The migration to online lending and the rise of private regulation of online financial transactions with business customers

Regulation of online banking services may be viewed in both a public and private context. The public context concerns governmental regulation of the banking sector and focuses primarily on issues relating to safety and soundness of national financial systems and adequate levels of consumer protection. The private context concerns financial institutions individually and focuses on the allocation of liability between the financial institution and its customers through written agreements pursuant to which it provides banking services. While governments have been focused on increasing prudential measures for regulated financial institutions in light of the recent financial crisis, less attention has been given to the developing “fintechs” that act either as intermediaries in the online provision and distribution of credit or as online non-depository lenders. Although government consumer protection regulation has imposed requirements on consumer electronic banking, most of these regulations do not apply to business banking where the bulk of transactions occur. Although these transactions may be subject to national commercial law, many of the terms and conditions are set forth in banking agreements. These agreements become the basis for allocation of liability between the customer and the financial institution, particularly when unauthorised transactions occur due to the security of electronic banking systems being compromised. This article will focus on the rise of private regulation of online banking services enforced through contractual agreements and the various factors giving rise to this development, including, but not limited to, the lack of effective government regulation of “fintech” providers and the wide variance of security procedures utilised by business customers of financial institutions.