Originally from:
The Journal of Eurasian Law (JEL) - 2008 Vol. 2 No. 2
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Legal Problems with Electronic Retail Loans:
Balancing the Freedom of Contract and the
Protection of Consumers—The Case of Estonia
Ingrid Ulst*
Introduction
The changes of information technology have facilitated the
development of flexible products (e.g., e-money, m-payments, etc.) in the
field of financial services.1 In the Baltic States, the last couple of years have
marked the establishment of specialized companies whose business focuses
on retail lending via electronic means. Such lending is known as Short
Message Service (SMS) lending whereby small loans with short maturities
are granted through the means of internet and text messaging (SMS) of a
portable phone to natural persons of active legal capacity.
Such “first-aid loans” are designed to serve as a last (and fast)
alternative to solve an extraordinary (short term) lack of funds. On one
hand, electronic retail loans ((hereinafter also referred to as SMS loans)
contain a few formalities and the loan is granted without a detailed
assessment of credit risk. Therefore the receiving of funds is fast and
flexible. This is favorable to customers in urgent need of smaller amounts
to cover some extraordinary expenses. However, next to flexibility such
loans are expensive instruments because money is given for short term and
risks are higher than usual. High cost is also tied to the non-bank lenders
not having access to low-cost financing in the market. Due to simplified
procedures there is also higher risk of malpractice. Thus, the flexibility has
a rather high price which can easily turn the benefits into pitfalls. In the
light of the historical evidence from the recent financial crisis in the US that
partially derived from the preceding subprime crisis, the issue also contains
an international dimension because the regional failure of a large number of
poor-quality retail loans may have drastic effects globally.
Ingrid Ulst, Ph.D. candidate, Faculty of Law, University of Tartu. Graduate of the University of Tartu Faculty of Law (BA Law, 2000), Estonian Business School (BBA International Business Administration, 2001), J.W.Goethe Frankfurt University, Institute for Law and Finance (LL.M. Finance, 2003) and the University of Tartu Faculty of Philosophy (BA History, 2009).