Guidelines by RBI for Non-bank buy now pay later (BNPL) companies

Guidelines by RBI for Non-bank buy now pay later (BNPL) companies

Subject: Economy

Section: Monetary Policy

Context:

• After slapping curbs on non-bank buy now pay later (BNPL) companies, the Reserve Bank of India (RBI) is likely to come out with guidelines for the BNPL segment which was using pre-paid instruments (PPIs) to extend short-term, interest-free loans to customers for online purchases.

Non-bank buy now pay later (BNPL) segment:

• According to banking observers, the Reserve Bank is not happy with fintech companies using PPIs as a credit instrument, circumventing the regulatory oversight.
• The banking regulator is in discussion with fintech players to find a way out and bring the segment under a regulatory framework so that PPIs are used as a payment instrument and not as a credit avenue.
• While BNPL services have developed into a new payment mode alongside the existing payment modes like cards, UPI and net banking, it has remained outside the direct RBI regulation.
• This channel, facilitated by a few payment aggregators, leverages the existing nodal account (escrow account after authorisation) to route payments between a BNPL customer and a merchant.
• New norms will bring more transparency in the fintech lending space. The main purpose of a PPI licence is to act as a payment instrument and not as a credit instrument.
• The latest regulation is probably coming from recent developments wherein newer business models of credit-based payment products were built by companies using PPI as a vehicle
• The RBI has raised concerns on funding of these PPI instruments through a credit line from an NBFC.
• Regulatory clarity for big tech and fintechs as well as BNPL will really help entities plan long term and invest even more in fintech in India.
• BNPL is India’s fastest-growing online payment method with a significant impact on banks, large merchants and card schemes.
• Due to its hassle-free on-boarding experience, extension of credit facility, low-cost structure for the customer and facilitating easy repayments, BNPL is growing popular among young income earners.
• Some of the popular BNPL companies are LazyPay, Simpl, ZestMoney, Amazon Pay Later, Ola Money Postpaid, Paytm Postpaid, Flexmoney, Slice, UNI and EPayLater.

How does a BNPL company operate?

• A customer who holds a BNPL card or account can make a purchase at a participating retailer and opt for the ‘Buy now, pay later’ option.
• After the purchase, the customer can repay the BNPL firm in a series of interest-free EMIs – unlike credit cards which carry a high interest rate of 42 per cent — spread over 3 months or as a lump sum amount.
• If it remains unpaid, interest will be charged.
• The BNPL company will pay the merchant immediately.
• However, for a purchase of Rs 500, instead of settling the full Rs 500, they would pay something like Rs 470 or Rs 450 and pocket the difference.
• The merchant agrees to give a discount to the BNPL firm.