PPI startups and their downfall
Prepaid Payment Instruments (PPIs) startups have been popular in recent years, but many of them have also faced challenges. In this blog, we will examine the rise and fall of PPI startups and explore the reasons why some have succeeded while others have not. We'll delve into the complex dynamics of the industry, the challenges of compliance, competition, and the role of government policies that influence the PPI startup ecosystem.
What is PPI?
PPI is an instrument that facilitates the purchase of goods and services against the value stored therein. It helps to make payments on credit for a certain period. Payment wallets, smart cards, magnetic chips, vouchers, and other methods are some examples of PPI.
Types of PPIs
As per RBI, PPIs can be issued under the following systems -
1. Closed system
In the closed system, the PPI issued is only valid against purchases made by the entity that issued it in the first place. As this PPI system is not classified as a payment system by the RBI, the issuance of such PPIs does not require prior RBI approval. Examples - Gift vouchers and coupons.
2. Semi-closed system
PPIs issued under the semi-closed system can be used in most establishments. PPIs can only be issued by banking institutions approved by the RBI or non-banking institutions authorized by the RBI under this system.
3. Open system
In the open system, PPIs can only be issued by banking institutions that have been approved by the RBI under this system to make purchases, remittances, and cash withdrawals. Examples - Debit and credit cards
The downfall of the PPI startup ecosystem
There were many Fintech startups providing PPIs as financial services. But not all had the license from RBI to do so. RBI regulated these activities and then examined the practices and models of PPI service providers. A few days later, it stated that fintech players cannot practice such regulated activities without authorization, by dint of innovation.
The RBI states that companies can issue PPI after getting authority from the central bank and these fintech startups providing similar PPI services without the authority is incorrect. Hence, the new RBI regulation allowed only banks and Buy Now, Pay Later (BNPLs) that have the authorization to provide PPI services. Non-bank PPI issuers were strictly informed not to load their wallets and cards through any credit system.
This regulation affected a lot of startups like Slice, LazyPay, and Uni Cards, that provided PPI services. It resulted in the downfall of the startup ecosystem as many startups got shut down.
PPI service was indeed a great initiative as it helped people solve a lot of issues. However, it is also necessary to have authorization for serving such data-specific services. The RBI is looking at a framework that works without enthralling the pace of digital transformation and innovation along with addressing consumer protection and cyber security concerns.
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