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SEC-OGC Opinion No. 23-08: Lending Company Activity

On 09 May 2023, the Office of the General Counsel (“OGC”) of the Securities and Exchange Commission (“SEC”) issued SEC-OGC Opinion No. 23-08 where the SEC classified and explained whether the intended business activity using an online platform called Earned Wage Access (“EWA”) constitutes a lending activity which requires obtaining a Certificate of Authority to Operate as a Lending Company from the SEC. 

In resolving the query raised, the SEC first explained that the elements of a loan are the following: 

  1. One of the parties (creditor) delivers money or another consumable thing to another;
  2. Person who receives the money or consumable thing (debtor) acquires ownership thereof; and 
  3. Debtor is bound to pay to the creditor an equal amount of the same kind and quality.

The SEC then proceeded to discuss Republic Act No. 9474 or the Lending Company Regulation Act of 2007 (“LCRA”), as amended. The LCRA was enacted to regulate the establishment of lending companies and to place their operation on a sound, efficient and stable condition to derive the optimum advantages from them as an additional source of credit.

Section 3(a) of the LCRA provides for the definition of a lending company as “a corporation engaged in granting loans from its own capital funds or from funds sourced from not more than nineteen (19) persons.” While the LCRA does not specifically define “loan” in the context of a lending company, the SEC explained that a loan involves a contract between a creditor, the lending company, and the borrower or person granted a loan by such lending company, subject to interest or charges as authorized under the LCRA. 

Going into the proposed business model of GetPaid Philippines Incorporated (“GetPaid”), the SEC explained that there are three contractual relationships that are present to wit:

  1. Between GetPaid and corporate employers – GetPaid will enter into a commercial contract with the corporate employers on the use and access of the EWA for its employees. The employers will provide GetPaid the relevant information on hours/days worked by their employees and the monetary equivalent of the earned wage. 
  2. Between GetPaid and the employees – The employees of the employers who wish to avail and use EWA will have to register online, agree on the terms on the use of EWA, provide details of their bank accounts where funds can be transferred, and once registration is completed, access details will be provided by GetPaid. When a registered employee needs money in between payroll dates, such employee may access his/her available earned wage reflected in the EWA platform. For each access which results in transfer of funds to the registered employee’s bank account, a transaction fee of up to 4% is deducted to the total amount used.
  3. Between the employees and the employer as regards the amount advanced by GetPaid – Part of the terms that the registered employee will be required to agree on to will be on the assignment of the payment of the relevant amount of the earned wage from the employer to GetPaid. On a specific payroll date, the employer will release to GetPaid the equivalent amount that has been transferred by its registered employee, and any balances of the total earned wage or salary will be paid directly to the relevant registered employee. 

Based on the business model presented, the SEC found that the main business activity of GetPaid is advancing an amount of money to registered employees with the latter’s earned wage as the maximum amount of money that can be advanced less transaction fee of up to 4%, as the limit. 

The SEC concluded that that elements of such business activity fall within the definition of a loan, to wit: 

  1. GetPaid, as the creditor, delivers to another, the registered employee;
  2. A sum of money using the EWA platform; 
  3. Upon the condition that the same amount shall be paid in return, subject to interest or charges incidental to such transaction, if any.

The SEC also emphasized that what is transferred by GetPaid to the registered employees is an amount advanced by GetPaid using its own funds. While the amount transferred is based on the wage earned by the registered employees as the limit, the said amount is not yet owned by the registered employees since the wage is yet to be received at a later date as agreed with the employer (e.g. bi-monthly, monthly etc.). This is precisely the reason why the amount is being extended by GetPaid to the said registered employees in the first place.  

From all the foregoing, the SEC concluded that GetPaid’s usage of the EWA platform falls within the act of extending a loan under the LCRA; hence, GetPaid should secure a secondary license to operate as a lending company in the Philippines.