🤔 BharatPe's New Pivot?
Fintech companies in India are all cleaning up their acts now and staying away from regulatory grey areas. Here's how BharatPe is attempting to do this.
Fintech companies have taken the world by storm, but a lot of these fintechs are still operating in regulatory grey areas.
Wondering what those are and how they impact fintechs? ReadOn!
âš– Regulatory Arbitrage
Though fintech as a concept is quite old, the current fintech firms around the world have all cropped up in a very short period of time.
And these companies offer payments services, loan options and more financial services in a much easier way to users.
But this ease of business is not just because these companies leverage technology.
It is because they are unregulated.
Thanks to the speed with which these companies sprang up, central authorities have not had enough time to regulate them.
And even though the RBI has now come up with some regulations regarding fintech companies especially NBFCs, many fintechs still operate either in a regulatory grey area (meaning they use loopholes in the regulations to function) or ignore the rules.
Yes, just take the case of Buy Now, Pay Later companies using prepaid payments instruments despite RBI forbidding it.Â
These companies now face a scary future ahead after an RBI circular abruptly brought an end to their entire business model.
This has given many fintechs a major jolt and they are now working towards rethinking their business models.
One such fintech is BharatPe.
The company has already been surrounded in a lot of controversy due to co-founder Ashneer Grover's exit.
And now it is trying to avoid any further regulatory issues.
But what regulatory issues could BharatPe possibly face?
📜 BharatPe's Business Model
While most payment companies were focused on making payments easier for customers, BharatPe decided to focus on the people who had to accept these payments: merchants.
By introducing QR codes that would work with any app and adding UPI to the payment mechanism, it helped shopkeepers from a lot of hassle.
And even though this meant that the company hardly got any commission from merchants (with UPI you don't need to pay card issuers or platforms any extra fees), it was happy.
Because it was getting data that would help it attain its ultimate goal: become a lending company.
You see, the payments space isn't really very lucrative. But by setting up QR codes and getting data regarding how much a merchant earns in a day, BharatPe could build a credit history for these merchants and give them loans.
Now, giving loans was also a major issue. As a regular fintech company it can't just give out loans.
So, it partnered with NBFCs to launch a peer-to-peer lending platform, 12%Club, which would lend to merchants.
But it is now supposedly considering shutting this platform down and selling its stake in NBFCs.
Why?
Because BharatPe's P2P platform was kind of borrowing money like savings and investments and lending it out at super high interests to potentially risky clients.
Even though the company claimed it would bear most losses and not let them come down to the customers, this was a potentially risky area that could face the wrath of the RBI at any time.Â
Also, this was a super risky proposition for the company, which now wants to cut down on losses as it is thinking of going public.Â
Moreover, the company's claims that the risks would not pass down to the customers was also sketchy as P2P platforms cannot make any such promises.
What's more, the company is now transitioning into proper banking operations, one of rare fintechs in India to have this opportunity.
The company owns 49% of Unity Small Finance Bank which is now merging with Punjab and Maharashtra Co-operative Bank.
This will bring in more regulatory limelight on the fintech unicorn.Â
The company, however, has not confirmed it will be shutting down 12%Club but it has not been accepting payments from investors since January, according to LiveMint. However, it has since begun taking payments again.
Additionally, thanks to the new BNPL rules BharatPe's PostPe could also be in trouble now.
So, what is BharatPe's plan now?
It plans on becoming a platform that just facilitates P2P lending, instead of taking money from investors and then giving it to merchants.
Also, it now plans to stick QR codes only at merchants' shops to whom it can lend to.Â
Now, we will have to wait and watch if this strategy will work out or not.
âš¡In a line: Fintech companies in India, including BharatPe are all cleaning up their acts now and staying away from regulatory grey areas.
💡Quick question: Do you think these fintechs will be able to work around regulatory grey areas?
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They opened the window for investmet yesterday but now it's closed. They also changed the limit to 10 lakh instead of 1 lakh. Earlier, Their CEO said in a linkedin comment that they closes the window because they have too much funds to lend.