Online Arbitration Leads New Trend of Collection Mode?
As the last mile of the credit and loan system, post-loan management has always been a weak link through the whole loan management loop, but it also plays an indispensable role in controlling risks and preventing non-performing loans.
Credit service is the main profit-making business for financial institutions. The collection capacity directly affects the ratio of non-performing loan and bad debt for commercial banks and micro loan companies, which dramatically influences the profitability. Earlier this year, the China Banking and Insurance Regulatory Commission (CBIRC) pointed out at a regulatory briefing that by the end of 2018, the balance of non-performing loans of commercial banks in China had reached RMB 2 trillion, with a non-performing loan ratio of 1.89%.
This article by Pintec Academy (ID: PINTECAcademy) will delve into the features, practice highlights, current development status and prospects of the new collection mode realized by online arbitration.
01 Online Arbitration Against Pain Points in Collection
Any institution that has the qualification to conduct loan business, especially the micro loan companies, usually encounters the problem of overdue debts. At present, most institutions deal with this situation mainly through debt collection calls, text messages, door-to-door collections and legal actions. However, these modes not only have unsatisfactory collection results in practice, but also encounter many challenges, mainly reflected in:
- Frequent phone calls lead to lower effect and mounting costs. If the debt collector sets up a large collection team, it could be costly to immediately scale down or disband the team as the business shrinks.
- Outsourcing the collection business to a third-party institution tends to cause compliance problems due to unfamiliarity with the other party’s mode, increase of management pressure and the proportion of complaints.
- Although high commission improves the collection effect, it also brings higher risks, resulting in collection personnel sometimes using extreme means to recover funds.
Whether it is through debt collection calls or traditional collection methods, or the emerging voice robot or interactive voice response (IVR), the protection of user privacy is not in place. Given it is an indirect way to protect the privacy of borrowers through the national judicial system, arbitration has gradually become one of the effective ways to solve the problem of overdue repayment through legal approaches.
With the rapid development of the Internet, the use of the internet for commercial activities and transactions is becoming more and more frequent, resulting in more and more disputes and frictions in online transactions. Since the emergence of Online Disputes Resolution (ODR) in 1995, ODR has gradually been widely used to solve online commercial disputes. Because of the convenience of the internet, people gradually resort to the Internet to solve offline disputes, online arbitration emerges under such contexts.
Online arbitration, also called internet-based arbitration, means to move the offline arbitration to the Internet. It mainly refers to technical methods that use internet and other network resources to provide online arbitration services. Main procedures of arbitration include filing, acceptance, hearing, adjudication and delivery, which are conducted online. According to the analysis of industry insiders, the third-party service providers that currently provide online arbitration legal collection services are mainly divided into four categories, including 1) pure arbitration suppliers such as ARBEXPRESS.CN and Ulegal, 2) branch companies that originally developed or incubated from electronic seal services such as Yibao Sign and 51Signing.com, 3) one that derives from collection companies such as Shanchui, and 4) one that derives from the payment companies such as Fuiou-Yunzheng.
Compared with the traditional litigation or arbitration, online arbitration has prominent features and advantages that can offer high efficiency, great convenience and high recovery rate required by debt collection.
- The online arbitration can bypass regional restrictions as long as two interested parties agree that without controversy a particular arbitration institution has the jurisdiction over all disputes.
- The arbitration award shall be final and binding, and the related parties do not have to worry about the result being changed.
- The online arbitration takes a short time with a simple procedure. The arbitral award can be issued in 7 to 15 days at the soonest and in 45 days at the latest through bulk processing. The compulsory enforcement can be initiated after the receipt of the arbitral award, and the enforcement materials can be handed over to the court within 2 months.
- Arbitration application documents can be made and signed online. By connecting with electronic contract and archival data, case data can be transferred in bulk directly.
- The online arbitration is a dispute resolution that is compliant with national regulations and policies, that can do the utmost to protect the privacy of the related parties in line with the national policies.
As Chinese legal system and credit system have further improved, the online arbitration provides high efficiency, great convenience and lower cost for both online and traditional lending businesses. The online arbitration has become a new direction and another suitable path for the post-loan disposal of overdue payment prior to the traditional debt collection, as well as conforms to the direction of national policies.
02 Intelligent Procedure
Generally, if borrowers do not repay the loan within time limit, and there is no result after manual debt collection calls, especially for a large amount of debt, most institutions will choose to solve the issue through legal means. Compared with traditional litigation and arbitration, online arbitration has advantages of high efficiency, great convenience and simple procedure, and has gradually become the main way for some institutions to seek legal solutions to clients’ overdue payment. A complete online arbitration includes three main stages (Figure 2): material sorting and acceptance in the early stage, defense, trial and adjudication of arbitration commission in the middle stage, and the final enforcement stage initiated by the applicant to the court when the borrowers fail to follow the arbitral award after it is issued.
At the first glance, it seems no difference between online arbitration and traditional offline arbitration, but it is not hard to find that the intelligence of online arbitration is precisely reflected in the whole procedures.
Firstly, there is no location restrictions. The parties, arbitration tribunal and personnel in charge of final procedure can select any time and location for a series of procedure from filing to court hearing. Documents are delivered in electronic manner and stored via electronic data.
