RBI Restricts Fintech Over KYC Concerns

The Reserve Bank of India (RBI) has taken strict measures to prevent fintech companies from issuing business credit cards to their customers, citing concerns over compliance with Know Your Customer (KYC) norms and usage limitations of such cards.

What are business credit cards and why are they issued by Fintech?

Business credit cards are different from consumer credit cards in that they are issued to businesses for making vendor payments and managing their working capital needs. Traditionally, banks have been the main issuers of these cards to corporates. However, in recent years, fintech aggregators, also known as business payment solution providers (BPSPs), have entered this space, offering credit lines to small and medium enterprises (SMEs) and enabling them to pay their suppliers through credit card networks.

What are the RBI’s concerns and actions?

According to media reports , the RBI has asked payment networks Visa and Mastercard to stop facilitating business credit card issues by fintech aggregators with immediate effect. The central bank has also initiated regulatory actions against some payment companies, including Paytm Payments Bank, for lapses in KYC compliance. The RBI’s move comes at a time when India is undergoing an audit by the Financial Action Task Force (FATF), a global watchdog for money laundering and terror financing.

The RBI’s main concerns are:

  • Fintech aggregators are not authorised to issue cards as they are not banks or non-banking financial companies (NBFCs).
  • Business credit cards must be used only for specified transactions and not for personal or other purposes.
  • Fintech aggregators may bypass KYC norms by issuing cards to those merchants who are not officially onboarded to the card acceptance network.

What are the implications of the RBI’s decision?

The RBI’s decision may have a significant impact on the fintech sector, especially those players who rely on business credit cards as a key product offering. According to industry estimates, there are over 50 fintech aggregators in India who have issued more than 10 lakh business credit cards to SMEs, with a total credit limit of over Rs 10,000 crore. These fintechs may face a disruption in their operations and revenue streams as they will have to stop issuing new cards and recall the existing ones.

On the other hand, the RBI’s decision may benefit banks, who will regain their monopoly over the business credit card market. Banks may also see an increase in demand for their other credit products from SMEs who may face a liquidity crunch due to the withdrawal of fintech cards.

The RBI’s decision may also affect the SME sector, which accounts for about 30% of India’s GDP and 40% of its exports. SMEs may face challenges in accessing timely and affordable credit from banks, which have stricter eligibility criteria and documentation requirements than fintechs. SMEs may also face difficulties in paying their vendors and managing their cash flows due to the lack of alternative payment options.

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