The Aftermath of Credit-on-Prepaid Chaos (#59)
Prepaid card and wallet issuers move towards co-brand credit cards, early salary products, and struggle underneath RBI regulations
Welcome to the 59th issue of Unit Economics, and the 1st of 2023. In this article, I dive into the world of Fintech companies that were impacted by the credit-on-PPI regulations last year, and look at what’s cooking behind the lull of the last few months.
Before you go reading, I am excited to announce the Beta launch of CheQ, a secure and (highly) rewarding platform for managing and paying all your credit bills, that we had been building since the last ten months. We have loved the early response from customers, and if you are in India and want to join the Beta, fill this form: https://bit.ly/3Zej0gT.
No more pitching, straight to the topic now :) Dive in!
The RBI issued renewed Master Directions on Prepaid Payment Instruments (PPIs) back in August ‘21. The onlookers were surprised that the directions omitted the central bank’s stance on the loading of PPIs with credit lines. Fintech companies happily interpreted this as sufficient grey for operating a credit-on-PPI model.
To begin with, many takers of the model had been drawn towards prepaid instruments for issuing credit because prepaid cards & wallets gave them (A) a lower time-to-market and (B) more flexibility in functionality and commercials. Both arguments favor decisions toward PPIs in the usually small startup huddles.
The opportunity to innovate gave way to the likes of M2P, SBM Bank, RBL, and others to leverage their PPI license and switch capabilities to sell to tens of excited fintech companies.
And it seemed to be working well.
Slice had just turned Unicorn after raising $220Mn, and was growing its prepaid card issuance by 40% month-on-month! Uni Cards struggled, but with the lack of money to disburse – not with customer acquisition or engagement. Uni knew that it only had to bring co-lenders in, and there were hundreds of thousands of customers in line to sign up for the Cards. Our team, at Jupiter, had similarly banked on two out-of-the-box credit products loaded on PPIs.
It seemed to be a happy, innovative area where the industry was heading. But only just.
On 20th June ‘22, the RBI came down aggressively on the model, especially with the audible noise that the likes of Slice, and Uni had started creating. The central bank clarified and mandated, with little consideration, that “The [Prepaid Payment Instruments – Master Directions] does not permit loading of PPIs from credit lines. Such practice, if followed, should be stopped immediately. Any non-compliance in this regard may attract penal action under provisions contained in the Payment and Settlement Systems Act, 2007”.
In Aug ‘22 and Sept ‘22, the scrutiny came more formalized through notifications around Digital Lending that suggested that “no pre-paid card can be directly funded through loan accounts/credit facilities”. The stick was too sudden to have given anyone time to defend.
The Aftermath
With the announcement, the RBI left little room for muddled interpretation. The grey quickly turned red. Some went back to the whiteboard, and some chose not to.
LazyPay kicked off the domino by pausing its LazyPlus UPI and contemplated blocking transactions on the prepaid LazyCard, which it eventually had to. State Bank of Mauritius (SBM Bank), which offered its PPI license to Slice, Uni, and LazyPay, signaled a larger bloodshed by mulling a stop in onboardings for any PPI loaded with credit.
Not too later, and with little hope for a change in the RBI’s view, Uni Cards proactively suspended card services on its Uni Pay 1/3 Pay Card and Uni Pay 1/2 Card, stopping new transactions for more than half a million customers. Fortunately, Uni did not have to hit a dead-end and could continue providing its customers a credit line through Uni Cash, a feature that allowed customers to transfer their approved credit line to their personal bank accounts for use. But it must have hardly been comforting.
Soon, the staunch stance from the RBI pushed the SBM Bank to announce a complete block on “all transactions on pre-paid cards directly funded through loan accounts/credit facilities with effect from December 1, 2022.”. Slice, with a user base of 7 million, had no choice but to follow suit. The lending team at Jupiter, similarly, completely withdraw its credit-on-UPI product – Jupiter Edge, and midway pivoted the development of another credit-backed prepaid card. EarlySalary Card, OlaMoney, and Paytm Postpaid met similar ends.
The regulation, industry-wide, possibly impacted more than 10Mn customers. Ouch!
A few months later…
The chaos appears to have followed a period of whispers. Some product lines have been quietly pushed forward to keep customers engaged, and many others – more elaborate - continue to be under the sheets. Lending, given its criticality for monetization and the potential for disorder, needs that little extra thought before launch.
