In spite of the fact that Fintechs are considered as financial inclusion tools worldwide due to the easy access to credit they can imply, a recent survey made by Techo and Mastercard reported by La Voz reflects thatthe lack of access to financing still prevails. On this opportunity we will approach some legal issues affecting growth potential (disregarding access conditions and applicable rates).
One of the most attractive aspects of FinTech companies is the possibility to operate fully online (in this case we will focus on lending activity). Companies may possibly require to fill in forms on the internet and to sign digital documents (mostly with electronic signature, not digital; you can enter this link for additional information on Digital Signature) with the subsequent lent amounts credited in an account appointed by the borrower and even through automatic debit procedure.
As reported by iProUp, the FinTech credit market lacks a proper legislation (as opposed to traditional banking credit market) and, so, it is governed by the rules applied to obligations in general and to loans in particular (in this case “mutuum”, a type of loan agreement by which a lender lends money upon agreement that the borrower will return upon certain conditions). This credit “democratization” involves higher risks due to credit access by some low-creditworthy people with higher default probability (resulting in higher rates).
The key issue is connected to litigation permitting lenders to recover unpaid installments or credit in arrears. What sort of trial are lending companies entitled to? A full trial (with an estimated duration of 5 years) or a summary proceeding (executory proceedings) with some few issues for debate due to the credits evidence.Judges will authorize executory proceedings if any document of the digital agreement is considered as aTitle of Execution (or upon an amendment of the applicable legislation).As set forth by the provisions of section 523 of the Civil and Commercial Procedural Code of the Argentine Nation, titles of execution are listed below:
Section 523. Titles of Execution can be:
1)Public instruments duly presented.
2)Private instruments signed by the debtor, duly acknowledged at court or with signature certified by a notary public in presence of the debtor and upon registration of such certification in the notary public formal registry.
3)The admission of a provable and enforceable debt before the judge with jurisdiction on the enforcement procedure.
4)An approved or acknowledged account as set forth by the provisions of section 525.
5)The credit instrument, credit invoice, credit invoice bank collection, promissory note, check and the debit balance certificate in bank current account with enforcement effects as set forth by the provisions of the Commercial Code or any other special Act.
6)The credit in concept of real property rentals and leases.
7)Any other instrument with enforcement effects by law and excluded from special procedures.
We will rule sub-sections 1, 4, 5, 6 and 7 out and we will focus on sub-sections 2 and 3 aiming to analyze the documentation required by the lending companies upon granting loans. We have to bear in mind that the digital signature as required by law is an expensive procedure, unavailable to most Argentine population. As a result, we will have to deal with electronic signatures in most cases and those parties wishing to enforce outstanding unpaid credits will have to prove that said signatures belong to the defendants. This lack of certainty regarding signatures is an obstacle for executory proceedings.
If the platform seeking the executory proceedings is able to present an acknowledgement of debt before a judge or a notary public (or an arbitration or mediation certificate of similar nature) or is able to present evidence of a provable and enforceable debt with proper and suitable signatures; then, in such cases, the platform would be likely to file summary proceedings. The judge could be entitled to consider the calculation as settled by the platform’s algorithm and the electronic signature’s safety as satisfactory evidence of the —– provable and enforceable debt, or the executory proceedings could be initiated pursuant to the provisions of sub-section 4. These procedures imply uncertainty and shall be finally decided by the judge involved and by the corresponding Court of Appeals.
Considering the above, I insist, it is quite important to analyze all the documentation in detail related to the granting of loans, in order to make a proper assessment of the risks involved for the FinTech lending activity. More developed and safer platforms would minimize the risks for the FinTech credit market.
Regardless of my opinion, the first order for a judicial sale was pronounced on October 27th., 2020 in favor of Afluenta in an Executory Proceeding filed for delay in repaying a loan granted through their platform. This new interpretation applied to consent and evidence will open the path for a more widely acceptance of these mechanisms in civil and commercial actions. A judgment by the Supreme Court of Justice in either sense could set a precedence in future similar cases. In my opinion, a proper legislation addressing these issues would be healthier and faster in such a dynamic activity.
FinTech’sbusiness modeldoes not match with excessive documents; their goalis less paperwork to be signed and a fast and dynamic online activity. Each company should make an evaluation of the benefits and risks involved to enhance credit risks assessment (more risks for loans refund or less dynamism in lending activity).
Financial industry should evolve, especially as from the pandemic, towards an updated regulatory framework for the overall credit environment, both for non-banking institutions as well as for credits awarded by banks through phone calls or cell apps without physical paperwork to be signed. Quick enforcement actions should be available for both groups since they are engaged inthe same legal business; the only difference between them is that FinTechs are not necessarily regulated as financial entities and the capital they move is 100% private (either own or contributed by investors). It is a common consensus in the industry that users should be given financial education and reliable trustworthy information by lending companies before celebrating the mutuum agreement.
Briefly, online credit and the new risk assessments have the potential to transform the financial industry with more inclusion and making it available to vulnerable sectors. If the FinTech lending activity is not governed by simple and clear guidelines for companies and investors with quick and simple enforceable actions, the whole activity will become a mega structure with heavy legal and enforcement costs likely to affect the rate and jeopardizing the potential involved due to lack of proper legislation for this emerging business model (and excluding, once more, vulnerable population sectors). Clear rules on summary proceedings could substantially improve the access to financing, promoting greater financial inclusion and striving for market expansion in the future ahead.
