Banking’s technology challenges

Author: | Published: 24 Apr 2015
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The electronic contract market continues to grow. But its rise has caused concern, as regulation fails to keep up. The financial industry will also have to adapt if it hopes to compete

The use of electronic contracts is growing worldwide and in Peru. Transactions are being executed without the parties being faces to face. The growth of cross-border transactions and developments in technology is forcing this trend to develop fast. One may think that electronic contracts through digital means belong in the future; but this is not the case: they belong in the present. Digital means are evolving very rapidly.

In the financial world, we see the arrival of new players that compete in an arena traditionally reserved for financial entities. We can pay our debts, transfer money and even get loans by using digital means, such as the internet, mobile phones, and social networks, without the need for the traditional services of a financial entity.

One of the consequences of globalisation is the need to execute contracts in real time. Fortunately, innovation in technology allows sellers and buyers, providers and consumers, to do business in real time. This reduces some transaction costs and allows economic growth. The business tendency to use digital means is irreversible. Furthermore, we have a new generation of consumers that have grown up digitally. In this changing context, the Peruvian banking industry needs to think seriously about electronic contracting.

We need to evaluate the usefulness of traditional procedures for executing contracts, and rethink, along with the regulators and the judiciary, the legal principles that govern the regulation of civil, commercial and banking contracts. We cannot forget that such principles were adopted in a very different world, where, among other things, the world economies were attached to the gold standard.

"We can pay our debts, transfer money and even get loans by using digital means, without the need for the traditional services of a financial entity"

In Peru, congress has approved regulations that allow contracting through digital means. In 2000, law 27269 established electronic signatures and digital certificates. That same year, law 27291 amended the Civil Code, specifying that an individual's will could be expressed through digital means; while law 27309 introduced digital crimes to the Penal Code. In 2013, resolution 212, issued by the National Identity and Civil Status Registry, introduced the electronic ID.

Electronic signatures and identifications seem to be the right tools for making the virtual world a safe place both for providers and consumers. Unfortunately, obtaining electronic signatures and digital certificates is too costly for the average consumer, and, electronic IDs are only just being introduced.

In any case, obtaining electronic signatures, digital certificates and electronic IDs alone will not be enough in Peru. We have to find the ideal security mechanisms for electronic contracting. In the banking world, public trust means everything. By their nature, banks take deposits in order to make loans, and risk analysis is a key element of the business. Therefore, banks must take reasonable precautions to reduce the risks that are associated with the financial world, hence why banking activities are regulated and supervised.

Electronic contracting presents several types of risks to banks, one of which is fraud. What happens if someone takes the identity of another with the intention of executing a transaction? How does the bank know that Mr. X is really Mr. X? In the digital world, the bank neither sees Mr. X nor checks his identity by reviewing his ID. The story would be different if Mr. X had an electronic signature, a digital certificate or an electronic ID, but this options are not yet used by consumers in Peru due to their high costs.

"We need to evaluate the usefulness of traditional procedures for executing contracts"

One may think that fraud is a common risk to all service providers. This is true, however, banks, face some specific risks. Banking regulation obliges banks to keep records of the contractual conditions of the transactions executed with consumers. A bank may be able to prove that an on-line transaction was executed by Mr. X, but how does it prove the agreed interest rate and other contractual conditions of the transaction? The bank may have tools to prove those contractual conditions, but there is no certainty that the regulator would accept anything other than a printed document signed by Mr. X. Similarly, there is no guarantee that the judiciary would enforce the bank's rights in the absence of a physical document stating the interest rate and other contractual conditions. These are key issues to be resolved.

Another problem is that while both consumer and banking regulations allow electronic contracts, certain contradictions remain. Provision 47 of the Consumer Protection Code and provision 41 of the Information Transparency Rule (ITR) expressly permit the execution of consumer contracts through electronic means. However, the latter provision obliges banks to provide consumers with extensive physical documentation regarding the electronic contracts and conditions. This requirement contravenes the essence of electronic contracting and fails to satisfy the needs of digital consumers who are paperless and interested in saving time. If a bank must produce and deliver physical documentation for digital consumers, contracting through electronic means will lose its advantages and increase transaction costs.

If we want to create a sound environment for electronic contracting, we need to eliminate the requirement for banks to provide digital consumers with supporting physical documentation that could be provided virtually. Furthermore, if we want to create a safe environment that allows banks to use digital means for executing contracts with their customers, we need to approve specific regulation that recognises the possibility of proving the agreed contractual conditions without the need to have records of the physical documents.

We have work to do in Peru. Our biggest challenge is to help create flexible regulations that provide safe electronic contracting while ensuring the necessary control elements are in place; not only for security mechanisms, but also for the protection of personal information and the prevention of money laundering.

About the author

Enriqueta González de Sáenz
General counsel, BBVA Continental

Lima, Peru
T: +51 1 211 1046

Enriqueta González de Sáenz has a Juris Doctor degree (JD) from Pontificia Universidad Católica del Perú (PUCP), and also holds a masters degree in international economic law from PUCP.

González is a professor of banking law at PUCP. Since 2000 she has been the general counsel and secretary of the board of directors of BBVA Continental; director of BBVA Continental Securitisation Company; and director of BBVA Continental Consumer Finance Edpyme.

She participated in the drafting of the prevailing Banking and Insurance General Law.

She has been legal adviser and general secretary to the Ministry of Justice; general counsel of COFIDE, a second-tier bank owned by the Peruvian state; and deputy superintendent of banking and insurance, responsible for regulation and the legal department.

She has also held the following positions:

Director of the Insurance Deposit Fund (2005-2009);

Member of the academic board of the Banking Studies Institute (2006-20013); and,

Director of BBVA Asset Management (2011- 2014)