Secondly, filing, payment, documents exchange and court hearing can be processed by the parties in any time and location, which curtails the cost of transportation, travel, meals, accommodation and venue.
Last but not least, online arbitration breaks through geographical restrictions and joints hands with various arbitration organizations to share network data. The unanimous standards, practices and rules will finally be formed to formulate more personalized methods.
Early in 2015, the Guangzhou Arbitration Commission launched the first self-developed online arbitration system and online attorney service platform. Eight major services have been introduced, including online filing, similar cases push and written record of the hearing. Both the parties and agents can review the process of case handling via this platform. Besides, “one button for arbitration” has been implemented to intelligently verdict online disputes such as debt repudiation for online loans. Official statistics from the Guangzhou Arbitration Commission has shown that it accepted 11,621 online cases in total in 2016. The number of cases in 2017 increased by 7 times and hit the record of 70,000. And the general subject matter of online arbitration cases reached 2.6 billion, of which type was mainly micro consumer loan and cash loan.
However, due to the short period of development, online arbitration is still at the stage of experience replications and nationwide promotions. Some related provisions are needed to improve and standardize. For successful online arbitration, material preparation in the early stage and design stage of credit products should satisfy the requirements of online arbitration for future application, which embodies in legal logic sorting, contract text revision, evidence chain improvement, store form and signature form optimization in order to meet the requirements of arbitration commission.
03 Practice Highlights & Challenges
Online arbitration allows applicants to promptly access to the online arbitration commission systems. Bulk applications uploading can not only compress the time needed, but also reduce the costs, ultimately leading to better efficiency, so as to achieve the two core objectives of debt collection – debt collected successfully and getting listed on the credit blacklist.
In January 2019, China’s Ministry of Justice announced that by 2018 there were a total of 254 arbitration commissions across China, of which only a dozen were officially providing online arbitration services, including the Guangzhou Arbitration Commission, Beihai Arbitration Commission, Zhanjiang Arbitration Commission, Zhuhai Arbitration Commission, Shenzhen Arbitration Commission, Hengshui Arbitration Commission, Wenzhou Arbitration Commission, Quzhou Arbitration Commission, Harbin Arbitration Commission, Shanwei Arbitration Commission, Nanjing Arbitration Commission, etc. Among them, the Guangzhou Arbitration Commission was the first to conduct online arbitration and has a well-established business system. Some insiders noted that in addition to the abovementioned compliance of the material preparation in the early stage, the following points also should be noted in practice for driving successful online arbitration:
- The loan contract signed by the two parties, must clearly state that when the borrower fails to repay the loan, the two parties under the contract agree to conduct “online arbitration” in accordance with the “current and valid online arbitration rules”, and stipulate the jurisdiction (i.e. the address of specific arbitration commission).
- Before applying for online arbitration, it is crucial to be familiar with the business system of the court and the differences in various regions, since the executors are often the local intermediate people’s courts where the place of domicile of the person subject to enforcement is located, and opinions on the arbitral award may vary in different courts, so sometimes the execution may be hard to push forward.
- Online arbitration documents are primarily delivered electronically. Agreeing to “deliver via email” can dramatically shorten the time it takes for online arbitration process.
- It is encouraged to proactively participate in bidding on the relevant R&D, design and refinement projects of online arbitration systems of arbitration commissions, so as to realize the fast docking with systems.
Online arbitration is now in its vigorous infancy. It enjoys a rapid development, but also faces some critical challenges and unsolved difficulties in practice, which include that
- The compulsory enforcement procedures are sometimes hard to be pushed as there is no unanimous standard to regulate the overall procedures of online arbitration in different regions.
- As arbitration applicants are more accustomed to using traditional phone calls, they have to pay high commissions and fees for an attorney to conduct online arbitration which they are not familiar with. It leads to a cost rise and is only used to deal with large overdue cases.
- As regulations are introduced and improved step by step, cases of online arbitration will increase and may probably reach a cap of approvals in the future.
- Considering the high population mobility in China, it is relatively hard to push enforcement with limited credit score factors.
In conclusion, current regulations on online arbitration are defective and not well-established. From a practical point of view, the online arbitration for debt collection is mainly used by many micro loan companies and online banking platforms, but not commonly used by traditional financial institutions. However, it does receive attention from those traditional financial institutions for its low time cost, streamlined procedures and high recovery rate.
From the perspective of judicial practice, China follows statute law under the circumstances rather than case law performed by Anglo-American countries. The online arbitration, just like many other new concepts, can hardly be acknowledged until it is regulated and interpreted by the statute law.
In January 2019, China Internet Arbitration Alliance issued the Model Rules of Online Arbitration (Draft for Comments) along with over ten members. It is formulated to further satisfy the development needs for online arbitration after three-year practice of the Online Arbitration Rules since its nationwide implementation in 2015. The Model Rules, regarded as a milestone for further growth of the online arbitration, clearly defines and stipulates the application scope of online arbitration, the way to enter into an agreement, cloud platform, procedures before a tribunal is constituted, settlement, evidence, delivery and expenses.
Overdue debt collection does not just mean debt collection, but an extension of financial service. It is worth pondering that, under these challenges, how online arbitration can develop in the future and whether it can lead the new trend of debt collection.