Pay Later — Post Paid — Credit Card

Regulate later?

We are hungry — We go to our current favorite food delivery app and just when we are about to checkout, a mysterious new payment scheme appears.

In this post, we look at the Pay Later / Post Paid instruments. How they came into being (hypothesis), how are they used and how are they regulated?

TLDR: RBI currently has no regulation/does not regulate Pay Later / Post Paid schemes like LazyPay/Simpl.

Genesis

Like most payment-related fintech stories in India. It all started with RBI mandating second-factor authentication (popularly seen as an SMS OTP) for transactions. After this regulation, Wallets came into existence to make lives simpler. You would add money to the wallet by jumping through the OTP hoops, wallets would, in turn, allow you to operate like second-factor didn’t exist. In theory, at least the fintech companies operating these wallets had better fraud detection than old school banks, so all was good. Wallets mushroomed everywhere, even banks started having wallets 😕.

And then — RBI put out new master directions on issuance and operations of prepaid instruments in October 2017, pretty much stopping this party. RBI mandated a full KYC for the wallet user within a year ( later changed to 2 years), with a minimum KYC ( Identification document number ) needed to open an account.

KYC is more work for a customer, more pain, leading to more dropouts. Wallet companies even tried to incentivize/bribe the users with cashback, sometimes laziness > cashback (I hope this trend increases, cashback is a poor excuse for shoddy product).

The result, fintechs started finding creative ways of doing the same thing but by sidestepping wallet regulation. The Postpaid / Pay Later schemes came into existence in India. It also helped that lending is the hot new buzz word in the world of Fintech funding.

How do they work?

The way they work, in theory anyway is this.

• Fintech companies use ancient Indian magic to give a small “Post Paid” limit to a user.

*cough* no data protection laws = wild west of data collection from data brokers who read SMS’/private data, there are also rumors of payment gateway data correlation to assess creditworthiness

• Users use this limit to buy food, take a cab ride, etc.
• Services generate a bill at the end of the “Billing” period.
• The user either pays the bill or defaults leading to a “Penalty/Fine”.

If it works like a credit card, asks you to pay the bills like a credit card, it probably is a credit card?

Credit card issuance is regulated by RBI, with only banks allowed to issue a card. NBFCs can only partner with banks for credit card issuance ( Example: https://www.bajajfinserv.in/super-card ). Also, credit cards need full KYC and report to credit rating agencies. My LazyPay account did not require any KYC, neither does it show up in my credit scores.

I had to know, so I filed a query under the Right To Information Act ( RTI ) with RBI (Back in August 2018 — We have quite a backlog of collected data that we need to write about). Turns out “RBI has no information in this regard”.

They don’t show up in the entities authorized by the Payment and Settlement Systems Act, 2007 either -> Link

In short, RBI hasn’t opened its third eye to look at these entities yet, or the numbers are probably too small to worry about at this point. Regulate later?

Bonus read: Vishes Kothari from Vinod Kothari Consultants writes about the confusing nature of digital instruments.

Closing thoughts

It is about time RBI updated the definition of a credit card. The regulation needs to take into account cases where purely digital instruments are being issued. If smaller transaction volumes in newer / innovative payment mechanisms don’t bother RBI much, they should probably officially bless this.

As much as I am a fan of lower regulation — grey areas in regulation usually favor bigger companies that have the legal bandwidth to wriggle out of issues while curbing the creativity of smaller companies.

I sure do like the convenience of LazyPay, but then lately I have been gravitating towards using PayPal, which has the card on file, with no need for OTP ( < 2000 INR ). With more payment operators announcing card on file recently, maybe this phase in the fintech history will finally pass.

As with most of my posts, this is an opinion piece. I welcome comments, brickbats or free swag.