Post prepaid ban, NBFCs, fintech may bank on credit cards

Non-banking financial companies (NBFCs) and fintech lenders may look to explore the credit card route to reach out to new customers, now that the prepaid card model has been junked due to a regulatory stricture.

People in the industry pointed to Reserve Bank of India’s (RBI) April 21 master direction which allowed NBFCs to issue credit cards, even as they remain wary of the need for the regulator’s approval mandated by the same direction.

V Raman Kumar, founder-chairman at lender CASHe, said that the company was not directly impacted by the prepaid payment instrument (PPI) circular because it had stayed away from PPI-based credit cards. However, as a fintech industry participant, CASHe was actively looking at it and would have gone ahead if the RBI had not barred the use of non-bank PPIs for lending. “But, we can always explore the NBFC route of issuing credit cards, which the RBI has recently permitted. We are awaiting the detailed guidelines governing such an issuance.” Kumar said.

According to him, the RBI is keen to regulate the issuance of credit cards and restrict them only to banks and select NBFCs. “The sheer proliferation of prepaid cards issued by a plethora of fintechs may have posed concerns and hence the directive,” he said.

An executive with a lender which stopped PPI-based disbursements after the June 20 ban said that the industry will now look at other options to replace the loss of business. “We’ll have to look at whether NBFCs can actually start issuing credit cards now,” he said.

A recent report by Kotak Institutional Equities (KIE) said that new-age players typically build models that allow traditional lenders, especially banks, to scale up from what they have built. It pointed to the example of traditional NBFCs, who built product segments such as housing finance for the self-employed, auto finance, gold loans and microfinance, which banks later entered.

“We are at a point where we are looking at new solutions on retail credit as penetration is quite low,” KIE analysts said, adding, “We are seeing newer models by various companies where we are experimenting through BNPL (Buy Now, Pay Later) or even short-term personal products. We are looking at companies that are building credit on UPI or credit cards.”

However, new-age players have their doubts about how comfortable the regulator will be in letting them enter the credit card market. Kunal Varma, co-founder and chief executive officer, Freo, said, “Remember, even though the RBI has said it will allow NBFCs to apply for a license, we are unsure about the applications it approves or rejects. So, while NBFCs have the ability to apply for a credit card issuance license, they’ll have to see whether the RBI approves their application or not.”

Varma believes that the larger NBFCs are better positioned to issue their own credit cards since they have a longer history of having run established businesses and come with a much larger brand presence and better legal and compliance teams.

Also, the cost-benefit ratio is not too favourable for a small NBFC to apply for an independent license. “To have an end to end card management stack is extremely complex, expensive and time consuming — it will require a minimum of six to 12 months to get the new setup to function flawlessly,” Varma said. Overall, issuing a co-branded credit card makes more sense for a player like Freo, Varma said.

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