Ensuring the long-term viability of alternative financing in the UAE through regulatory oversight
24 Apr 2023
The UAE’s market for alternative payment financial solutions that include buy now, pay later is set to reach $18.34 billion by 2028, but it is important to better understand these products to make sure that you reap the rewards these financial products have to offer, improving your financial management rather than hindering it.
The industry is facing growth at an accelerated pace, with a compound annual growth rate of 33.9% till 2028. Digital payment providers, such as cashew, have emerged as major players in the UAE’s e-commerce and retail markets.
But, these alternative payment solutions are not without their risks.
It can lead to unnecessarily managing debt and harm consumers’ credit scores.
This article highlights the importance of regulatory oversight to ensure the long-term viability of alternative financing in the country and how the government and regulators can help consumers establish positive credit profiles, limit the number of active credit lines per consumer, and integrate financial products like BNPL reports into the credit reporting system.
We've broken down a number of scenarios with possible solutions to save you from being trapped in the potential risk of using alternative payment solutions such as buy now, pay later. The aim is to prevent overextension of credit and reduce the risk of default, ultimately establishing the BNPL industry as a reliable and trustworthy form of credit.
Let’s see how.
Role of the regulators: How to avoid the risks of using BNPL products?
A consumer’s common psychological behavior can be buying a product with the BNPL solution, splitting the payment into the smallest portions, and deferring payments from multiple providers.
At first, this may sound smart, but it can lead you to become irresponsible and totally forget about paying installments at a later stage. And, when you miss an installment, you may pay the late payment fees.
So, how do you avoid non-payment risks and negative impacts on credit scores?
Let’s see possible solutions and the importance of the Government and regulators in protecting the BNPL industry.
Building a positive credit score
According to a survey by the Dubai Chamber of Commerce, around 71% of UAE residents believe it is crucial to maintain a good credit score.
Have you ever applied for a loan or a credit card only to be turned down due to a lack of credit history? If you have, you know the importance of a positive credit profile. And if you live in the UAE, this is especially true.
Lenders and financial institutions use credit history as a way to assess the creditworthiness of potential borrowers. A positive credit history indicates your track record of paying debt on time.
An adverse credit history means you could be a risky borrower who may default on repayments .
But how is credit history established in the first place?
This is where credit reporting agencies like Al Etihad Credit Bureau (AECB) come in. They collect and maintain credit information about individuals and businesses from various sources, such as banks, credit card companies, and other financial institutions.
They use this information to create credit reports, including your credit history, such as payment history, credit limit usage, and outstanding payments.
Here, regulators have a significant role to play. They can support consumers in establishing a positive credit profile by requiring financial solution providers to report their customers’ repayment behavior to credit bureaus.
What are the benefits of a positive credit profile?
- Positive credit history can make it easier for customers to obtain other financial products in the future, such as loans or credit cards.
- It can also help them secure the lowest interest rates and easier credit terms on financial products.
- For businesses, building a positive credit profile can help improve the company’s reputation as a responsible and reliable partner to lend money.
- This, in turn, can attract customers to buy now, pay later providers, and increase the industry’s long-term viability and sustainability.
The solution: Regulation will help providers of financial solutions such as buy now, pay later report their customers’ repayment behavior to credit rating agencies and in turn, help their customers build their credit score. cashew welcomes regulations requiring us to report our customers’ repayment patterns to credit agencies to help our consumers build positive credit profiles. |
Limiting the number of active credit lines
While accessing credit facilities enables businesses to maintain a positive cash flow, excess credit utilization can turn things against them.
It’s a common problem that you apply for numerous credit lines to get benefits from all providers. But having multiple lines of credit can only make it worse for you.
This is why regulating the BNPL industry in the UAE is crucial to prevent the overextension of credit.
One of the most common reasons for low credit scores in the UAE is late payments on credit cards, mobile phone bills, and loans.
To prevent this from happening, we need regulatory interventions to:
- Limit the number of active credit lines per consumer.
- Conduct credit checks and other safeguards to ensure that consumers are not overextending themselves financially.
- Ensure that consumers can repay their debts and reduce the risk of default.
- Set minimum income requirements.
- Ask consumers to provide relevant proof of employment.
| The solution: Regulatory interventions to prevent overextension of credit are essential for the long-term sustainability of the Digital lending industry in the UAE. This helps establish the industry as a reliable and trustworthy form of credit. |
Integrating BNPL reports into the credit reporting system
56% of consumers in the UAE are more likely to trust the buy now, pay later schemes than people across all surveyed markets.
Alternative payment solutions such as BNPL have become increasingly popular recently, especially in the UAE. After all, consumers can make purchases and spread the cost over time, often without interest fees.
One of the concerns around BNPL products is their legitimacy as a form of credit. It seems too good to be true to buy something now and pay for it later without any added fees (except for late payment fees).
But the truth is that it can be a legitimate form of credit as long as it’s regulated properly.
That’s where the importance of regulatory oversight for BNPL providers comes in.
- By setting standards for providers and requiring them to follow specific rules and regulations, regulators can help protect consumers from potential risks of overspending, multiple credit lines, and negative credit history.
- This includes credit checks to ensure that consumers can avail of the BNPL schemes and limits on the number of active lines of credit to prevent overextension.
Benefits of regulatory oversight to BNPL providers and consumers
It’s a win-win situation - consumers benefit from improved credit scores and BNPL providers like cashew benefit from increased customer loyalty and trust.
The solutions: Regulation can enable smooth integration of the BNPL reports with the credit reporting agencies to enhance the industry’s viability. We at cashew provide our customers with detailed reports on how much credit they have availed and for how long. We will be quite comfortable sharing such reports with credit rating agencies to help our customers enhance their positive credit history. |
Encouraging transparency in reporting
When seeking clarity from alternative payment providers, regulators can gain deeper insights into the customer behavior for BNPL products to identify whether customers make serious efforts to repay the installment amounts.
The regulators can enhance transparency from the BNPL players in the region by making provisions for regular reporting requirements and submission of critical reports, such as the number of outstanding amounts, number of defaults, total defaulted amounts, etc.
Such reports can support the regulators in making stringent rules in case these reports reveal irresponsible behavior from the customer’s or provider’s side.
The solution: Establishing and increasing transparent reporting requirements through legal provisions can protect the BNPL providers’ interest. At cashew, we already practice transparent reporting, providing our customers with a detailed report on how much they used and how much is pending repayment. |
Recent developments
The Dubai International Financial Center (DIFC) announced last December that it will bring buy now, pay later products under the regulatory boundaries of DFSA (Dubai Financial Service Authority).
The regulator also proposed to include BNPL services within the scope of financial services called ‘providing credit.’ Thus, the regulators of the UAE are well-positioned to align BNPL services within the ambit of the regulatory regime to protect the industry’s growth sustainably.
How does cashew support regulatory amendments for its BNPL product?
As one of the leading BNPL players, cashew is all set to welcome the new amendments and developments proposed by the DIFC and DFSA. When it comes to transparency, we offer our products without any hidden fees, where we only charge late payment fees in case the customer misses paying before the due date.
Whether integrating with credit rating agencies or limiting credit utilization, cashew makes it a point to serve its customers with integrity and ethical practices.
https://www.dubaichamber.com/resources/u/resources/uae-consumers-credit-behavior-survey-2021.pdf
https://www.cbd.ae/personal/borrow/others/al-etihad-credit-bureau
https://www.pinsentmasons.com/out-law/news/difc-to-regulate-buy-now-pay-later-products