RBI’s Regulatory Hammer: Impact on Indian Fintech Giants

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Three points you will get to know in this article:

  • RBI directs Visa and Mastercard to halt card-based commercial transactions.
  • BPSP transactions suspended; non-compliance faces penalties for non-KYC merchants.
  • Regulatory shifts pose challenges for Indian fintech; Zestmoney ceases, Paytm restricted.

In a recent development that could spell trouble for fintech firms, the Reserve Bank of India (RBI) has purportedly instructed Visa and Mastercard to prohibit card-based commercial transactions initiated by companies.

Interestingly, some fintech players like Enkash, Karbon, and Paymate facilitate card payments for functions such as settling bills with suppliers or vendors. However, it’s worth mentioning that businesses typically opt for avenues like net banking or RTGS for their financial transactions, as highlighted by the Economic Times.

Visa’s Directive to Suspend Business Payment Service Provider (BPSP) Transactions

Visa, in communication with its partners, has announced a directive from regulatory authorities mandating the suspension of all Business Payment Service Provider (BPSP) transactions until further notice.

Therefore, we kindly request that all BPSP merchants, registered with Visa, be promptly suspended until instructed otherwise. It’s important to note that any transactions authorized before this communication will proceed as usual. We urge you to confirm the blocking of such merchants/merchant IDs and cessation of transactions at your earliest convenience. Failure to comply with these directives may lead to regulatory penalties and assessments for non-compliance with Visa regulations.

The reasons behind the RBI’s decision remain unclear at this time. However, according to reports from ET, the central bank is displeased with payments to merchants who haven’t adhered to KYC norms. Additionally, it has been noted that some merchants are ineligible to accept card payments.

Impact of RBI’s Regulatory Directives on Indian Fintech Enterprises

In recent times, Indian fintech enterprises have encountered significant challenges due to shifts in regulations. Take, for example, the case of Zestmoney, a well-known BNPL company, which ceased its operations last year in response to a series of regulatory directives issued by the RBI.

The initial setback occurred in June 2022 when the Reserve Bank of India (RBI) imposed restrictions on non-bank prepaid instrument issuers, prohibiting them from offering credit lines. This decision had a profound impact as it restricted these companies from providing credit through prepaid payment instruments like cards and wallets, a practice they had been engaging in by partnering with banks to issue customized cards and extend credit facilities to customers as needed.

Just a short while later, RBI’s guidelines regarding the first loan default guarantee (FLDG) delivered another setback to the BNPL firms.

Paytm’s Regulatory Compliance Issues and Stock Market Impact

Meanwhile, the fintech behemoth Paytm encountered similar hurdles as RBI prohibited Paytm Payments Bank (PPBL) from accepting fresh deposits and extending banking services beyond February 29 due to regulatory non-compliance. This action, taken pursuant to section 35A of the Banking Regulation Act, 1949, also impacted Paytm’s ancillary services like FASTags.

Since this announcement, Paytm’s stocks have been on a downward spiral in the stock market. As of the latest update, its shares plummeted by 9%, breaching the Rs 350 threshold and hitting a 52-week low.

In recent developments, the RBI has reportedly instructed Visa and Mastercard to cease card-based commercial transactions for Indian fintech firms. The suspension particularly impacts Business Payment Service Provider (BPSP) transactions, prompting directives for their immediate suspension until further notice. Unclear reasons behind the RBI’s decision include displeasure with non-KYC compliant merchants and card payment eligibility. These regulatory shifts have significantly affected Indian fintech companies’ operations, exemplified by Zestmoney’s cessation due to RBI directives. Furthermore, Paytm has faced comparable challenges, including regulatory restrictions on its banking services, leading to a sharp decline in its stock market performance.

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