First determine whose money is being advanced and who owes whom
A platform paying merchants in advance settlement funds it has not yet received, customers obtaining a buy-now-pay-later credit limit, and a platform purchasing merchants' receivables may correspond to different legal structures. The borrower or financing counterparty, recourse rights, maturity dates, fees, guarantees and actual fund flows should be verified. A product named "fast settlement" does not mean there is no financing, nor can it be concluded that credit regulation does not apply merely because no interest is charged.
Incidental credit attached to payments is generally not an unlimited lending authorization
The UK FCA Handbook makes clear that certain incidental credit permitted under the payment regulations does not exempt a firm from other credit business permissions that would otherwise apply. Irish payment regulations likewise impose conditions on corresponding incidental credit, including transaction purpose, source of funds and capital, and do not exclude consumer credit rules. These are examples from specific jurisdictions and do not mean all crypto asset service providers can copy them; stablecoin lending or consumer credit limits must still be analyzed separately according to the nature of the assets and customers.
Hypothetical scenarios: one-day-early settlement and a long-term revolving credit limit
Assume a platform pays a merchant one day early for confirmed orders and recovers the funds after upstream settlement; another product allows a merchant to use a credit limit over the long term, borrow and repay at will, and charges financing fees. Both address working capital turnover, but continuous credit extension, purpose controls and default risk differ materially, and the same payment services agreement cannot cover both. Even where the former is very short-term, it should be confirmed who bears the loss from upstream non-payment, chargebacks or order disputes.
Customer funds are not a free liquidity pool
The relevant Irish rules expressly restrict the use of funds received or held for payment transactions to provide incidental credit. For other jurisdictions as well, asset segregation and purpose restrictions must be verified; funds awaiting settlement for Merchant A must not be used to advance funds to Merchant B. In practice, own liquidity, credit-limit concentration and stress scenarios should be measured separately, and overdue, dispute and recourse processes should be agreed; where a licensed financing partner undertakes the business, it must also be clear whether the platform provides guarantees, repurchases or bears first loss, rather than looking only at who transfers the funds.
Stress testing should not test only customers' normal repayment. It can also simulate consecutive upstream delays, multiple merchants refunding at the same time, depreciation of guaranteed assets and financing partners tightening credit limits, to observe whether the company can still complete settlement for unrelated customers. Credit-limit approval should match risk tolerance, and it should be clearly stated whether ceasing new financing affects existing payment obligations. If a product depends on continuously absorbing new customer funds to repay old debts, it should be reassessed immediately rather than masking structural funding problems by raising fees.
Recommended actions
- Map the financing contracts and fund flows, and confirm the creditor, debtor, recourse rights and fees.
- Verify the requirements for incidental credit to payments, lending and consumer protection according to customer type, assets and market.
- Segregate advance funds from client assets, and stress-test upstream delays and simultaneous defaults by multiple clients.
- Review the guarantees, repurchase obligations and first-loss undertakings in the financing partner agreement to determine where the actual risk lies.
This content is for general information only and does not constitute legal advice. Please consult a qualified lawyer about specific matters.
References
- FCA Handbook PERG 15.3 Q20A — UK FCA
- European Union (Payment Services) Regulations 2018, Article 29 — Irish official legislation database
