Digital Lending Guidelines: Fund Flow And Pass-through Accounts

Pass-through accounts are common in digital lending arrangements. Buy-now-pay-later (BNPL) products typically involve five parties: (1) a Regulated Entity (RE) like a bank or NBFC lending off its own books; (2) a Lending Service Provider (LSP) which owns the distribution channel and helps service borrowers through its Digital Lending App (DLA); (3) a payment service provider like a Payment Aggregator (PA) which facilitates the movement of funds; (4) a borrower who avails a loan from the RE through the DLA; and (5) a merchant who the borrower wants to buy products or services from, on credit.

When a loan is sanctioned, the RE transfers the loan amount to the PA. When the borrower buys a product from the merchant, the PA in turn transfers a portion of the loan amount (the sale price) to the merchant. When the due date for the loan arrives, the borrower transfers the loan amount utilized to the PA. And the PA transfers the repayment collected from the borrower to the