On Wednesday, the big news was that the Reserve Bank of India was cracking down on certain fintechs again. And that they’d asked payment networks VISA and Mastercard to halt credit card payments for certain institutions.

Then at 6:00 pm yesterday (Thursday), they issued a clarification and said ‘a Card Network’ had entered into arrangements that the RBI didn’t approve of.

So in today’s Finshots, we tell you what on earth is going on.

But before we begin, if you're someone who loves to keep tabs on what's happening in the world of business and finance, then hit subscribe if you haven't already. If you’re already a subscriber or you’re reading this on the app, you can just go ahead and read the story.

The Story

To understand what’s happening, we have to first understand the concept of a BPSP or a Business Payment Service Provider.

Let’s say you’re in the business of making art. You’ll need a consistent supply of raw materials to do the job. You know, things like brushes, paints, and canvases.

So you find a trusted supplier to get these to you.

Your relationship with the supplier is still fairly new. They don’t know whether to trust you. So they’re not very keen on giving you a long rope when it comes to credit. They ask for immediate payment on delivery. They want cold, hard cash.

Now it’s a little tricky for you to manage this because your paintings aren’t flying off the shelves that quickly. You’re a little tight for working capital. So you end up knocking on the doors of a bank for a credit line. When the bank grants you the loan, they deposit the money into your bank account. And then you transfer it to the supplier via NEFT or RTGS.

That’s how these business transactions typically work.

But a few years ago, some fintechs jumped into the scene. They felt they could disrupt these business transactions. And the fintechs became Business Payment Service Providers (BPSP).

What was special about them, you ask?

Well, let’s take your art business itself as an example. You could choose to apply for a credit card from your bank and use it for your T&E (travel and entertainment) expenses. But if you try and pay your supplier with it, you might face a roadblock if they don’t have a PoS (point of sale) or card machine that’ll let you swipe the card.

That’s what BPSP companies wanted to fix.

They’d partner with banks and offer co-branded credit cards to businesses. They would use the existing payment rails of card networks like Visa and Mastercard. And voila, you could suddenly use this credit card to pay your supplier for the paint. Even if the supplier didn’t have the infrastructure to accept credit card transactions.

How would they do that?

The fintech would simply say yes to the card payment from the business. And then send the required funds to the supplier via NEFT or RTGS. Then they’d wait for the business to make the payment within a certain period.

And if you think about it, it is quite a boon for everyone involved.

Since it’s a credit card, you, the business, would get time to clear the dues to the bank. Typically up to 45 days. Meanwhile, the supplier doesn’t have to wait too long for payments to hit their account. The bank would clear it within a couple of days. And everyone can go about their business happily.

It’s quite nifty.

And if you look up the websites of some of these companies, such as PayMate, this feature is front and centre — “Transfer Money from Credit Card to Vendor’s Bank a/c”. It looks like it’s their biggest sales pitch.

Source: PayMate website as of 15th February

The testimonials are on the same lines too and basically say, “PayMate enables us to pay our suppliers using our credit card. This helps us manage our cash flows.”

So it’s no wonder that business quickly picked up for the BPSP folks. They’re now involved in roughly ₹30,000 crores of turnover a month.

But wait…the RBI has just poured cold water over the business of BPSPs.

Their clarification says they’ve asked ‘the Card Network’ to block all such commercial credit card transactions.

And which is this ‘Card Network’?

Well, if you look at PayMate’s website, it should give you a hint. It calls VISA its Partner. And since RBI says there’s only one card network involved in this business, it is likely Visa.

Anyway, the only question is — why on earth has the RBI taken this step?

Well, the bombshell is that the RBI says this entire business doesn’t have its “legal sanction.” Yup, using commercial credit cards to pay merchants who don’t have the infrastructure to accept it never got a green light from the RBI!

It says these sort of payment systems requires a licence under the RBI’s Payment and Settlement Systems Act of 2007. And no one has taken that licence in this case.

Crazy, huh?

Now you could argue that BSPS entities aren’t exactly shadow entities operating behind the scenes either. VISA has stated that BSPS companies do need licences to conduct their affairs — such as a Payment Aggregator licence that helps in digital payments. And PayMate does have in-principle authorisation for that.

So don’t ask us how it slipped under the RBI’s radar for so long if that’s the case.

Also, the RBI points out problems it has with the dreaded three-letter acronym — KYC! Or Know Your Customer. It says this arrangement does not fulfil all the KYC norms.

It doesn’t elaborate on the exact problem here. But, as per earlier rumours, there could be issues with businesses using their credit cards to pay rent to their landlords. After all, these landlords aren’t registered as merchants. And a credit card isn’t meant for such merchant-to-peer transactions. You have bank transfers and even UPI for that.

Anyway, this is still a developing story, so we’ll have to keep our eyes and ears open to see what's next. But in the meantime, the BPSP industry isn’t going to be too pleased. There isn’t anything out there to suggest they’d received any warnings about this earlier. So they couldn’t have anticipated the setback or provided information to clear up any doubts the regulator might’ve been grappling with either.

For now, the only thing we can do is hope the ban is only temporary. And that the RBI quickly sorts out any loopholes or issues it finds.

Until then…

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PS: Corporate credit card payments to merchants that have the infrastructure to accept cards shouldn’t face any issues.

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