But reading a little between the lines, a few trends seem to be emerging.
Co-brand Credit Cards are back as Favorites
Everyone, to no exaggeration, is running to launch credit cards. Uni, Slice, LazyPay, Jupiter, Fi – and the list goes on.
Uni, backed by SBM Bank, will extend co-branded Visa cards named Uni NX Wave, which will offer 1% cashback, on-app deals, and zero forex markup. This suggests a move away from the 1/3 or 1/2 model of repayment and competes directly with OneCard, and the others to be announced.
LazyPay, instead, has partnered with RBL Bank and promises cashbacks and EMI options on all transactions. Jupiter, as may be announced soon, would be attempting something unique as it wanted to with the prepaid card – and will have big bets placed on it.
Get salary earlier, and on-demand
Early salary is emerging as another popular idea, with the product concepts centered around allowing salaried employees the flexibility to withdraw money earlier than the salary credit date.
Jupiter had been working on On-Demand Salary (ODS) since early last year, but the full launch – with a successful media campaign – formally kickstarted its lending journey only in December. Uni, similarly, has jumped on the ship to launch Paycheck Pro, allowing customers the option to get an interest-free monthly deposit of upto ₹50,000 in the middle of the month.
The product constructs, although solving the same problem, differ in a few ways for two. While for Jupiter, the underwriting is linked to validating an actual salary credit to the customer & the customer’s access to Jupiter’s Salary Pro Account, Uni relies on bureau score + card transaction & repayment data to make decisions instead.
Further, while Jupiter allows flexibility to get early credit on any day of the month at no cost, Uni restricts credit access to the 11th, 16th, and 21st of the month and charges an annual & convenience fee for accessing monthly service for early credit.
Although packaged as an early-salary product, Uni’s Paycheck Pro falls not too far from a traditional personal or term loan, similar to ‘Slice borrow’, an on-demand loan being granted by Slice – as an alternative to its prepaid card.
Customer ownership is slowly coming back to Regulated Entities
The high share of voice and the fast-growing customer base of partner fintech companies had grown to become a serious concern for Regulated Entities. Since we last discussed this, the RBI seemed to have turned the tables around strongly.
Slowly, with the regulations restricting what data a fintech may store and display to their customers, what credit product it may issue, and in what form factor - the reliance on the partner Regulated Entity (RE) has increased. With the digital lending guidelines mandating that borrowers and lenders interact more closely from disbursal to collection, regulated banks and NBFCs are expected to get more control of the communication and data of their customers, leaving limited control with the co-brands and increasing visibility of the REs.
Additionally, with the credit cards in focus, the card issuers will risk losing the customer control for the repayment customer journey – as customers flock to aggregator platforms such as CheQ and CRED for all credit card repayments.
For fintech companies, the lack of control would further increase the importance of owning a PPI, NBFC, or credit card issuing license, as it would allow them to build a deeper relationship with the customer – and also limit the future regulatory risk that co-brands face. Slice, for instance, offers traditional prepaid accounts with slice mini, and should gain immensely with its new PPI license.
New-age Banks, TSPs, and Switches to focus more on Credit Cards
The regulations and the ensuing shift in focus from Fintech players combine to have a second-order effect on the sales and development focus for the likes of RBL, SBM, and IDFC Banks, who would continuously work with their switch providers and TSPs to bring more technical maturity to the credit card issuance and card management APIs.
Final few thoughts…
Long story short: the restriction of credit-on-PPI was a hard blow that the dependent fintech apps are still yet to recover from. What the regulation has done, however, is that it has made sure that everyone,
Operates in the white area more, and goes back to issuing the traditional, regulated lending products. Playing in the grey seems less fun now.
Allows loading of prepaid account only on the customer’s intent, and from the customer’s existing bank account, credit card, or another full-KYC PPI.
Despite, we must not mourn or ignore the quiet phase, as the product pipeline signals a forthcoming battle of new-age credit cards and a phase of controlled innovation in lending product features. With a few more launches, we will surely revisit this around the mid of next year. Until next time!
If you have any views or feedback to share on the topic, feel free to add a response below or to share your thoughts with me over Linkedin. In case you feel your friends or family would be interested in reading about payments, feel free to share the blog with them as well. See you in a couple of weeks!