The New Financial System Meets the Old Justice System

Why is Expedited Arbitration the Solution for Fintech?

Alegalis - Aurelio Gurrea Martínez and Nydia Remolina tell us that after the 2008 financial crisis, which caused market collapse and growing public discontent with the traditional financial system, new players and technological solutions began to emerge, radically transforming the financial landscape. It was in this context that the concept of "Fintech" started gaining relevance.

The term "fintech" refers to the integration of technology into financial activities. The evolution of this term can also be seen in the work The Evolution of Fintech: A New Post Crisis Paradigm by Arner Barberis and Buckley.

Despite the recent boom in the industry and the term "Fintech," the reality is that technology has always been linked to the financial sector. A notable example is the introduction of the first ATMs in the 1970s, which sparked a debate about the impact of this innovation on the banking system. At that time, frequent questions arose about whether these ATMs would lead to a drastic reduction in the number of bank branches and, consequently, job losses for human tellers. However, over time, empirical studies conducted in countries like the United States showed that there is no direct correlation between the reduction of tellers or physical branches and the introduction of ATMs. Despite this, it is natural for both regulators and the industry itself to face the challenges that these technological innovations present. In fact, some consider ATMs to be the most significant invention in the financial system in the last 30 years. These points are discussed by author James Pethokoukis in his work What the Story of ATMs and Bank Tellers Reveals About the "Rise of Robots" and Jobs and by Paul Volcker in The Only Thing Useful Banks Have Invented in 20 Years Is the ATM.

This demonstrates that the integration of technology into the financial industry and, therefore, the concept of "Fintech" (though not the term itself) is not a recent phenomenon. However, in recent years, new technologies have emerged, or the use of existing ones has intensified for providing financial services, which, along with the emergence of new players, has triggered a technological revolution in the financial sector.

Currently, in Guatemala, the Fintech Association claims to have 42 affiliated companies dedicated to this sector of the economy. While it is true that some of the companies included in this categorization are engaged in the commercialization of digital assets, such as Osmo Wallet and IBEX, while others offer POS positioning services, such as Paggo, and still others offer "digital wallets" services (like Fri), all of them share the same need: transactions that are fast but at the same time legally valid and backed by a justice system that enforces them if necessary.

This brings us to the discussion of the Guatemalan judicial system and the challenges we are currently facing as a country.

Currently, Guatemala’s civil and commercial justice system is ranked 136th out of a total of 142 countries globally. In other words, only six countries worldwide have a worse ranking than Guatemala in their civil and commercial justice systems. Among the countries in a worse state are, in order: Afghanistan, Myanmar, Nicaragua, Bolivia, Venezuela, and Cambodia. This information is verifiable through the World Justice Project’s Rule of Law Index website. Depending on the type of judicial proceeding being discussed, the timeframes for a judge to issue a final decision can range from 1 to 5 years. It is not uncommon for practitioners to have cases that began in the 2010s and are still ongoing.

If these timeframes already represent a significant problem for the average merchant, the complication becomes even more palpable when considering that, due to the nature of Fintech, having payments made in short periods is crucial for their operations. It is then necessary to ask ourselves: what solutions exist for these companies?

Much has already been discussed about the advantages that arbitration offers over other methods for resolving disputes. Flexibility, speed, and confidentiality are often the most cited reasons. However, how fast is arbitration, really? Studies conducted by the London Court of International Arbitration (LCIA) provide data on arbitrations that took place between 2013 and 2016. According to these reports, in which 224 arbitration cases were evaluated, the average time to resolve a dispute was 16 months. This means that even if we take the average time of a commercial judicial proceeding in Guatemala, say three years, arbitration would represent an improvement of more than 50% in terms of the time it takes to resolve a dispute.

This reason alone would be enough to consider arbitration a useful method for de-judicializing commercial proceedings, but now we must address the elephant in the room: what are the costs of conducting arbitration?
As is well known, arbitration centers or chambers are private entities dedicated to administering arbitration proceedings. These centers issue their own regulations, have their own lists of arbitrators, and are generally responsible for ensuring that the administrative aspects of arbitration proceed without major setbacks. These entities charge what is known as an "administrative fee" for each of the proceedings carried out under their supervision. Additionally, the costs of paying the arbitrators must be considered. Arbitrators are third parties responsible for resolving the dispute; they will hear the parties’ arguments and subsequently issue a final and binding decision that resolves the dispute entirely. This final and binding decision, issued by the arbitrator, is called an award, and its foundation lies in the parties’ agreement to submit to arbitration, the Arbitration Law, and international conventions such as the New York Convention.

The costs of the arbitration process will vary depending on several factors, including the value of the dispute, the arbitration center hearing the case, and the number of arbitrators chosen to hear the case. This often leads to arbitration proceedings being considered notoriously more expensive than litigating a case in national courts. This could pose a problem for the Fintech sector, as many of the companies operating in this sector aim to have a large market of micro-transactions, which, due to their value, may not necessarily justify the cost of an arbitration proceeding.