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“It was like demonetisation,” says the founder of a Mumbai-based company that issues credit-line-backed prepaid cards that emerged as a challenger to credit cards. If the 2016 note ban sucked out over 85% of the currency in circulation, the banking regulator’s two decisions over the last three months struck off the fintech product that attracted nearly $700 million in investments, according to startup database Tracxn.

In June, the Reserve Bank of India (RBI) said said Livemint Why fintech PPIs are in a soup Read more prepaid payment instruments ( PPIs PPIs Pre Paid Instruments PPIs lets people purchase goods and services, enable remittance, etc., against the value stored in it ) could not be loaded from credit lines. It was a body blow to companies like Slice, Uni Cards, BharatPe’s PostPe, Kissht, KreditBee, and RedCarpet that issued credit-line-backed prepaid cards, and companies like Paytm* that disbursed credit into wallets. Marquee investors like Tiger Global, Accel, and Sequoia Capital, among others, have backed these companies.

“The reason for the move was that PPIs were always meant to be a digital alternative for cash. Think Sodexo coupons or gift cards. It can be loaded using only your own source of funds—bank account, debit card, or cash,” says R Gandhi, the former deputy governor of the RBI.

Indian banks issue credit cards only to people with a high credit score. As a result, banks have issued over 70 million credit cards to just about 30 million active users. Fintechs broke that barrier with credit-line-backed prepaid cards, which behaved like a credit card. And users lapped it up.

For instance, starting in 2019, Slice Slice The Ken Lending is easy for Slice, making money isn’t Read more added over 10 million registered users, while others like digital lender LazyPay issued 450,000 cards in just six months.

However, these companies are non-banks, with most of them not having a licence to offer PPIs loaded from credit lines. So they partnered with banks that were licensed to offer PPIs. The non-banks then deposited the capital they’d lend into a partner bank account that would then disburse it to PPI card users.

The partner banks didn’t pull the plug on PPI cards after the June notification. Then the RBI went ahead and issued new digital-lending guidelines guidelines Money Control RBI crackdown on digital lenders to hit NBFC, fintech business models, raise costs Read more in August.

AUTHOR

Arundhati Ramanathan

Arundhati is interested in how people use money in the digital age and how new economies will take shape based on that interaction. She writes the newsletter Ka-Ching! every Monday. She lives in Bengaluru and has spent over 12 years reporting and writing on various subjects.

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