debit card to disburse loans, issuing co-branded credit cards instead of PPIs, and disbursing credit as cash directly into a customer's existing bank account.

Partnerships with co-branding

In addition to issuing prepaid cards, the affected fintech firms are considering collaborating with banks to create a co-branded credit card. The bank will issue the credit card, while the fintech entity will acquire and manage customers. This, however, will limit the ability of fintech firms to operate in this space. As a result, card-based fintech firms are continuing to use the traditional method of disbursing credit into a customer's bank account until there is regulatory clarity on the issue.

Will the new Buy Now, Pay Later Guidelines affect customers?

The term BNPL may be new to many Indians, but the concept of allowing customers to split bills is as old as consumer credit. Regardless of the RBI's restrictions, high-risk borrowers are expected to continue using BNPL apps for various online transactions, as obtaining credit from a bank is a major challenge for them. These apps are also appealing to the middle-class population because they offer exclusive deals with food delivery apps, mobility apps, and e-commerce platforms. Furthermore, BNPL is in high demand in tier 2 and 3 cities, where many consumers seek small-ticket credit for specific needs but are not eligible for credit cards.In such cases, BNPL apps are the ideal solution for them to conduct hassle-free online transactions.