By Vishes Kothari (firstname.lastname@example.org)
With the proliferation of retail lending NBFCs offering a variety of traditional and disruptive products, there has been the frequent question about NBFCs being able to issue credit cards.
This question leads onto various further questions- for example, is a credit ‘card’ facility in virtual form also a credit card? Hence it appears that one must first examine what exactly is the defining feature of a credit card. This note intends to explore this pertinent question.
Credit Card: Defining features
There is no direct definition of the credit card to be found in Indian laws and regulations issued by the RBI. This is because before the advent of new technologies resulting in new products, it was generally quite clear as to what was meant by a credit card facility. A card meant what looked like a card – the piece of plastic that one would keep in one’s pocket or wallet. However, technological advancements have completely changed that perception.
In UK law, one finds a definition of a credit card in The Credit Cards (Merchant Acquisition) Order 1990. This regulation provides:
“credit card” means a payment card the holder of which is permitted under his contract with the issuer of the card to discharge less than the whole of any outstanding balance on his payment card account on or before the expiry of a specified period (subject to any contractual requirements with respect to minimum or fixed amounts of payment), other than:
(a) a payment card issued with respect to the purchase of the goods, services, accommodation or facilities of only one supplier or of suppliers who are members of a single group of interconnected bodies corporate(1) or who trade under a common name,
(b) a payment card with respect to which the payment card account is a current account, or
(c) a trading check;
“payment card” means a card, the production of which (whether or not any other action is required) enables the person to whom it is issued (“the holder”) to discharge his obligation to a supplier in respect of payment for the acquisition of goods, services, accommodation or facilities, the supplier being reimbursed by a third party (whether or not the third party is the issuer of the card and whether or not a fee or charge is imposed for such reimbursement);
A credit card has thus been defined by an exclusion principle- it is all those payment cards which a user can use to ‘discharge obligations’ (i.e. make payments) with the exception of debit cards, cheques and cards which can be used at the outlet of only a single brand/store.
Thus, the credit card appears to have been defined by its ability to claim credit from the issue to make payments to a third party, via the use of the card.
This definition appears quite convenient to apply to the Indian financial services sector.
Who can issue credit cards?
Prior approval of the RBI is not necessary for banks desirous of undertaking credit card business either independently or in tie-up arrangement with other card issuing banks.
In the case of NBFCs, the RBI vide Master Direction DNBR. PD. 008/03.10.119/2016-17 dated September 01, 2016, has stipulated that only the following types of NBFCs are permitted to issue credit cards with the prior approval of the RBI:
- Issue of Credit Card
Applicable NBFCs registered with the Bank shall not undertake credit card business without prior approval of the Bank. Any company including a non-deposit taking company intending to engage in this activity requires a Certificate of Registration, apart from specific permission to enter into this business, the pre-requisite for which is a minimum net owned fund of ₹ 100 crore and subject to such terms and conditions as the Bank may specify in this behalf from time to time. Applicable NBFCs shall not issue debit cards, smart cards, stored value cards, charge cards, etc. Applicable NBFCs shall comply with the instructions issued by Bank to commercial banks vide DBOD.FSD.BC.49/ 24.01.011/ 2005-06 dated November 21, 2005 and as amended from time to time.
It seems clear that the RBI intends to make the eligibility criteria very steep by putting in place the requirement for an NOF of 100 crores. Moreover, the issuance of credit cards can only happen via approval route.
The case of virtual credit-cards
New technologies have led to the development of various new products and variants of traditional credit card facilities. One such development is the possibility of having ‘virtual credit cards’ which function via a downloadable app or other software and eliminate the need for a plastic card altogether. The question arises that are such virtual cards to be considered as ‘credit cards’ and hence, is it that only the NBFCs eligible to issue credit cards may issue the virtual variants?
A literal reading of the definition/regulations above would, of course, imply that the credit card refers to a plastic card. Hence once could conclude that any NBFC can issue virtual ‘credit cards’ as it does not involve the use of a card at all.
In our opinion, this is not in keeping with the spirit of the law. Restrictions have been placed to restrict the NBFCs which can issue credit cards as this facility is a sensitive facility which is offered to and used by members of the lay public. If by merely changing the actual form of the credit card, i.e. by making it a downloadable app or any other virtual form, if one could circumvent all the checks and balances that have been put into place on who can issue credit cards, then that would not be in keeping with the spirit of the law/regulations.
In our view the regulation applies not only to potential credit card issuers but instead to credit facility issuers- i.e. issuers wanting to issue credit card-like instruments, whatsoever may be their actual form. Hence we would hold that only those NBFCs which are eligible to issue credit cards are eligible to issue virtual credit cards.
There have appeared on the market another type of card – the ‘EMI Cards’.
While a credit card facility involves the user having an instrument which gives him access to an on-tap revolving line of credit, the EMI Card is a card with a pre-approved loan. When the user of the card presents the Card at third party merchant outlet, the Card converts the purchase payment into EMI payments payable to the card issuer. Hence the card acts like a pre-approved loan. Usually no interest rates are charged from the user of the card, instead there the card issuer has an arrangement with the merchant (perhaps a commission arrangement). Such cards might also come with an annual subscription fee charged from the user.
In an EMI card the issuer of the instrument is able to regulate the expenses for which the holder can make payments using the EMI card, unlike in case of a credit card, where the issuer has no control over the places where the card is being used. The issuer of an EMI card can reject a loan request as per the agreement under which the card is issued, even when there is unused balance on the card, whereas in case of credit card the issuer cannot reject a payment request if there is unused balance on the instrument.
An EMI card is an instrument which is mostly used to finance purchase consumer goods by the holder of the card, whereas credit card are being used to pay for any kind of expenses of the holder.
The issuer of an EMI card is able to have greater control over its usage by the holder as compared to a credit card issuer.
Hence in a credit card, while the user taps into a new loan each time he avails of credit via using the card facility, an EMI card is an instrument which activates a loan up to a certain pre-approved limit.
Because the EMI Card is not a credit facility, it would follow that the usual restrictions applicable to the issuance of credit cards would not be applicable here. However, the distinction between a traditional credit card and a so-called EMI card is too thin to be visibly clear. Therefore, there is a strong possibility of the regulations on credit cards getting surpassed by entities promising loan facilities via cards. While the need for regulatory clarity is clear, in the meantime, issuers have to be able to evidence their ability to control the facility, such that the card does not become a surrogate for a credit card.