BNPL - The New Age Credit System

Recently, RBI released a circular that addressed Prepaid Payment Instrument (PPI) issuers, saying, "The PPI-MD does not permit loading of PPIs from credit lines".

PPI is nothing but cards issued by Buy Now Pay Later (BNPL) companies, like Slice, which can be used at POS. This allows customers to use it like a regular credit card for offline shopping.

But wait, regulations don't allow even big NBFCs like Bajaj Finserv to issue a credit card, then how does this PPI, which is essentially a credit card can be issued by BNPL?

Let's take it from the top here, Shall we?

Firstly let's understand what is BNPL?

Let's say you want to buy an INR 5,000 smartwatch, but currently, you don't have INR 5,000 in your account. In such cases, you opt for BNPL.

What's in it for BNPL company and the merchant you ask?

Well the BNPL company pays the merchant INR 4,900 and pockets the difference of INR 100, and the merchant gets INR 4,900 immediately which otherwise could have been delayed or not received at all, and obviously, the customer gets the goods immediately.

In case you are wondering why not use a credit card, well not all can afford one since it is based on your credit score, but with BNPL credit score is not of paramount importance given the limit of transaction and plus the documentation for availing the service is non-existent.

In fact in India alone, the BNPL industry soared by a staggering 569% in 2020 and 637% in 2021.

But BNPL companies wanted more, they wanted to challenge the credit cards, and they wanted to be in the pockets of their consumers, But How?

Enter PPI.

Take cards issued by Slice for instance. It struck a deal with the State Bank of Mauritius (SBM) which had a PPI license. They could issue a card now. And then, Slice used its own NBFC — Quadrillion Finance to top up the card with a loan. Consumers think they’re using a credit card. It looks and feels like one. But if somebody defaults, it’s Slice and the NBFC partners who are left licking their wounds. Not SBM. The bank had just lent its name for the purpose of issuing a card and that’s about it.

And now that RBI circular makes much sense, isn't it?

They are worried that this little jugad (temporary way) of BNPL companies can backfire given that consumers served by BNPL companies have little to no credit history.

Since RBI has called out on BNPL companies to stop using credit lines to top up their PPI, in the Slice example, this means they have to take out Quadrillion Finance out of the equation and ask SBM to be the lender and issuer of these PPIs, which is a big risk for the bank.

Do you think BNPL can find another way to issue cards and maintain the strong growth it has shown?


Will their popularity fall?

Do let us know your thoughts on the above topic in the comment section and let a healthy conversation begin.

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The above information is to spread financial literacy. We are not SEBI registered financial advisors, kindly consult your financial advisor before making any investment decision.


RBI sets the cat among the BNPL pigeons ( | RBI eyes BNPL norms, to rope in fintechs amid concerns over cards by non-bank PPI issuers to extend short-term loans | Business News,The Indian Express

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