5 Things Traditional Lessors Can Learn from Our Fintech Counterparts

With a goal of bringing speed and simplicity to the industry, Fintechs have emerged as a disruptive force to traditional sources for equipment finance and leasing, including banks, captives and independents (collectively, “Traditional Lessors”). A “Fintech”—the term is shorthand for financial technology—refers to an entity that integrates technology into financial services products. Although Traditional Lessors may have dedicated business areas or affiliates focused on technology, a Fintech firm provides end-to-end solutions through the customer’s mobile device or personal computer, which may involve little or no human interaction. This article will examine several legal areas where Fintechs have challenged the status quo and provide new ways of thinking about longstanding pain points. 

1.  Transaction Complexity and Legal Documents

Technology is at the heart of the Fintech business model, including minimizing layers and reducing complexity. In the traditional equipment finance space, the customer may interact with sales, credit, pricing, underwriting, operations, documentation and other teams in order to finance a single piece of equipment. For Fintechs, these steps are reduced through significant reliance on technology and automation. 

From a legal perspective, Traditional Lessors can learn from the document generation and signing experience of Fintechs. According to Bill Verhelle, a lawyer by training who founded Innovation Finance USA LLC and its QuickFi platform (“QuickFi”) after building First American Equipment Finance, the legal documents should be user-friendly, in simple English and devoid of the layers that are often baked into lessors’ forms over years of revisions and changes. 

Additionally, consider how many signatures are required for a customer to execute a legal document package, including signature lines on master agreements, schedules, addenda, billing forms, authorizations, etc. Fintech companies engaged in commercial lending have streamlined the number of signatures—QuickFi has a single digital signature—to allow the customer to scroll through the agreements and execute the agreement.

Mobile and digital platforms serve as a catalyst for streamlining the Fintech document generation and signing process. However, Traditional Lessors can benefit by thinking critically about what legal provisions are “must haves” versus “nice to haves” in the finance or lease documents. In the COVID-19 era, automation of the documentation process is especially helpful. Also, electronic signatures have become more pervasive during recent years and especially through the COVID-19 pandemic. As long as Traditional Lessors navigate legal concerns related to electronic chattel paper and other nuances, Fintechs have shown that it is possible to build a business by shifting entirely to digital signatures.
 

2.  Creativity for Navigating UCC Requirements

Traditional Lessors often address security perfection as part of the documentation and funding process, once the collateral is more clearly identified and capable of being referenced in the UCC financing statement. Some Fintechs have incorporated creative UCC strategies into the “Terms of Use,” which allows for a possible purchase money security interest in situations involving tight delivery timing. Although Traditional Lessors may not find this approach ideal for every financing, it may be worth evaluating the timeline for filing UCC financing statements in certain transactions.

Also, the issue of “acceptance” is critical for equipment lenders and lessors seeking to provide only funding for equipment and not being involved in its manufacture, performance or selection. Fintechs have leveraged their mobile platforms to address this issue where certain goods may not be delivered immediately due to production or shipping. Of course, if a customer finances equipment that is available immediately (e.g., stock computers), acceptance is less of an issue. However, if a customer orders equipment that has not been manufactured yet or that must be shipped, the lessor cannot fund the transaction until the customer accepts delivery. QuickFi’s mobile application prompts the customer about whether the equipment has arrived yet. When the customer affirmatively indicates it has been delivered, the equipment is “accepted,” and the vendor can be funded promptly. 

For Traditional Lessors, it is worth considering issues and timelines around “acceptance” to avoid gaps (see Liberatore, D. “Equipment Acceptance is Important,” Equipment Leasing & Finance Magazine, Jan./Feb. 2020). Even in the absence of a mobile application, implementing electronic forms or communications certifying acceptance could streamline the process and protect the lessor.

3.  Security, Fraud Risks and Mitigation

Fraudsters can engage in misconduct whether on paper or electronic documents, but Fintechs view their technology as providing greater protections and mitigation. Mobile device features, such as biometric authentication, driver’s license verification, geolocation data and unique device ID information provide additional levels of security when compared to transactions completed on computers or paper contracts. These features can enhance the security of a Fintechs’ overall platform. The camera feature on mobile devices acts as a scanner for the customer’s driver license, which can be uploaded and matched against 50 state data for validation, before facial recognition is used to compare the likeness of the user of the mobile device with the photo on the validated license. This entire process can be completed in minutes, 24/7/365. Additionally, digital signature tools create a verifiable audit trail, memorializing the time, date, location, device type, unique device ID and IP address of the signer. 

Although Traditional Lessors may not desire to implement all these tools, certain options, such as driver’s license authentication, may be practical and provide a better security and audit trail than a photocopy. Even small changes from the Fintech world may provide incremental improvements and legal protections for Traditional Lessors.

4.  Regulatory and Legal Structure 

In the same way that one structure does not work for all lenders or lessors, Fintechs have taken different approaches regarding their organization and legal structure. Many operate as finance companies and maintain numerous states licenses. However, Varo Money obtained a national bank charter (Varo Bank, N.A.) from the Office of the Comptroller of the Currency on July 31, 2020, and in late October 2020, the OCC granted conditional approval for SoFiBank, N.A. Other entities, such as Square, Inc., have elected to obtain Utah industrial loan company charters. These Fintechs have pursued legal structures that may help navigate the numerous federal and state laws and regulations governing financial services companies. However, bank structures require capitalization and oversight that could impact the priorities of certain entities. 

Ultimately, all market participants, whether Fintechs or Traditional Lessors, must periodically reflect and examine the best structure for advancing interests of their customers, employees and shareholders. However, these recent examples of Fintechs obtaining bank charters serve as a reminder that significant structural changes should not be cast aside when analyzing what legal structure is best for an organization.

5.  Collections and Recovery

When it comes to collecting accounts and exercising legal rights and remedies after charge-off, Traditional Lessors may have institutional tools and personnel that facilitate collections. However, Fintechs can use device notifications to prompt the customer for payment and to make payment through the mobile application. On the other hand, after the point of default and charge-off, some Fintechs have turned to selling non-performing accounts to debt buyers. Traditional Lessors have also used debt sales for many years. To the extent that internal resources for debt collection are stretched during the COVID-19 recession, Traditional Lessors may benefit from exploring automated text/SMS reminders with a link to the lessor’s payment portal. Of course, such tools require appropriate policies and customer consents. Debt sales may provide benefits to lessors facing mounting defaults and legal spend. 

In conclusion, certain benefits of Fintechs, such as speed, security and a better user experience, are goals that all lessors will continue to pursue. Other aspects of Fintechs’ ways of doing business may be worth considering as equipment finance lawyers identify ways to innovate and help clients provide better service.